Exam 7: Overview of Deductions and Losses

V bought electric motors for her business from a sales representative who said that they had a four horsepower output.V discovered while using the motors that they only produce two horsepower after a few weeks use.V may recognize as a loss the value of the reduction in horsepower and currently deduct the amount as a business expense.

The crucial reason for determining whether an item is deductible as an expense under § 162 or under § 212 is that

If taxpayer B pays a dependent son's real estate taxes, B cannot deduct the expense.

According to the Cohan rule, taxpayers may deduct reasonable estimates of expenses where they have no evidence, such as a receipt, to substantiate the actual amount.

Any expense that is reimbursed by the taxpayer's employer is deductible for A.G.I, (e.g., reimbursement of a parking ticket incurred by a salesperson when calling on a customer).

Business expenses (other than interest) related to tax-exempt interest income are deductible.

Z is a ten-percent (10%) shareholder of H, Inc.H, Inc.has distributable net income of $100,000 this year and no accumulated earnings and profits.Z was paid $15,000 by the company for his expertise as a pilot, but he did not fly this year.How is the IRS likely to view the $15,000?

J, employed as a male dancer, regularly uses a tanning salon to keep his body looking healthy.J may deduct the cost of visiting the tanning salon.

T's itemized deductions for the current year are $14,000.Assuming the standard deduction is $5,000, T may deduct no more than $9,000 of her itemized deductions.

An "ordinary" business expense need not be recurring.

T was looking for a house when he happened upon an old mansion.After looking it over, he decided that although he would not want to live there himself, it would be a good investment.As a result, he decided to buy it to hold as rental property.T borrowed $100,000 from his bank to finance the purchase.The loan was to be repaid over a 10-year period starting January 5 of the following year.In addition, he paid five points for the loan.T closed the deal in early December and paid the closing costs, including the points, at that time.T also paid his first installment on the loan in late December, even though it was not due until January 5 of the following year.The installment he paid included $800 of interest.How much can T deduct in the year of the closing? (T is a cash basis taxpayer.)

Tax preparation fees incurred by an individual generally are treated as miscellaneous itemized deductions and can be deducted only to the extent they exceed two percent of A.G.I.

Expenditures for goodwill may be recovered for tax purposes only when there is a disposition of the asset such as a sale or exchange, and not through amortization.

For tax purposes, the term "nonbusiness expense" refers to nondeductible personal expenses, such as the costs of personal hygiene.

As an employee for BBB, J earned a salary of $40,000 and incurred unreimbursed employee business expenses of $1,000.Assuming J itemizes his deductions, he may deduct all of his expenses.

Expenses incurred in the production of income, such as legal fees and safe deposit box rentals, may be deducted even though the income produced is wholly tax-exempt (i.e., municipal bond interest income).

Either W or one of his employees visits a local factory every week to wash the windows.W may deduct the cost of all of his expenses from washing windows.

A cash basis taxpayer may deduct all prepaid interest in the year it is paid.

Deductible expenses related to an activity that is considered a hobby, and that are not otherwise allowable, are treated as miscellaneous itemized deductions and can be deducted only to the extent they exceed two percent of A.G.I.

In regard to the statutory scheme for determining deductibility, a taxpayer may deduct an expense only if it is "specifically" identified (e.g., interest) as deductible in the Code.For example, advertising expense of a business would not be deductible unless a code provision specifically indicated that advertising expense is deductible.