Ind. IO Chap. 6 - 2008

Ind. IO Chap. 6 - 2008 - Chapter I:6 Deductions and Losses...

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Chapter I:6 Deductions and Losses Learning Objectives After studying this chapter, the student should be able to 1. Distinguish between deductions for and from AGI. 2. Discuss the criteria for deducting business and investment expenses. 3. List the substantiation requirements for deducting travel and entertainment expenses. 4 Explain the timing of deductions under both the cash and accrual methods of accounting. 5. Explain the tax consequences of wash sales. 6. Explain the tax consequences of transactions between related parties. 7. Discuss the criteria used for determining whether an activity is a hobby or a trade or business. 8. Determine the tax consequences of vacation homes. Areas of Greater Significance Students must understand whether an expense is a deduction for or from adjusted gross income. The adjusted gross income subtotal is used to calculate several different limitations. Also the relationship between the standard deduction and itemized deductions is affected by whether deductions are taken for or from AGI. Areas of Lesser Significance In the interest of time, the instructor may determine that the following areas are best covered by student reading, rather than class discussion. 1. Proper substantiation requirement. 2. Expenses and losses must be incurred directly by the taxpayer. I:IO6-1
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The following areas may prove especially difficult for students: 1. Whether an expense is deductible for or from AGI. 2. When a home office is deductible. 3. Which expenses related to a vacation home are deductible. Highlights of Recent Tax Law Changes The following item of tax law changed since the 2007 edition of this chapter: 1. The Sec. 179 deduction has increased to $112,000 in 2007. Teaching Tips 1. At this point you may wish to stress the proper substantiation requirements. The importance of adequate record-keeping should be emphasized for both the taxpayer and the preparer. 2. This chapter has several topics of special interest. It is important to keep the students' interest level up by spending time on "fun" topics. Topics that students typically enjoy include expenditures that are contrary to public policy, expenses related to drug activity, hobby losses, vacation homes, and home office deductions. Lecture Outline I. Classifying Deductions as For versus From AGI (Question I:6-2; Problem I:6-33) Whether a deduction is for AGI or from AGI (an itemized deduction) is important for utilization reasons and limitation reasons. 1. If a deduction is classified as an itemized deduction, it will have tax benefit only if the total of itemized deductions exceeds the applicable standard deduction. Examples of itemized deductions are medical deductions, qualified residence interest, certain nonbusiness taxes, charitable contributions, personal casualty and theft losses, and miscellaneous itemized deductions. I:IO6-2
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Ind. IO Chap. 6 - 2008 - Chapter I:6 Deductions and Losses...

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