Taxes: Limits on Business Deductions Flashcards Preview

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Flashcards in Taxes: Limits on Business Deductions Deck (5)
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1

Taxes:
Limits on Business Deductions
Hobby Losses

Hobby Losses
- activity primarily taken for enjoyment that generates profit
- expenses deductible to extent of revenues (before 2% AGI limit)
- to avoid hobby, must prove real profit
- 2% miscellaneous itemized deductions
- no carryover
- if profit 3/5 years, IRS must prove hobby
- if losses 3/5, taxpayer must prove hobby
Order
- taxes and interest
- cash expenses
- depreciation

2

Taxes:
Limits on Business Deductions
Business Use of Home

Business Use of Home
- deduction for home office or rental of personal residence
Requirements
- business use is exclusive and regular
- office is principal place of business OR ordinary meeting place for clients
- used for convenience of employer if taxpayer employee
- expenses allocated between part used for business and
- multiply the square footage by $5, Max 300
- same order as hobby losses
- do carry forward and can be used in future

3

Taxes:
Limits on Business Deductions
Business Use of Home
Vacation Home

Vacation Home
- rented less than 15 days per year = personal residence
- 15+ days and not personal for greater of: 1) 14 days or 2) 10% days total rented then treated as rental property
- all rent taxable net of expenses, prorated for # days
- rental loss is allowable
- if 15+ days and personal for greater of: 1) 14 days or 2) 10% days total rented,
- all regular expenses, prorated for # days
- NO rental loss is allowable

4

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules

Passive Activity Loss Rules
- losses only offset passive income, and excess suspended
- Definition: profit-seeking activity in which taxpayer does not materially participate in management
- work more than 500 hours, or work more than 100 when no one else works more than 100
- all limited partners and most rental activities
- real estate professional must work 50% in activity and must perform 750 hours

5

Taxes:
Limits on Business Deductions
Passive Activity Loss Rules
Rental Real Estate

Rental Real Estate
- exception for taxpayers who actively manage rentals
- Active Participation: own at least 10% of property and significantly participate in decision making
- deduct max loss $25k /year
- phaseout AGI over $100k at 50% rate until $150k
- suspended losses are deductible in later years or when sold

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