Unformatted text preview: Business Income, Deductions and Losses
Certain Business Expenses and Losses Review For/From AGI Deductions Business deductions most common from AGI Itemized deductions From AGI Worthless Securities Section 165 treatment as sale for $0 on the last day of the year. Section 1244 first $50,000 or $100,000 MFJ treated as ordinary in year of loss, if original capital contributed is less than $1 Mil. and shareholder is individual buying from corp. Qualified small business stock exclude 75%of stock acquired between 2/2009 and 1/1/2011 (assets <= $50 million Transportation Differs from travel in that a reasonable person would not be away from home overnight. Taxi fares, auto expenses, tolls, parking NOT commuting unless: You must carry bulky tools to temporary worksite deduction Transportation between jobs, work stations To first and from last site deductible Auto Expenses If vehicle is owned or leased, may use actual expenses or (standard mileage allotment of $0.50 for 2010 ($0.485 for 2007) + parking & tolls), unless part of a fleet of 5 or more. Switches between methods tricky, often not allowed. Different rules apply for taxis. Maximum Dpn for 2010, autos: $3,060 Yr 1; $4,900 Yr 2; $2,950 Yr 3; $1,775 Yr 4+. Trucks sllightly higher. Sample Question J.B., a selfemployed taxpayer, acquired a car this year and uses the standard mileage method to compute her deduction for automobile expenses. During the year, J.B. drove 50,000 miles: 40,000 for business and 10,000 for personal purposes. Other expenses related to the car that she has brought to her tax advisor's attention include insurance of $400, parking on business calls of $50, and interest on debt incurred to purchase the car of $1,000. What is J.B.'s deduction for automobile expenses (assume mileage rate is 36.5 cents per mile for all units)? a. $14,650 b. $15,450 (40000*.365+50+1000) c. $15,650 d. $14,600 Travel Expenses Away from home, longer than an ordinary day's work, temporary assignment of less than 1 year. Must be for business (travel as a form of education not allowed) Generally no deduction for spouse/family Rules for domestic travel different from foreign travel. TV Tax 9 Sarah travels from Austin to Dallas for American Idol auditions. Her only current employment is singing at local Austin venues. Would her travel to Dallas qualify as a job hunting expense? Yes, it's a miscellaneous itemized deduction subject to the 2% floor. Domestic v. Foreign Travel If domestic, all air fare deductible *if* primary purpose of trip is business; else none is deductible If foreign, prorate between business and personal Travel as a form of education is not deductible Sample Question R, a museum director, timed a business trip to Egypt to coincide with a trip to the Pyramids organized by her college's Alumni Association. She spent 14 days on business and 7 days sightseeing at the Pyramids. Air fare was $1,500, and lodging plus 50 percent of R's meal costs totaled $75 a day. She can deduct a. $1,000. b. $1,050. c. $2,050. (1500+75)*14/21
d. $3,050. Sample Question L flew from Chicago to Miami primarily for a business meeting. The meeting lasted three days, so she stayed in Miami for two additional days to enjoy the sunshine and visit. With respect to the plane fare for the trip, L should a. prorate the plane fare based on time devoted to business and personal activities and deduct the business portion. b. divide the plane fare equally between business and personal activities and deduct the business portion. c. deduct the entire plane fare. d. deduct none of the plane fare. Education Expenses Must be required by employer or law OR Maintain/improve existing skills BUT NOT qualify for a new trade or profession Deductible Subject to 2% floor: travel/transportation, books, tuition (unless tuition taken FOR AGI), room & board FOR AGI up to limit May prefer HOPE/Lifetime credits Sample Question The moving expense provisions are designed to ensure that deductions are granted only when expenses arise from business concerns. Which one of the following statements most correctly describes the operation of the rules governing moving expenses? a. A deduction is denied unless the taxpayer moves more than some predetermined amount from his former residence. b. A deduction is denied unless the taxpayer's commute, absent the move, would have increased by more than some predetermined amount. c. A deduction is granted as long as a taxpayer's move is attributable to a job change. d. A deduction is granted if the taxpayer obtains either parttime or fulltime employment at the new job site. Office in Home Part of home used exclusively for business on a regular basis, OR daycare Limited to income from business, with carry forward Deduct itemizable deductions first, then repairs, utilities etc., then depreciation For AGI if selfemployed, else, miscellaneous deduction subject to 2% floor Sample Question 11. Rebecca has a qualifying home office. The room is 600 square feet; the entire house is 3,000 square feet. Use the following to determine her allowable home office deduction: Revenue from legal practice, $160,500; Expenses (before office), $157,000; Office in home expenses (100%): Mortgage interest Property Taxes Homeowners Insurance Utilities Convert patio to sunroom Depreciation (office only) $10,000 $ 3,300 $2,000 $1,200 $5,000 $ 800 Possible Answers: A) $ 3,300 home office deduction B) $ 16,500 home office deduction C) $ 3,500 home office deduction D) $ 4,100 home office deduction ( (10000+3300+2000+1200)*20% + 800) E) No deduction is allowed this year Miscellaneous Employee Business Expenses Special clothing & cost of cleaning them Job hunting expenses if in same trade or business (not first job but moving to first job ok) School supplies paid by teachers and not deducted FOR AGI. Sample Question Which of the following is considered a miscellaneous itemized deduction subject to the 2% of A.G.I. limitation? a. Moving expenses of an employee. b. Interest expenses attributable to a mortgage on the taxpayer's principal residence. c. Property taxes assessed on the taxpayer's residence. d. Tax preparation fee. Meals & Entertainment 50% deductible, unless reimbursing contractors Must be directly related or associated with business & not lavish. Taxpayer must be present at meal (else, may be gift). Tickets limited to face value; sky boxes are luxuries limited to face value of nonluxury seats Club dues almost NEVER deductible Sample Question When J became a partner in the public accounting firm of PL&A, he was required to obtain a membership at a country club. During the year, he spent $5,000 for dues. His records indicate that he used the club as follows: Business meals 40 days Substantial business discussions at the office followed by golf at the club 100 days J. may deduct dues of a. $0. b. $800. c. $1,600. d. $2,800. 