Deductions: Busi. Cost, Loss & Bad Debt, Pers'al Cost, & Int.

Can't Deduct

  1. Gen. Pers'al Expense 262
  2. Cap. Expenditure 263
  3. Specif. Policy Limits 162
    1. Illegal bribe, kickback / others dir'ly / indir'ly if result in crim. penalty by US / state law 162)c)2
    2. Fine / similar penalties paid 2 govt 4 viol. 162)f
    3. Attempt 2 influence gen. pub. 4 election, leg., / referendum 162)e)1)C
  4. Ed. Cost Reg. 1.162-5
    1. Prob's of pers'al & cap.
    2. Expense 4 travel as form of ed. dir'ed toward teachers 274)m)2
    3. Expense 2 enter prof. Reg. 1.162-5)b)3
    4. Can deduct 2 improve & maintain skill / keep job

Busi. Expense Deducted

  1. Gen. Types
    1. Ord. & Nec. Busi. Expense 4 Trade / Busi. 162
      1. Ord. if
        1. Used 4 things lasting less than 1 yr.
        2. For busi. rsn
      2. Nec. is what busi. person says
    2. Expense 4 Activities Rel'ed 2 Profit If Not in Trade / Busi. 212
      1. Ord. & nec. expenses 4 prod'ing / collecting income
      2. Obj. rsbl stand. w/subj. factors by IRS 2 det. profit motive
        1. Manner in which T carries activity
        2. Experience / expertise
        3. X & effort
        4. Expectation that assets used in activity incr. in value
        5. Success in similar activities
        6. History of income / losses
        7. Amt of occasional profit
        8. Fin'al status of T
        9. Elements of pers'al pleasure / recreation
    3. Expense 4 Activities Not 4 Profit 2 Extent Have Income 183)b
      1. Allowable deductions like state taxes +
      2. Deduction = 2 amt. of deduction allowable if activity was 4 profit but only 2 extent that GI derived exceeds deductions allowable by 1st reqt
  2. Presumption of Profit by 183)d
    1. GI from activity 4 3 out of 5 yrs & if horse activities, 2 out of 7 yrs.
    2. Rebuttable presumption
  3. Busi. Uses
    1. If listed prop. of 280F)b not predom'ly used in qualified busi. use, depreciate through slow method of 168)g
      1. Predom'ly used 4 busi. use if more than 50%
      2. Listed prop. incl's auto / like, entertainment prop., computer, phone
      3. Ee must use 4 er's conv. & req'ed by 280F)d)3
    2. Clothes deductible by 162 if
      1. Req'ed as condition of empl.
      2. Not suitable 4 use outside of empl.
      3. Not worn outside of empl.
    3. Office decoration by 162
      1. If req'ed 2 bring client in like law firm
    4. Office home by 280A)c only if excl'ly used reg'ly 4
      1. Princ. place of busi. 4 any trade / busi.
        1. Can B where subst'l adm. perf'ed
        2. If do most work, imp. place of work, & others see as such
      2. Place of busi. used by pat's, clients / customers in mtgs w/T
      3. Where sep. structure not attached, it's in cnxn w/T's trade / busi.
    5. Settlement agmts
      1. Origin of claim doc. 2 see if arose from prof'l activity 2 deduct
  4. Travel, Transportation, & Commute 162)a
    1. Commuting btwn 2 & from work not deductible
    2. Travel expenses deductible by 162)a
      1. Incl's meal & lodging
      2. Must B away from home 4 trade / busi. / stay overnight
        1. Home where U live / works
        2. T not temp'ly away from home if per. exceeds 1 yr.
    3. Transportation
      1. Deductible if go 2 other place than place of reg. work
  5. Entertainment & Meals 274
    1. No deduction 4 activity / facility 4 entertainment, amusement / rec. unless dir'ly rel'ed / assoc'ed w/T's trade / busi.
      1. Req's bona fide busi. disc. during, before, / after 2 rel. 2 T's busi.
    2. Good substantiation / suff. evid. 2 corrob. T's stmt 274)d
      1. For entertainment, amusement, / rec. activity / facility
      2. Traveling expense
      3. Listed prop. of 280F)d)4
    3. No deduction 4 food / beverage unless 274)k
      1. Not lavish / extravagant under circ. +
      2. T present 2 furnishing of food / beverage
    4. Only 50% of meals & entertainment deductible by 274)n unless
      1. If it's 4 ee's in compensation / reimbursement 274)e /
      2. If 4 pub., customers / who isn't ee by 274)e
    5. Sky boxes, then only deduct cost of reg. tix 274)l)2
    6. No deduction 4 spouse on busi. travel unless 274)m)3
      1. T's ee
      2. Travel 4 bona fide busi. purpose +
      3. Expense otherwise deductible by spouse
    7. Clubs
      1. Can't deduct dues 2 clubs 274)a)3
      2. Can deduct other costs if club used 2 prim'ly further T's busi. / trade & dir'ly rel'ed 2 busi./ trade / more than 50% 4 busi.
  6. Compensation 162)a
    1. Deduct only 4 rsbl allowance of salary / other compensation
    2. Contingent compensation K, then look @ whether rsbl & arms length barg. when entered K
    3. Concern w/small closely held corp.

