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Chapter 17 with Homework

Chapter 17 with Homework - Restrictions on Deductions...

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Restrictions on Deductions Chapter 17 At Risk Limitations - §465 Hobby Losses - §183 Home Deductions - §280A Passive Activity Losses - §469 Illegal Activities
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Restrictions on Deductions Restrictions generally come in two forms: Denial – permanently disallow deductions (§280A) Deferral – requires waiting until some future time or event to offset the deductions against income (§465, 469)
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At Risk Deferral - §465 Generally, this section limits the amount of deductions you can take to the amount you have invested. Note this does NOT mean your basis. Basis includes non-recourse liabilities, while at risk amount does NOT.
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At Risk Deferral - §465 Section applies to individuals and closely held C corporations who are involved in an active trade or business or pursuit of profit. Does not apply to partnerships and S corporations as entities, but instead applies to their owners. Attributes the activities of the entities to the owners.
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At Risk Deferral - §465 This is a “cumulative” section, not an annual test. Once your losses exceed your “at risk basis” you can no longer deduct your losses. If your amount at risk goes up (i.e. you invest more money or have a profitable year), you can deduct carryover losses. Losses do not disappear, just are deferred.
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At Risk Deferral - §465 Real Estate gets a special exemption that allows you to include non-recourse debt in your “at risk basis” amount. Loan must be from one of the following to count: Government Guarantee from the government A third party who is regularly in the business of lending money.
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Hobby Losses - §183 Also know as “activities not engaged in for profit” These rules act to prevent you from deducting your excess expenses over your hobby income. A permanent disallowance section.
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Hobby Losses - §183 What is a hobby? IRS created a rebuttable presumption that if you do not make a profit in at least 3 years of a 5 consecutive year period, then the activity is not engaged in for profit and is therefore a hobby. Rules for horse businesses are 2 years out of 7.
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Hobby Losses - §183 What is a rebuttable presumption? Means that through objective facts and circumstances, you can prove that even though you lost money for more than 2 of the years, you truly are engaged in an active trade or business or profit seeking activity. Thus your losses should be allowed (subject to the passive and at risk rules)
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Hobby Losses - §183 IRS and taxpayers can use a list of roughly 8 main items to determine whether an activity is engaged in for profit: Is there a written business plan? Use of outside experts Maintain complete and accurate books and records Devote a significant amount of time to the business Realize significant appreciation on the assets Significant investments in the business Limited elements of personal pleasure Expertise in the business
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Hobby Losses - §183 Determination of gain or loss: Hobby income, less Other fully deductible items
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  • Spring '08
  • Professor
  • Supreme Court of the United States, Taxation in the United States, Generally Accepted Accounting Principles, Passive Activity Losses

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