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TAX 4001 EXAM 2
______ is allowed for the contribution of services, unless there was - ANS-No deduction; unreimbursed expenses relating to the service or transportation and reasonable expenses for lodging and cost of meals while away from home incurred while performing donated services 2 tests must be met for moving expenses to be deductible - ANS-distance test time test 20% ceiling applies to - ANS-contributions of appreciated capital gain property to private non-operating foundations that are not 50% organizations 30% assets include - ANS-capital gain property for which contribution amount is FMV certain contributions to private non-operating foundations 30% Limit - ANS-charitable contribution deduction for 30% assets cannot exceed 30% of taxpayer's AGI 50% Limit - ANS-In no case can charitable contribution deduction for a year exceed 50% of taxpayer's AGI 50% Organizations are - ANS-public charities and private foundations (both operating and non-operating) that qualify for the 50% ceiling A 30% ceiling applies to contributions - ANS-of cash and ordinary income property to private non-operating foundations that are not 50% organizations; contributions of appreciated capital gain property to 50% organizations A cash basis taxpayer must have _____ or ______ paid the Expense - ANS-Actually Constructively A Current Deduction is Not Allowed for Capital Expenditures except through - ANS-Amortization, Depletion, or Depreciation A Hobby is an Activity - ANS-Not Engaged in for Profit
A key distinction between trade/business expense and not a trade/business expense is whether or not the activity is a: - ANS-Hobby Accountable Plan - ANS-requires adequate accounting to employer for expense reimbursed any excess reimbursements must be returned to employer employee reports no income and takes no deduction Activities that have both Personal and Profit-Seeking motives are classified as - ANS-Hobbies Additional First Year Depreciation (Bonus Depreciation) allows taxpayer to - ANS-deduct additional 50% (2017) cost recovery in the year qualified property placed in service Additional First Year Depreciation is calculated as 50% of the adjusted basis ______ any Section 179 Expense, and _____ regular MACRS depreciation for that year - ANS-after; before Adjusted Basis is reduced each year by - ANS-The amount of cost recovery that is ALLOWED, and at least by the amount that is ALLOWABLE Adjusted Basis of an Asset is - ANS-The book value for tax purposes initial cost + capital additions - cost recovery to date (either allowed or allowable) AGI as a function - ANS-Income - Exclusions - Deductions for AGI All Events Test - ANS-All of the event have occurred to create taxpayer's liability Amount of the liability can be determined with reasonable accuracy ALLOWABLE cost recovery amount is - ANS-The recovery that COULD HAVE been taken under applicable cost recovery method ALLOWED cost recovery amount is - ANS-the recovery actually taken Amount Deductible for Transportation Expenses - ANS-Actual expenses: must keep adequate records of all expenses, depreciation is limited automatic mileage method 53.5 cents per mile for business miles for 2017
Business Bad Debts - ANS-Charge-off Method used Deduct as Ordinary Loss in the year where an estimable amount of the debt becomes Partially or Wholly Worthless Business expenses for self-employed are deductible - ANS-deductible FOR AGI Business Income Limitation - ANS-Election to expense cannot exceed taxable income of taxpayer's businesses or trades Business or Investment Expenses are Deductible only if - ANS-taxpayer can show that the activity was entered into for a Profit Can deductions FOR AGI be claimed if taxpayer does not itemize? - ANS-Yes - itemized deductions are a type of deduction FROM AGI Can there be a loss on rental property that is deemed as Primarily Rental use? - ANS-Yes - but only for deductions allocated to rental days, not for expenses allocated to personal days Capital Gain Property: - ANS-assets that would produce long-term capital gain or section 1231 gain if sold Carry-forward of amount exceeding Business Income - ANS-Any Section 179 amount in excess of business taxable income is carried forward to future taxable years and added to other amounts eligible for expensing then the various limitations (statutory amount, placed in service maximum reduction, and business income limitation) are applied in that year Civil or Criminal Defense Legal Fees are deductible only if: - ANS-they are primarily related to a Trade or a Business, or an Income-Producing Activity Combined Business/Pleasure Travel - ANS-Only actual expenses for Business are Deductible meals, lodging and other expenses must be allocated between business and personal days Deductibility of transportation costs depends on whether trip is Domestic or Foreign Common Personal Expenses classified as ITEMIZED Deductions (FROM AGI) include:
