Ch 6 discussion questions -
ACCT 401 fully solved &
updated
How is a business activity distinguished from an investment
activity? Why is this distinction important for the purpose of
calculating federal income taxes? - answer Both business and
investment activities are motivated primarily by profit intent, but
they can be distinguished by the level of profit-seeking activity. A
business activity is commonly described as a sustained, continuous,
high level of profit-seeking activity, whereas investment activities
don't require a high level of involvement.
The distinction between business and investment activities is
critical for determining whether a deduction associated with the
activity is above or below the line, or even deductible. With one
exception, business expenses are deducted for AGI. The lone
exception is unreimbursed employee business expenses, which are
not deductible. In contrast, investment expenses are deductible as
itemized deductions, if deductible at all, with one exception.
Expenses associated with rental and royalty activities are
deductible for AGI regardless of whether the activity qualifies as an
investment or a business.
Describe the mechanical limitation on the deduction for interest on
qualified education loans. - answer The maximum deduction for
interest expense on qualified education loans is the amount of
interest expense paid up to $2,500. However, the deduction is
reduced (phased-out) for taxpayers depending on the taxpayer's
filing status and modified AGI. Specifically, the deduction for
interest on educational loans is subject to proportional phase-out
over a range of $15,000 ($30,000 for married filing jointly). The
range begins for taxpayers at $75,000 of modified AGI ($155,000 for
MFJ) and ends at $90,000 of modified AGI ($185,000 for married
filing jointly). Modified AGI for this purpose is AGI before deducting
interest expense on the qualified education loans. Married
, individuals who file separately are not allowed to deduct this
expense under any circumstance.
Describe the type of medical expenditures that qualify for the
medical expense deduction. Does the cost of meals consumed while
hospitalized qualify for the deduction? Do over-the-counter drugs
and medicines qualify for the deduction? - answer Medical expenses
include any payments for the care, prevention, diagnosis, or cure of
injury, disease, or bodily function that are not reimbursed. Included
are the costs of prescription medicine, insulin, and payments to
doctors, dentists, and the like incurred by the taxpayer, taxpayer's
spouse, and dependents. Over-the-counter drugs and medicines do
not qualify for the deduction. Besides direct medical expenses, the
deduction includes the cost of health insurance (if not already
deducted above the line by self-employed taxpayers or if not offset
by a premium tax credit under IRC Section 36B). Medical expenses
also include long-term care services for disabled spouses and
dependents to the extent the costs (including meals and lodging)
are attributable to medical care. The cost of elective cosmetic
surgery is not deductible. The cost of meals and lodging qualify if
incurred at a medical-care facility or hospital and are incident to the
care of the patient, but the cost of lodging is limited to $50 per
eligible person per night. The cost of travel for and essential to
medical care, including lodging (still limited to $50 per eligible
person per night) is also deductible if the expense is not
extravagant and the travel has no significant element of personal
pleasure.
What types of taxes qualify to be deducted as itemized deductions?
Would a vehicle registration fee qualify as a deductible tax? -
answer Taxes qualifying for this deduction include state, local, and
foreign income taxes, state and local real estate taxes, and state
and local personal property taxes. State and local sales taxes may
also be deducted but only in lieu of state and local income taxes.
The deduction for sales tax can be based upon either the amount
paid or the amount published in the IRS tables.
Vehicle registration fees are not deductible (unless calculated based
on the value of the vehicle rather than its weight).
ACCT 401 fully solved &
updated
How is a business activity distinguished from an investment
activity? Why is this distinction important for the purpose of
calculating federal income taxes? - answer Both business and
investment activities are motivated primarily by profit intent, but
they can be distinguished by the level of profit-seeking activity. A
business activity is commonly described as a sustained, continuous,
high level of profit-seeking activity, whereas investment activities
don't require a high level of involvement.
The distinction between business and investment activities is
critical for determining whether a deduction associated with the
activity is above or below the line, or even deductible. With one
exception, business expenses are deducted for AGI. The lone
exception is unreimbursed employee business expenses, which are
not deductible. In contrast, investment expenses are deductible as
itemized deductions, if deductible at all, with one exception.
Expenses associated with rental and royalty activities are
deductible for AGI regardless of whether the activity qualifies as an
investment or a business.
Describe the mechanical limitation on the deduction for interest on
qualified education loans. - answer The maximum deduction for
interest expense on qualified education loans is the amount of
interest expense paid up to $2,500. However, the deduction is
reduced (phased-out) for taxpayers depending on the taxpayer's
filing status and modified AGI. Specifically, the deduction for
interest on educational loans is subject to proportional phase-out
over a range of $15,000 ($30,000 for married filing jointly). The
range begins for taxpayers at $75,000 of modified AGI ($155,000 for
MFJ) and ends at $90,000 of modified AGI ($185,000 for married
filing jointly). Modified AGI for this purpose is AGI before deducting
interest expense on the qualified education loans. Married
, individuals who file separately are not allowed to deduct this
expense under any circumstance.
Describe the type of medical expenditures that qualify for the
medical expense deduction. Does the cost of meals consumed while
hospitalized qualify for the deduction? Do over-the-counter drugs
and medicines qualify for the deduction? - answer Medical expenses
include any payments for the care, prevention, diagnosis, or cure of
injury, disease, or bodily function that are not reimbursed. Included
are the costs of prescription medicine, insulin, and payments to
doctors, dentists, and the like incurred by the taxpayer, taxpayer's
spouse, and dependents. Over-the-counter drugs and medicines do
not qualify for the deduction. Besides direct medical expenses, the
deduction includes the cost of health insurance (if not already
deducted above the line by self-employed taxpayers or if not offset
by a premium tax credit under IRC Section 36B). Medical expenses
also include long-term care services for disabled spouses and
dependents to the extent the costs (including meals and lodging)
are attributable to medical care. The cost of elective cosmetic
surgery is not deductible. The cost of meals and lodging qualify if
incurred at a medical-care facility or hospital and are incident to the
care of the patient, but the cost of lodging is limited to $50 per
eligible person per night. The cost of travel for and essential to
medical care, including lodging (still limited to $50 per eligible
person per night) is also deductible if the expense is not
extravagant and the travel has no significant element of personal
pleasure.
What types of taxes qualify to be deducted as itemized deductions?
Would a vehicle registration fee qualify as a deductible tax? -
answer Taxes qualifying for this deduction include state, local, and
foreign income taxes, state and local real estate taxes, and state
and local personal property taxes. State and local sales taxes may
also be deducted but only in lieu of state and local income taxes.
The deduction for sales tax can be based upon either the amount
paid or the amount published in the IRS tables.
Vehicle registration fees are not deductible (unless calculated based
on the value of the vehicle rather than its weight).
