ACCTG 5130 Tax Ch. 6
What are deductions FROM AGI?
everything else that the Code allows: Production or conservation of income Personal expenses
Quiz #1 Jorge is a single individual age 42 and had the following income and expenses during 2020: Income: Salary: 43,000 Rental of a vacation home (rented 60 days, used 60 days and vacant 245 days): 4,000 Local municipal bond interest: 2,000 Dividend from Apple Inc.: 400 Expenses: Interest on home mortgage: 8,400 Interest on vacation home mortgage: 4,758 Interest on loan used to buy local municipal bonds: 3,100 Property taxes on home: 2,200 Property taxes on vacation home: 1,098 State income taxes withheld from salary: 3,300 State sales tax: 900 Charitable contributions: 1,100 Tax return preparation fees: 300 Utilities and maintenance on vacation home: 2,600 Depreciation on rental portion of vacation home: 3,500 Calculate Jorge's taxable income for the year. If Jorge has any options, choose the method that maximizes his deductions.
23,507
#34 Daniel, age 38, is single and has the following income and expenses in 2020: Salary: $60,000 Net Rent Income: 6,000 Dividend income: 3,500 Payment of Alimony (divorce finalized in March 2019): 12,000 Mortgage interest on residence: 9,900 Property tax on residence: 1,200 Contribution to traditional IRA: 5,000 Contribution to the United Church: 2,100 Loss on the sale of real estate (held for investment): 2,000 Medical expenses: 3,250 State income tax: 300 Federal income tax: 7,000 A. Calculate Daniel's AGI B. Should Daniel itemize his deductions from AGI or take the standard deduction? Explain.
A. 60,000 (salary) + 6,000 (rent income) + 3,500 (dividend income) - 5,000 (Contribution to traditional IRA) - 2,000 (loss on sale of real estate held for investment) = 62,500 B. Standard deduction for single people is $12,400 Itemized deduction: Mortgage interest: 9,900 Property tax: (up to 10,000 for taxes) 1,200 Charities: 2,100 Medical expenses: 10%*62,500 = 6,250, but this is the max, actual was 3,250, it's 3,250 - 6,250 = -3,000 (don't put on deductions) Taxes: (up to 10,000 for taxes) 300 (can't include federal) Total deductions: 9,900+1,200+2,100+300=13,500 Daniel should itemize deductions (13,500) because it is more than the standard deduction (12,400) 62,500 - 13,500 = 49,000 4,617.50 + (22%*(49,000-40,125)) = 6,570 Minus federal income tax prepayments: 6,570 - 7,000 = -430 Refund: 430
#29 Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year: Rent: 24,000 Bribes: 40,000 Travel expenses: 4,000 Utilities: 18,000 Wages: 230,000 Payroll taxes: 13,800 Property insurance: 1,600 Illegal kickbacks: 22,000 What are Vella's total deductible expenses for tax purposes?
All ordinary and necessary expenses incurred in operating an illegal business are deductible. Expenses that are in violation of public policy are not deductible (bribes and illegal kickbacks). All other expenses, which total $291,400, are deductible.
#42 Henrietta, the owner of a very successful hotel chain in the Southeast, is exploring the possibility of expanding the chain into a city in the Northeast. She incurs $35,000 of expenses associated with this investigation. Based on the regulatory environment for hotels in the city, she decides not to expand. During the year, she also investigates opening a restaurant that will be part of a national restaurant chain. Her expenses for this are $53,000. She proceeds with opening the restaurant, and it begins operations on September 1. Determine the amount that Henrietta can deduct in the current year for investigating these two businesses.
Even though Henrietta decides not to pursue the expansion of her hotel chain into another city, the investigation expenses of $35,000 are deductible in the current year. Because Henrietta is in the hotel business, all investigation expenses associated with the hotel business are deductible in the year paid or incurred. Because Henrietta was not in the restaurant business, she can deduct only part of these investigation expenses. Of the $53,000, an amount of $2,000 [$5,000 − $3,000 (reduction for excess over $50,000)] can be immediately expensed. The balance of $51,000 ($53,000 − $2,000) is amortized over a period of 180 months at the rate of $283.33 per month ($51,000 ÷ 180) commencing in September (the month the business is started). Consequently, the total deduction for the year is$35,000 for the hotel investigation + $3,133.32 [$2,000 + ($283.33 × 4 months)] for the restaurant investment, or a total of $38,133 (rounded).