- ANS-Medical Expenses in excess of 10% of AGI
Certain State and Local Taxes Contributions to Qualified Charitable Organization Personal Casualty Losses in Excess of 10% (AGI) + 100*(#casualties) Certain Personal Interest Expense (Mortgage Expense on a PERSONAL Residence) Miscellaneous Itemized Deductions in Excess of 2% of AGI (hobby expenses) Commuting from home to work and back is - ANS-nondeductible exceptions: additional costs incurred to transport heavy tools employees with more than 1 job Contribution amount of capital gain property - ANS-Generally, the FMV of asset Contribution Deduction for Ordinary Income Property: - ANS-FMV of Asset - (net) ordinary income that would have been realized from selling it Generally, the lower of adjusted basis or FMV Contributions to Retirement Accounts - retirement plans fall into 2 major classifications depending on who is covered: - ANS-Most plans allow an exclusion from income for the contributions the employee makes to pension plan alternatively, using the approach followed by a Traditional IRA, a contributing employee is allowed a deduction FOR AGI max deduction is 5.5k in 2016, or 6.5k in 2016 for those age 50+ Convention travel expenses - ANS-no deduction for travel unless directly related to taxpayer's trade or business Cost Recovery Deductions apply only to - ANS-Assets that for either Business Use or Income-Production Use Cost Recovery Deductions are NOT allowed for Personal Use Assets Deductible Contributions to HSAs are limited - ANS-to 3400 for self-only, 6750 for family care in 2017 Deductible losses of individual taxpayers are limited to Those: (These include Business and Nonbusiness Losses) - ANS-Incurred in a Trade or Business Incurred in a Transaction entered into for Profit Casualty Losses from Fire, Storm, Shipwreck, and Theft
Disallowance Possibilities: - ANS-Tax Law disallows the Deduction of Certain Items under some circumstances, relating to: Expenditures Contrary to Public Policy Legal Expense Incurred in Defense of Civil or Criminal Penalties Expenses Relating to an Illegal Business distance test - ANS-distance from new job to old home must be at least 50 miles farther from old job to old home new job must be at least 50 miles farther from old home as old job was from old home Domestic Production Activities Deduction is: - ANS-9% of the lesser of either: Qualified Production Activities Income or Taxable Income (Business) Modified Adjusted Gross Income (Individuals - sole proprietors) Domestic Production Activity Deduction is based on _______ from _________ - ANS-income; manufacturing activities in the US Earnings on funds in HSAs are - ANS-not taxable Economic Performance Test - ANS-The service, property, or use of property giving rise to the Liability is actually Performed, Provided for, or Used by the taxpayer Education expenses include: - ANS-tuition books supplies transportation travel (lodging and 50% meals) Education expenses of an employee are not Deductible if they are incurred: - ANS-to meet minimum education standards for existing job to qualify taxpayer for new trade or business Education travel expenses - ANS-travel as form of education is not deductible Employee Contributions to HSAs are Deductible ____ AGI - ANS-FOR
Employee Education Expenses are Deductible if they are incurred: - ANS-to maintain or improve existing skills to meet express requirements of employer or requirements imposed by law to retain employment status for a degree-seeking thing, no cpa review courses Employee Expense categories - ANS-transportation travel moving education entertainment other Employee Expense Classification depends on - ANS-whether reimbursed, and if reimbursed, under what type of plan employers can have 3 types of reimbursement plans - ANS-accountable nonaccountable no reimbursement given Entertainment Expenses can be classified as either - ANS-directly related to business - actual meeting or discussion occurs during meal or entertainment associated with business - meal or entertainment directly precedes or follows business meeting or discussion Entertainment Expenses Deductible amount allowed - ANS-50% of meals and entertainment costs including related taxes, tips, cover charges, parking fees, and room rental fees 100% of transportation costs amounts cannot be lavish/extravagant Examples of Miscellaneous Itemized Deductions Subject to 2% floor - ANS-most reimbursed expenses under non-accountable plan unreimbursed employee expenses section 212 expenses not related to rents and royalties tax return prep feees hobby expense up to hobby revenue investment expenses (except interest and taxes)
