Tax Accounting Chapter 6 latest Test

Three categories of deductions for AGI? - 1. Directly related to business activities 2. Indirectly related to business activities 3. Deductions subsidizing specific activities DIRECTLY Related to Business Activities? - Taxpayers are allowed to deduct expenses incurred to generate business income For tax purposes activities are either what? - 1. profit-motivated 2. motivated by personal objectives Profit-motivated activities are classified as what? - 1. Business activities (called "trade or business") 2. Investment activities How are business activities distinguished from investments? - Trade or business activities = relatively high involvement or effort from the taxpayer Investment activities = investing in property for appreciation or for income payments Business activities deduction for and From AGI? - for = Self-Employed business expense from = unreimburnsed employee business expense Investment activities deduction for and From AGI? - for = rental/royalty expense from = other investments expense Trade or business expenses must be for AGI if? - 1. Directly connected to the business activity 2. Ordinary and necessary for the activity (e.g., 3. appropriate and helpful for generating a profit) 4. Reasonable in amount (not extravagant) Which expenses are claimed on Schedule C? - 1. Revenues from the same activity are also reported on the same Schedule C 2. The net income or loss from Schedule C is transferred to Form 1040 (page 1) on line 12 Rental and royalty expenses are what? - 1. Claimed above the line (for AGI) 2. Could either be an investment activity or a trade activity depending on facts 3. Taxpayers report expenses and revenue on 4. Schedule E and transfer the net income or loss from Schedule E to Form 1040 (page 1), line 17 Flow-through entities? - Expenses and losses incurred by a flow-through entity pass through to the entity owners who typically report these amounts on Schedule E and Line 17 Losses? - 1. Taxpayers disposing of trade or business assets at a loss are allowed to deduct the loss for AGI 2. Losses from investment assets (called capital assets) are offset against capital gains 3. If capital losses exceed capital gains, this is called a net capital loss 4. A net capital loss is deducted for AGI but limited to $3,000. Losses in excess of the $3,000 limit are carried forward indefinitely to subsequent years Deductions INDIRECTLY Related to Business Activities? - The cost of moving personal possessions is not a direct cost of doing business or being employed.