60 days Personal use Gifts Limited to $25/donee per year before gift wrapping, engraving, shipping, etc. Gifts to supervisors not deductible Research & Experimental Expenses Development of experimental or pilot model, plant process, product, formula, invention Improvement of above Does not include ordinary testing, advertising Generally expensed, but may be deferred & amortized, or capitalized May prefer similar applicable credit Domestic Production Activities Deduction 3% of lesser of : Qualified production income Taxable income Limited to 50% of W2 wages 6% in 2007 2009; 9% 2010 Flowthrough expense Production expenses does not include sale of food, relatedparty leases Direct production income direct production expenses Bad Debt Expenses Must use specific chargeoff method Usually not deductible for cash basis taxpayers Debt must be "worthless" Nonbusiness bad debts are treated as short term capital losses when they become totally worthless Related party loans Either gift or bad debts depending on facts & circumstances Involuntary Conversions From destruction, theft, seizure, (threat of) condemnation Gains deferred to the extent of similar or related use replacement property purchased. Exception: if condemned real property, only need be "likekind" Replacement must be no later than 2 tax years after year of gain (3 years if due to condemnation), with extensions sometimes granted Loss recognition is mandatory "Boot" is nonlikekind property, usually cash or Effect of Boot on Involuntary Conversions
assumed liability If net boot received, gain recognized is lesser of realized gain or boot received. Basis of boot received is FMV Basis of likekind property is substitute basis +/ net boot given +/ gain or loss recognized, or Amount after tax that you're outofpocket Holding period for boot begins with exchange, likekind property has carryover holding period 4. Which of the following is not considered an involuntary conversion? a. Voluntary sale of property after public announcement that it will be condemned for use as a highway right of way b. Weather damage that meets all tests for casualty loss treatment except the suddenness test c. Theft of property d. Actual condemnation of property because it was structurally unsuitable for occupancy Casualty Losses Watch for special Katrina/Rita provisions Sudden, unexpected, unusual Not due to taxpayer negligence While in a domestic dispute, Mr. Blackman set his wife's clothes on the stove and set them on fire, which spread to the rest of the house, even though he thought he had put them out with water: Deductible? Theft Losses Deducted in the year of discovery Do not include "lost" items Not deductible if "reasonable prospect for recovery exists" Amount of Casualty and Theft Losses Loss = amount of damage: Less: insurance proceeds Lesser of basis or change in FMV If for an individual, also deduct 10% of AGI/year and $100 per incident Personal Casualty Gains If gains exceed losses, then net gains are capital gains Gilligan's Island TV Tax Mr. & Mrs. Howell, Ginger, Mary Ann and the Professor hire the Skipper and Gilligan to take them on a 3hour tour. They sail into a storm and are shipwrecked. What is the amount of the casualty loss to each of the castaways? Destroyed Baseball Card A mint condition 1952 Mickey Mantle rookie baseball card, which was kept in a safety deposit box was destroyed in 2001 by a flood. The basis of the card was $40, the FMV was $40,000. How much is deductible? (Lesser of the basus or the change in FMV) Presidentiallydeclared Disaster Areas Change the timing of casualty loss filing: Option of including casualty in the current year or Not subject to 10% floor Extra standard deduction in 20082009 Loss good against AMT
year just past Cash & Accrual Basis Accounting Exceptions Cash exceptions Capital expenses including intangibles (except as allowed by Sec. 179, R & D, mineral development, soil conservation, medical home improvements, taxes on investment realty) Prepaid items for longer than 1 year Medical expenses paid for or charged Items charged to a charge card are considered paid Reserves for bad debts Accrual exceptions Sample Question 12. X, a psychiatrist, is a cashbasis taxpayer. He charges Z $100 per session and bills him monthly. When Z declares bankruptcy, he owes X $400. What course of action is open to X? a. $400 may be currently deducted against ordinary income. b. $400 may be currently deducted against capital gains. c. Any deduction is postponed until Z is released. d. No deduction is allowed. 6. Which of the following is a true statement concerning the treatment of bad debts of an accrual based taxpayer? A) A company can estimate its bad debt expense for tax purposes. B) The deduction for bad debts is generally the same for cash and accrual basis taxpayers. C) The deduction for bad debts is generally the same for tax and financial statement purposes. D) The bad debt expense is based on accounts receivable that are actually written off during the year. Net Operating Losses Carryback 2 years, carryforward 20 years May elect to forego carryback Where casualty/theft causes NOL, may carryback 3 years if attributable to presidentially declared disaster areas and incurred by small business (<$5 million in receipts) or farm 3, 4 or 5 years carryback 2008 NOLS for qualified small businesses of $15 million or less NOL is deduction for AGI in carryover years Net Operating Losses Almost negative AGI, but with casualty losses Net nonbusiness capital losses added back Net business capital losses added back Form 1045 ...
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This note was uploaded on 03/27/2012 for the course ACCT 3321 taught by Professor Chambers during the Spring '09 term at Texas A&M University, Corpus Christi.
- Spring '09