Expenditures for deductions can be any of 3 mutually exclusive categories: - ANS-Investment/Production of Income (Section 212) Trade or Business (Section 162) Personal Activity Expenses Relating to an Illegal Business - ANS-The Ordinary and Necessary Expenditures of operating an illegal business are Deductible Exception for Drug Dealers: Drug Dealers are not allowed a deduction for Ordinary and Necessary Expenses incurred in their business, except for COGS Fees are _____ as tax - ANS-Not deductible FICA and excise taxes are - ANS-not Dedcutible For a Charitable Contribution to be Deducted ____ AGI, the contributor must: - ANS-FROM AGI; have Donative Intent and Expect Nothing in return For Business/Trade Expenses (162) and for Investment/Production of Income (212) expenses to be deductible, they must be: - ANS-Ordinary: Normal, usual, or customary for others in similar businesses, and NOT capital (big exp) in nature Necessary: a Prudent Businessperson would incur the same Expense Reasonable: salaries, compensation for services for domestic travel, if primary purpose is pleasure, transportation is - ANS-not deductible, but other expenses (lodging) associated with business days are deductible only if associated with business For domestic travel, if primary purpose of trip is business, transportation is deductible _____, and all other travel expenses (meals, lodging) are also deductible ______ - ANS-in full only for those allocated to business days For sales/use taxes, deduct either: - ANS-actual sales/use tax payments OR amount from an IRS table for self-employed people, how much of health insurance premiums are deductible, and they are deductible _____ AGI - ANS-100% FOR
For state and local income taxes, deduct the amounts during the year for: - ANS-amounts withheld estimated tax payments amounts paid in the current year for prior year's liability General Limitation to Charitable Contribution 2: If qualifying contributions > 20% AGI, the deductible amount may be limited to_______, depending on_____ - ANS-20%, 30%, or 50%; the type of property given and the organization to which the donation is made General Limitation to Charitable Contributions 3: In any case, the maximum charitable contribution deduction may not exceed - ANS-50% of AGI General Limitations to Charitable Contributions 1: if qualifying contributions for year total 20% of AGI or less, they are - ANS-fully deductible half year convention makes it so you have ______ of depreciation in year 1, and ______ of depreciation in the final year (year of disposal) and ______ of depreciation each year in between - ANS-6 months 6 months 1 full year Half-Year Convention for Personalty is a ______ rule for ______ It says that Assets are treated as if _________ this is regardless of when they were - ANS-General rule for PERSONALTY they were placed in service in the MIDDLE of the tax year they are placed in service or disposed of actually placed in service or disposed of Health Savings Accounts are often used in conjunction with - ANS-High Deductible Medical Insurance Plans Hobby Expenses are Deductible only - ANS-to the Extent of Hobby Income (Deductible Hobby Expenses cannot exceed Hobby Income) Hobby Expenses are treated as _____, and therefore are Deductible ____ AGI as a general rule - ANS-Miscellaneous Itemized Deductions FROM - itemized deductions
What is the total Deduction related to this business for the year 2017? - ANS-$3,000 is deducted in current year because 5,000 - [52,000 - 50,000] = 3, The balance, 49,000 (52,000 - 3,000) = 49,000 must be amortized over 15 years total Deduction = 3,000 + 49,000(3/180) = 3, If a business bad debt is partially worthless, deduct as _____ the ______ amount - ANS-Ordinary Loss Partially Worthless if a business donates depreciable property, it is ______ of the amount of any depreciation recapture that would have been recognized had the property been sold - in other words, - ANS-ordinary income property; if depreciable property's basis is not 0 at the time of sale, the amount of depreciation waiting to be depreciated (aka the adjusted basis at time of sale) is the amount of contribution deduction for that ordinary income property if a depreciation deduction is not taken, the basis of the asset is still reduced by _____ - ANS-the allowable amount if a depreciation deduction is taken, this amount ______ - ANS-reduces the basis the asset - what you normally expect if a taxpayer uses straight-line instead of accelerated method for their depreciable personalty - ANS-they must use the class life of the asset as the recovery period must use half-year convention or mid-quarter convention as applicable can elect to change their method annually all assets of a