Chapter 6 Deductions and Losses

Individual Taxation

I am answered my own questions to determine if I understand. Also, some of the questions I have paraphrase in my owns without looking in the textbook.

I need you to read each question and determine if I answer my questions correctly. And answer the questions that are blank. I really appreciate it.

Questions

1. What is the maximum business expense losses to deduct for property?

• The TCJA also limits deductions of "excess business losses" by individual business owners. Married taxpayers filing jointly may deduct no more than $500,000 per year in total business losses. Individual taxpayers may deduct no more then $250,000. If a business is owned through a multi-member LLC taxed as a partnership, partnership, or S corporation, the $250,000/$500,000 limit applies to each owners' or members' share of the entity's losses

1. When a taxpayer activity is a hobby, how to determine which items are miscellaneous expenses that are deductible?
2. What are three classifications for rental vacation homes? What are the tax rules for income and expenses for each classification?
   1. Personal Residence- Personal Use less than 15 days gross income is excluded

Personal Use more than 15 days gross income included and no losses allowed nor deductions

1. Primary Personal Residence
   1. Dont know
   2. Hybrid 50/50 Personal Use and Rental

1. Under Personal/Hybrid Rental Home, is the utilities and depreciation expense is For AGI or From AGI? Utilities is a miscellaneous Expense FROM AGI
2. How to determine a deduction is From or For AGI?
3. What does this mean To be deductible, an expense must be both ordinary and necessary.? I dont know.
4. What is the qualified business income deduction?

20 Percent deduction of AGI or Modified Adjusted Gross Income

1. Who qualifies for the qualified business income deduction?
   1. Self Employed Persons and Small Business Owners
2. What is "qualified business income"?
   1. Revenue that is generated from trade or business
3. What is the formula for Qualified Business Income?
4. Under the Accrual Method Requirements, what is the economic performance test? Dont know
5. Explain the 12 Month Rule.
   1. Dont know
6. In Example 19, Chapter 6, I do not understand this paragraph

• Rita pledged $50,000 to her churchs special building fund. She can make the contribution on December 31, 2022, or January 1, 2023. Rita is in the 24% tax bracket in 2022 and in the 35% bracket in 2023. She itemizes her deductions in both years. Assume that Ritas discount rate is 5%. If she takes the deduction in 2023, she saves $4,667 ($16,667 $12,000). Even though the tax savings from a January 1, 2023 contribution wont be realized until her 2023 tax return is filed, the increase in her deduction due to her increased marginal tax rates overcomes the time value of money consequences. See Table E-2
• Dont understand how the increase in her deduction due to her increased marginal tax rates overcomes the time of money consequences

1. Differentiate between deductions for and from adjusted gross income and describe the relevance of the differentiation. Dont know
2. Describe the cash and accrual methods of accounting with emphasis on the deduction aspects.
3. Identify tax planning opportunities for maximizing deductions and minimizing the disallowance of deductions
4. What are ordinary and necessary expenses? Provide examples
5. For an expense to be deductible, the expense has:
   1. Profitable 3 out of 5 years
6. What are employee expenditures?
7. What is economic performance test?

Economic Performance and the All-Events Test for Determining Timing of Deductions. Under the accrual method, a taxpayer deducts or capitalizes an expense when all events have occurred that fix the fact of liability and the liability can be determined with reasonable accuracy

1. What does Prepaid Expenses The 12-Month Rule mean?
2. Explain the Time Value of Tax Deductions.
3. Explain Excessive Executive Compensation. What is the limit amount executives can deduct?
4. What are personal and capital Expenditures?
5. Explain Disallowance of Deductions for Capital Expenditures and what is disallowed and deducted.
6. What is the actually paid requirement?
7. Under Accrual Method Requirements, what does The economic performance test is met only when the service, property, or use of property giving rise to the liability is actually performed for, provided to, or used by the taxpayer mean?
8. How to understand how deductions of individual taxpayers are classified?
9. Why Federal Income tax is non- deductible?
10. What is economic performance test?

19. Explain 6-3i Disallowance of Deductions for Capital Expenditures

20.

1. Explain to me the logic behind this statement legal fees incurred in connection with a criminal defense are deductible only if the crime is associated with the taxpayers trade or business or income-producing activity.

1. What does investigating a business mean?

1. What are miscellaneous itemize deductions?

1. A list of expenses that do not fit into any specific category. The items are FROM AGI.

Paraphrasing

Terms

• Qualified Business Income- income that is specified for S Corp, Sole propertiership and partner ship income.
• Casualty Losses- when taxpayers suffer financial losses due floods, storms, tornadoes. It is natural disasters they have no control over.
• Reasonableness-to determine an expense is deductible means rationale and common
• Ordinary income- common and usually way of
• Necessary- has to happen,
• average gross receipts test- Dont know.
• Accounting method
  • An procedure to recognize and record transactions
• Deductions for adjusted gross income
  • List of amounts that reduce gross income
• Deductions from adjusted gross income
  • Reduce AGI
• Hobby losses- taxpayer generates income from activity but has a net loss. Hobby are not deductible more than hobby income
• Ordinary and necessary-
• Qualified business income (QBI)
• Reasonableness
• Related-party transactions
• Startup expenditures
• Vacation homes-
• Public Policy
• Timing of Expense Recognition