TAX PREPARER Exam 2 Question with
100% Verified Answers Latest Version
Three categories of deductions for AGI
-Directly related to business activities
-Indirectly related to business activities
-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
profit-motivated or motivated by personal objectives.
Profit-motivated activities are classified as
-Business activities (called "trade or business") (involve high level
of effort. ex: land developer)
-Investment activities (not much effort, just sit back and wait. ex:
land buy and sell)
business expenses
all deducted for agi except unreimbursed employee expenses.
employees who incur unreimbursed business expenses relating to
their employment cannot deduct these expenses.
investment expenses
typically very limited. only deductible is from agi (investment
interest) with the exception of rent and royalty exps that are for
AGI no matter the amt of use)
Although both are motivated primarily by profit, business
activities are distinguished from investment activities.
Trade or business activities require a relatively high involvement
or effort from the taxpayer whereas investment activities do not.
,Investment activities involve investing in property for appreciation
or for income payments.
Trade or business expenses must be
-directly connected to the business activity
-ordinary and necessary for the activity (e.g., appropriate and
helpful for generating a profit)
-reasonable in amount (not extravagant)
Expenses are claimed on Schedule C.
Revenues from the same activity are also reported on the same
Schedule C
The net income or loss from Schedule C is transferred to Form
1040 (page 1) on line 12
schedule e
Supplemental income and loss ( rent, royalty, and pass through
income from Forms 1065, 1120S and 1041)
Rental and Royalty Expenses
Claimed above the line (for AGI)
Could either be an investment activity or a trade activity
depending on facts
Taxpayers report expenses and revenue on 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
Taxpayers disposing of trade or business assets at a loss are
allowed to deduct the loss for AGI.
Losses from investment assets (called capital assets) are offset
against capital gains.
If capital losses exceed capital gains, this is called a net capital
,loss.
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.
Excess Business Loss Limitation
Excess business loss is excess of aggregate business deductions
over the sum of business gross income or gain plus $250,000
($500,000 for married filing jointly).
Excess business loss is not deductible but is carried forward as
net operating loss.
theres now a limit on business loss. rest goes to next yr
Health Insurance Deduction by Self-Employed Taxpayers
Deduction provides equity with employees who receive health
insurance as a qualified fringe benefit.
Insurance must be provided for taxpayer or dependents who are
not eligible for employer-provided health insurance.
Penalty for Early Withdrawal of Savings
Reduces the taxpayer's net interest income to the amount actually
received
like interest. penalty we pay to the bank
SE Tax Deduction
Employer and employees each pay the employee's Social
Security tax.
Employers deduct the portion of Social Security taxes they pay for
employees.
Self-employed individuals are required to pay SE tax in lieu of
Social Security tax.
Self-employed taxpayers are allowed to deduct the employer
portion of the SE tax they pay to compensate for employers
deducting their portion of Social Security.
deduct the employer part of the taxes paid to make it more
, equitable bc theyre self employed and paying both (deduction for
1/2 of self employment taxes paid)
Alimony payments
are deductible for AGI to maintain equity if paid pursuant to a
divorce or separation agreement executed before 2019.
Contributions to a qualified retirement account
are deductible for AGI to encourage savings.
ex: contributing to IRA
Interest expense on qualified educational loans
deduction for agi. ex: student loan interest deduction.
Deduction for interest expense on loans used to fund
qualified educational expenses
Up to $2,500 of interest on education loans is deductible for AGI.
The interest deduction is phased out for taxpayers with AGI
exceeding $65,000 ($135,000 filing jointly).
The deduction is eliminated for taxpayers with AGI exceeding
$80,000 ($165,000 filing jointly).
cab be used on required books, supplies, tuition, fees, and room
and board. (for scholarships room and board wasnt included, but
for student loans it is).
MFS cant get this deduction
deductions from agi: itemized deductions
calculation picture
Medical Expenses
Taxpayers may deduct medical expenses incurred to treat
themselves, their spouse, and their dependents.
Qualifying medical expenses include unreimbursed payments for
care, prevention, diagnosis, or cure of injury, disease, or bodily
function.
Taxpayers using personal automobiles for medical transportation
purposes may deduct a standard mileage allowance (18 cents per
mile in 2018) in lieu of actual costs.