certain class must use the same method: either MACRS or Straight Line (can't have 2 manufacturing machines with 1 using MACRS and the other using Straight Line) If an activity is entered into for Profit, taxpayer can deduct Expenses ____ AGI, and an overall ______ can be reported for tax purposes from the activity entered into for profit, because _______ - ANS-FOR AGI ; LOSS ; Expenses even in excess of revenues for the activity can be deducted for activities entered into for profit (there can be a loss for profit activities, but not for hobby activities) If an employer pays all or part of taxpayer's medical insurance premiums, the amount paid by the employer is - ANS-not included in gross income of employee, and
not deductible by employee as medical expense If contributor receives tangible benefit from donating, the _____ of the benefit _____ the amount of the charitable contribution deduction - ANS-FMV; reduces If inventories are an income-producing factor in a Business, the individual business owner must - ANS-use accrual method for sales and cost of goods sold if personal use assets are converted to business or income-producing use, the basis for cost recovery and for calculating loss at that point is: - ANS-the lower of either: adjusted basis at time of conversion fair market value at time property was converted If previously deducted partially worthless bad debt becomes totally worthless in a future year, deduct - ANS-only the amount not previously deducted (the remainder) if real property is purchased and placed into service on 4/25, on what date will it be treated as being placed into service? - ANS-4/ if receivable has been written off and deducted and is collected after, in a later year - ANS-collection of receivable should be included in income in the year received if the previous year deduction resulted in a tax benefit If taxpayer is in a business the same as or similar to that being investigated - ANS-Investigation Expenses are Deductible in the Year Paid or Incurred This is the case regardless of whether the Acquisition Occurs If taxpayer is not in a business the same as or similar to that being investigated - ANS-Depends on whether the New Business is Acquired or Not: If not Acquired: All investigation Expenses are Nondeductible If Acquired: Investigation Expenses must be Capitalized as Startup Expenditures May elect to Deduct the first $5,000 currently Any excess over 5,000 must be Amortized over a period of 15 Years or Longer Finally, in calculating the first $5,000 immediately allowed to be deducted, a reduction of this amount is made equal to Expenses Paid Exceeding 50, if taxpayer's charitable contribution deduction exceeds the applicable maximum, they may be _____ for a period of up to ______ - ANS-carried forward; 5 years
so note: tax legal advice for the preparation of a BUSINESS tax return would be a deduction FOR AGI Legal Expenses Deductible FROM AGI: - ANS-All other deductible legal expenses besides those deductible FOR AGI such as tax legal advice for the preparation of an income tax return for the INDIVIDUAL'S tax return Limitations on Charitable Contribution Deduction are based on - ANS-Taxpayer's AGI, type of property donated, and charity receiving property MACRS applies to - ANS-assets used in trade or business or for production of income (not personal assets) assets subject to wear and tear or obsolescence assets that have a determinable useful life or that decline in value on a predictable basis assets that are tangible personalty or realty MACRS Classes for Realty - ANS-Residential Rental Realty Nonresidential Realty MACRS requires ______ depreciation for real estate - ANS-straight-line medical expenditures are deductible in the year they are - ANS-paid Medical Expenses do not include - ANS-unnecessary cosmetic surgery general health items nonprescription drugs Medical Expenses include expenditures for - ANS-the diagnosis, cure, mitigation, treatment, prevention of disease the purpose of affecting any structure or function of the body of taxpayer, spouse, or dependent includes prescription drugs and insulin Medical Insurance Premiums paid for medical care insurance are _______ - ANS-Deductible medical expenses Mid-Quarter Convention for Personalty applies when ______ of total personalty value is placed in service during ______ - ANS-more than 40% the last quarter of the tax year