Examples of FOR AGI deductions
Most are business, but some are personal: Trade or business and farming expenses (does not include an employee) Reimbursed employee business expenses Capital losses Rent and royalty expenses Alimony payments (suspended under TCJA for divorces after 12/31/2018 through 2025) Contributions to certain retirement plans Penalty for early withdrawal on a savings account Moving expenses (suspended under TCJA for 2018 through 2025) Interest on educational and student loans ½ Self-employment tax Medical insurance premiums paid by self-employe individuals Qualified tuition and related expenses Teacher supplies up to $250 for elementary and secondary school teachers A few other very minor items
#39 Fynn incurred and paid the following expenses during 2020: • $50 for a ticket for running a red light while he was commuting to work. • $100 for a ticket for parking in a handicapped parking space. • $200 to an attorney to represent him in traffic court as to the two tickets. • $500 to an attorney to draft an agreement with a tenant for a one-year lease on an apartment that Fynn owns. • $1,000 to an attorney to negotiate a reduction in his child support payments. • $2,500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse. Calculate the amount of Fynn's deductible expenses.
Only the $500 paid to the attorney to draft the lease is deductible by Fynn. This expense is an ordinary and necessary expense incurred in connection with rental property held for the production of income. The tickets and the related legal expenses are not deductible because they are personal in nature. Even if related to the conduct of a trade or business or the production of income, they are disallowed as a deduction because they violate public policy. The $1,000 payment for negotiating a reduction in child support payments is personal in nature. The $2,500 paid related to the alimony payment is a miscellaneous itemized deduction, so it is not deductible from 2018 through 2025.
#36 A list of the items that Faith sold and the losses she incurred during the current tax year is as follows: Yellow, Inc. stock: $1,600 Faith's personal use SUV: 8,000 Faith's personal residence: 10,000 City of Newburyport bonds: 900 She also had a theft loss of $1,500 on her uninsured business use car. Calculate Faith's deductible losses.
Selling stock: 1,600 Bonds: 900 Theft of business car: $1,500 1,600+900+1,500 = 4,000 Neither the $8,000 loss on the sale of Faith's personal use car nor the $10,000 loss on the sale of her personal residence is deductible because these assets are personal.
#31 Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2020. Stanford incurred the following expenses: Total investigation costs related to the restaurant: 28,000 Total investigation costs related to the bakery: 51,000 What is the maximum amount Stanford can deduct in 2020 for investigation expenses?
Since Stanford is not in the restaurant business and he does not acquire the restaurant, the$28,000 is not deductible.He cannot deduct all of the $51,000 related to the investigation of the bakery since he is not in that trade or business already. Since he did purchase the bakery, the maximum deduction (before amortization) of the $51,000 is $5,000.The $5,000 deduction is reduced dollar for dollar for those expenses in excess of $50,000. $51,000 - $50,000 = $1,000 reduction in the immediate deduction $5,000 - $1,000 = $4,000 Immediate deduction The remaining expenses of $47,000 ($51,000 - $4,000) can be amortized over 180 months beginning with the month business begins, which is November. $47,000/180 months = $261 per month. $261 × 2 months = $522. The total deduction is $4,522 ($4,000 + $522).
Why is the difference between FOR and FROM AGI important?
Standard deduction Limitations computed as a percentage ofAGI
Expenses Related to Trade or Business and Production of Income: What are the 3 different types/levels of expenses?
Trade or business production of income personal
#54 For each of the following independent transactions, calculate the recognized gain or loss to the seller and the adjusted basis to the buyer. a. Kiera sells Parchment, Inc. stock (adjusted basis $17,000) to Phillip, her brother, for its fair market value of $12,000. b. Amos sells land (adjusted basis $85,000) to his nephew, Boyd, for its fair market value of $70,000. c. Susan sells a tax-exempt bond (adjusted basis $20,000) to her wholly owned corporation for its fair market value of $19,000. d. Sinbad sells a business truck (adjusted basis $20,000) that he uses in his sole proprietorship to his cousin, Agnes, for its fair market value of $18,500. e. Martha sells her partnership interest (adjusted basis $175,000) in Pearl Partner-ship to her adult daughter, Kim, for $220,000.
a. Amount realized: 12,000 Adjusted basis: (17,000) Realized loss: (5,000) Recognized loss: - Kiera and Phillip are related parties under § 267. b. Amount realized: 70,000 Adjusted basis: (85,000) Realized loss: (15,000) Recognized loss: (15,000) Amos and Boyd (uncle and nephew) are not related parties under § 267. c. Amount realized: 19,000 Adjusted basis: (20,000) Realized loss: (1,000) Recognized loss: - Susan and her wholly owned corporation are related parties under § 267 d. Amount realized: 18,500 Adjusted basis: (20,000) Realized loss: (1,500) Recognized loss: (15,000) Sinbad and Agnes (cousins) are not related parties under § 267. e. Amount realized: 220,000 Adjusted basis: (175,000) Realized loss: 45,000 Recognized loss: 45,000 Martha and Kim are related parties under § 267.