100% Verified Answers Latest Version
Three categories of deductions for AGI
-Directly related to business activities
-Indirectly related to business activities
-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
profit-motivated or motivated by personal objectives.
Profit-motivated activities are classified as
-Business activities (called "trade or business") (involve high level
of effort. ex: land developer)
-Investment activities (not much effort, just sit back and wait. ex:
land buy and sell)
business expenses
all deducted for agi except unreimbursed employee expenses.
employees who incur unreimbursed business expenses relating to
their employment cannot deduct these expenses.
investment expenses
typically very limited. only deductible is from agi (investment
interest) with the exception of rent and royalty exps that are for
AGI no matter the amt of use)
Although both are motivated primarily by profit, business
activities are distinguished from investment activities.
Trade or business activities require a relatively high involvement
or effort from the taxpayer whereas investment activities do not.
,Investment activities involve investing in property for appreciation
or for income payments.
Trade or business expenses must be
-directly connected to the business activity
-ordinary and necessary for the activity (e.g., appropriate and
helpful for generating a profit)
-reasonable in amount (not extravagant)
Expenses are claimed on Schedule C.
Revenues from the same activity are also reported on the same
Schedule C
The net income or loss from Schedule C is transferred to Form
1040 (page 1) on line 12
schedule e
Supplemental income and loss ( rent, royalty, and pass through
income from Forms 1065, 1120S and 1041)
Rental and Royalty Expenses
Claimed above the line (for AGI)
Could either be an investment activity or a trade activity
depending on facts
Taxpayers report expenses and revenue on 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
Taxpayers disposing of trade or business assets at a loss are
allowed to deduct the loss for AGI.
Losses from investment assets (called capital assets) are offset
against capital gains.
If capital losses exceed capital gains, this is called a net capital
,loss.
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.
Excess Business Loss Limitation
Excess business loss is excess of aggregate business deductions
over the sum of business gross income or gain plus $250,000
($500,000 for married filing jointly).
Excess business loss is not deductible but is carried forward as
net operating loss.
theres now a limit on business loss. rest goes to next yr
Health Insurance Deduction by Self-Employed Taxpayers
Deduction provides equity with employees who receive health
insurance as a qualified fringe benefit.
Insurance must be provided for taxpayer or dependents who are
not eligible for employer-provided health insurance.
Penalty for Early Withdrawal of Savings
Reduces the taxpayer's net interest income to the amount actually
received
like interest. penalty we pay to the bank
SE Tax Deduction
Employer and employees each pay the employee's Social
Security tax.
Employers deduct the portion of Social Security taxes they pay for
employees.
Self-employed individuals are required to pay SE tax in lieu of
Social Security tax.
Self-employed taxpayers are allowed to deduct the employer
portion of the SE tax they pay to compensate for employers
deducting their portion of Social Security.
deduct the employer part of the taxes paid to make it more
, equitable bc theyre self employed and paying both (deduction for
1/2 of self employment taxes paid)
Alimony payments
are deductible for AGI to maintain equity if paid pursuant to a
divorce or separation agreement executed before 2019.
Contributions to a qualified retirement account
are deductible for AGI to encourage savings.
ex: contributing to IRA
Interest expense on qualified educational loans
deduction for agi. ex: student loan interest deduction.
Deduction for interest expense on loans used to fund
qualified educational expenses
Up to $2,500 of interest on education loans is deductible for AGI.
The interest deduction is phased out for taxpayers with AGI
exceeding $65,000 ($135,000 filing jointly).
The deduction is eliminated for taxpayers with AGI exceeding
$80,000 ($165,000 filing jointly).
cab be used on required books, supplies, tuition, fees, and room
and board. (for scholarships room and board wasnt included, but
for student loans it is).
MFS cant get this deduction
deductions from agi: itemized deductions
calculation picture
Medical Expenses
Taxpayers may deduct medical expenses incurred to treat
themselves, their spouse, and their dependents.
Qualifying medical expenses include unreimbursed payments for
care, prevention, diagnosis, or cure of injury, disease, or bodily
function.
Taxpayers using personal automobiles for medical transportation
purposes may deduct a standard mileage allowance (18 cents per
mile in 2018) in lieu of actual costs.