Miscellaneous Itemized Deductions - ANS-subject to 2% of AGI limitation (generally) Miscellaneous Itemized Deductions are generally subject to a - ANS-2% of AGI floor Miscellaneous Itemized Deductions Not subject to 2% floor - ANS-impariment-related work expenses of handicapped people gambling losses (to extent of winnings) certain terminated annuity payments Miscellaneous Itemized Deductions not subject to the 2% AGI floor include - ANS-gambling losses to extent of gambling winnings impairment-related work expenses of a handicapped person deduction for repayment of amounts under a claim of right if more than 3000 unrecovered investment in an annuity contract when annuity ceases by reason of death Moving Expenses are deductible for moves - ANS-in connection with the commencement of work at a new principal place of work Nonbusiness Bad Debts - ANS-debt unrelated to taxpayer's trade or business Nondeductible Items for Contributions to Qualified Organizations include - ANS-dues, fees, bills paid to country clubs, lodges, frats, etc cost of raffle, bingo, lottery tickets cost of tuition value of blood given to blood bank donations to homeowners' associations gifts to individuals rental value of property donatively rented out to charity Nonresidential Realty and its class life - ANS-I guess business realty class life: 31.5 or 39 years Nursing Home: if primary purpose for being in nursing home is medical, then - ANS-meal, lodging, and all medical costs qualify Nursing home: if primary purpose for being in nursing home is personal, then - ANS-only specific medical costs qualify, excluding meals and lodging`
Rental expenses are deductible only to the extent of rent income, cannot have a rental loss treated similar to hobby: rental expenses deducted in 3-step process:
- expenses deductible anyway (property tax, mortgage interest) deducted first
- if positive net income results, expenses other than depreciation, that are deductible for rental property (maintenance, utilities, insurance) deducted next
- if positive net income still remains, depreciation is allowed no rental loss allowed Any disallowed expenses (those that would have made rental result in a loss) are carried forward Personalty - ANS-anything that is not realty - anything that is not land or permanently affixed to land Personalty vs Personal use Property - ANS-personalty is property not affixed to land - personalty (and realty) can be either for Personal Use or Business/Production of Income Use Political Contributions and Lobbying Activities: - ANS-No business Deduction allowed for payments made for Political Purposes or Lobbying Primarily Rental Use is classification given to rental vacation home if: - ANS-rented for
= 15 days and Personal use days <= the greater of: 14 days or 10% of rental days Private Non-Operating Foundation Exception - ANS-contribution deduction limited to adjusted basis Process for Determining Amount of Hobby Deduction - ANS-Start with Gross Income from Hobby Deduct Property Taxes, Mortgage Interest attributable to Hobby (in full) Remainder cannot be deducted below $0 (since we started with gross income, we cannot create a loss by deducting below 0) Deduct [expenses not affecting adjusted basis such as Maintenance, Utilities, Supplies pursuant to Hobby + expenses affecting adjusted basis such as Depreciation/Depletion/Amortization pursuant to Hobby]
If 0 not reached, then add together all deductible expenses belonging to categories 2 and 3 (those subject to 2% of AGI floor), and deduct from them 2% of AGI Add this difference to the property and mortgage interest in full, and this is your deduction from AGI (itemized deduction) as a result of Hobby Expenses If/when 0 reached, add together all category 2 and 3 deductions excluding those that create a hobby loss - apply 2% floor, then add mortgage interest and property taxes, this is your hobby deduction Property can be classified as either - ANS-Realty or Personalty Qualifications for Residential Rental Realty - ANS-more than 80% of gross rental revenues are from non-transient dwelling units Apartment Buildings note: hotels, motels don't count because these are for transient dwellings class life: 27.5 years Qualified Property for Bonus Depreciation - ANS-most New (not used) depreciable assets Other Than Buildings with Recovery Period of 20 years or less Qualified Residence Interest is Deductible _____ AGI, and what are its Limitations? - ANS-FROM AGI Interest must be on Acquisition indebtedness or Home Equity Loan Maximum loans on qualified residences that will produce qualified deductible residence interest is 1.1 million Real estate taxes for the year property is sold must be - ANS-apportioned between buyer and seller according to how the portion of the year each was respectively in possession of the realty Realty - ANS-land, buildings permanently affixed to land Regular Method for Office in Home Deduction - ANS-Relevant expenses categorized as direct or indirect direct expenses benefit only the business part of the home - deducted in full indirect expenses are for maintaining and operating the home - allocate between business and personal