#48 During the year (not a leap year), Anna rented her vacation home for 30 days, used it personally for 20 days, and left it vacant for 315 days. She had the following income and expenses: Rent income: 7,000 Expenses: Real estate taxes: 2,500 Interest on mortgage: 9,000 Utilities: 2,400 Repairs: 1,000 Roof replacement (a capital expenditure): 12,000 Depreciation: 7,500 a. Compute Anna's net rent income or loss and the amounts she can itemize on her tax return, using the court's approach to allocating property taxes and interest. b. How would your answer in part (a) differ using the IRS's method of allocating property taxes and interest?
a. She rented it for more than 15 days She also used it more than the allowance for personal use if she wanted to have the property solely qualified as a rental residence She used the vacation home for more than 15 days or 3 days (10% x 30 days) The property has to be considered mix-use Include all of the income $7,000 Less real estate taxes and interest on mortgage (30/365)*2,500 = 205 (30/365)*9,000 = 740 Utilities, repairs: (30/50)*2,400 = 1,440 (30/50)*1,000 = 600 6,054.79 - (1,440 + 600) = 4,014.79 Depreciation (30/50)*7,500 = 4,500 Limited to the 4,014.79 Net rent = 0 Capital expenditure cannot make a loss, so it has to be expensed during the next tax years Personal expenses: Taxes: 2,295 Interest: 8,260 Total: 10,555 b. Include all of the income $7,000 Less real estate taxes and interest on mortgage (30/50)*2,500 = 1,500 (30/50)*9,000 = 5,400 7,000 - (1,500 + 5,400) = 100 Utilities, repairs (30/50)*2,400 = 1,440 (30/50)*1,000 = 600 100 - (1,440 + 600) = -1,940 depreciation (30/50)*7,500 = 4,500 Limited to the -1,940 number Net rent = -1,940 - (-1,940) = 0 Also the capital expenditure cannot be used to make the loss bigger, has to be amortized throughout the next years Personal Expenses: Taxes: 1,000 Interest: 3,600 Total: 4,600 Benefit of court's approach: 10,555 - 4,600 = 5,955
#26 Shanna, a calendar year and cash basis taxpayer, rents property to be used in her business from Janice. As part of the rental agreement, Shanna pays $8,400 rent on April 1, 2020, for the 12 months ending March 31, 2021. a. How much is Shanna's deduction for rent expense in 2020? b. Assume the same facts, except that the $8,400 is for 24 months' rent ending March 31, 2022. How much is Shanna's deduction for rent expense in 2020?
a. The entire $8,400 is deductible since the benefit from the payment will be completely received by the end of 2021. b. Since the benefit from the payment will not be completely received by the end of 2021 (the end of the tax year following the year of payment), the only payments deductible in 2020 are for the benefits received in 2020 (nine months; $8,400 × 9/24 = $3,150).
#46 Piper owns a vacation cabin in the Tennessee mountains. Without consider-ing the cabin, she has gross income of $65,000. During the year, she rents the cabin for two weeks for $2,500 and uses it herself for four weeks. The total expenses for the year are $10,000 mortgage interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance; and $3,200 depreciation. a. What effect does the rental of the vacation cabin have on Piper's AGI? b. What expenses can Piper deduct, and how are they classified (i.e., for or from AGI)?
a. The vacation home is classified as primarily personal because it was rented for fewer than 15 days during the year. Since Piper can exclude the $2,500 of rent income, the vacation home transactions have no effect on her AGI. The only expenses that Piper can deduct are those she normally would deduct as itemized deductions. This includes the following: Mortgage interest: 10,000 Property taxes: 1,500 Total: 11,500 Piper cannot deduct any of the utilities, insurance, and maintenance expenses or the depreciation. None of the expenses are deductible for AGI.