Loss & Bad Debts Deducted

  1. Loss 165
    1. If in trade / busi., deduct losses not compensated by ins.
    2. Limited 4 indiv. 2 165)c
      1. Trade / busi.
      2. Trxn entered 4 profit &
      3. Casualty loss
      4. Deduction only 4 basis 165)b
    3. Cap. Loss 1211
      1. Deduct cap. loss only 2 extent have cap. gains +
      2. Lwr of $3k / excess of loss over gain
      3. If not have cap. gain, carry over loss
      4. Can't deduct
        1. If transf. 2 rel'ed parties 267
        2. Got subst'ly same stock w/in 30 days after loss 1091 where basis is same as orig. stocks, incr'ed / decr'ed by dif. in price stock req'ed from X stock was sold
  2. Bad Debt 166
    1. Busi. debt
      1. Rel'ed 2 trade / busi. /
      2. In busi. of making loans
    2. Nonbusi. debt 4 loss of sale / exch. 4 cap. asset held less than 1 yr.
      1. Show entered 4 profit otherwise pers'al loss
  3. Tax Shelters
    1. Arose from partn. form & Crane rule that basis incl. nonrecourse liab.
    2. Ended tax shelters by
      1. At risk rule 2 deduct losses 2 extentreally had $ in risk 465
        1. Real estate exempt
      2. Passive activity rule 2 deduct losses 4 passive activity against passive activity income 469
        1. Corp. exempt

Pers'al Expenditure

  1. Casualty Loss 165)c)3
    1. Losses 4 fire, storm, shipwreck, theft, & other sudden & imm. sit's
    2. Deduction is
      1. Lesser of fair mkt value before casualty - fair mkt value after / basis
      2. Only 2 extent exceed $100 165)h
      3. Only 2 extent exceed 10% of AGI 165)h)2
  2. Charitable Contrib. 170
    1. Subsidy v. income consumption rationales
    2. Deduction
      1. Gen'ly = fair mkt value of charity contrib.
      2. Deduct 4 basis of appreciated prop. gifts if 170)e
        1. Prop. not prod. long term gain / prop. not held 4 1 yr.
        2. Unrel'ed tangible pers'al prop. 4 pub. charity except 4 land & stock
        3. Anything 2 priv. foundation
    3. Can't deduct
      1. Quid pro quo / receive something tangible in return
        1. If also get athletic tix, 80% deductible 170)l
      2. Relig. serv. w/comm'l value but if value is only relig., no comm'l value
    4. Deduction limited
      1. Corp. only 2 10% of income
      2. Indiv. 2 50% of AGI
      3. Only contrib. 2 501)c)3 tax exempt charity which IRS det's
    5. Req. proof of receipt 4 more than $150 contrib.
  3. State & Local Taxes 164
  4. Med. Expense Deduction 213
    1. Subsidy & consumption rationale
    2. Deduct 4 med. care 213)d
      1. Cost 4 diagnosis, cure, mitigation, treatment / prevention of disease / affecting any structure / fn. of body
      2. Not incl. cosmetic surgery unless nec. 2 improve congenital / pers'al inj. deformity from accident / disease 213)d)9
      3. Travel expenses & lodging 4 getting med. care deductible
      4. Drugs not deductible unless prescription drug 213)b
    3. Floor of 7.5% AGI
  5. Alimony
    1. Payor gets above line deduction, not itemized 62)a)10
    2. Payee has income
      1. Can't get bad debt deduction if not get alimony
    3. Alimony det'ed by factor
      1. If payment ends when spouse dies
      2. If ins. premium is owned by spouse
      3. If T in same household, not alimony 71)b)1)C
    4. Front loaded alimony discouraged
      1. If sig. reduction 3rd yr., payor recap. income & payee deduct 71)f
      2. Not recapture if not w/in payor's control
    5. Ch support not deductible
      1. Any amt in instr. reduced on conting. rel. 2 ch., amt of reduction treated as ch. support 71)c)2
      2. First payments of late payment goes 2 ch. support 71)c)3
  6. Dep. & Med. Deduction 4 Divorced
    1. Custodial parent gets deduction 4 dep. unless agree otherwise 152)e
    2. Each parent paying 4 med. can get deduction 152)e)6 & 213)d)5

Int.

  1. Busi. Int.
    1. Can deduct if can trace loan 163)a
    2. Can deduct investment int. only 2 extent have investment income 163)d
    3. If commingle borrowed $
      1. Then 1st $ out 2 use is consid'ed loan $ used
      2. Anything bought w/in 15 days of commingling is from loan $
  2. Residential (Res.) Int.
    1. Acq. indebtedness 163)h)3
      1. For acq., construct / subst'ly improve qualified res.
      2. Limited 2 aggreg. of $1 mill.
      3. Qualified res. is princ. res. + 1 other res. selected by T
      4. Home is if have bathroom & kitchen
    2. Home equity indebtedness 163)h)3
      1. For anything where debt secured by qualified res.
      2. Can't exceed aggreg. fair mkt value of qualified res. - amt of acq. indebtedness
      3. Limited 2 $100k in aggreg.

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December 8, 1997

Ms. Haeji Hong
1