ACCT 411- Exam 2 Part 2

Topic 1: Business Bad Debt Write-Off Rules

Deductible For AGI as an Ordinary Loss using the specific charge-off method (partial or complete worthlessness allowed). Nonbusiness bad debts require 100% complete worthlessness and are treated as Short-Term Capital Losses (STCL, capped at $3,000/yr).

Topic 2: Taxpayer’s Benefit or Legal Obligation Requirement

Taxpayers can only deduct expenses incurred for their own benefit or arising from their own legal obligation. Paying mortgage interest or property taxes on another person's property yields no tax deduction. Exception: dependent medical expenses.

Topic 3: Sale of Loss Property to a Related Party (§267)

Realized losses on sales to related parties (family members or >50% owned entities) are disallowed. When the related buyer later resells to an unrelated third party, any realized gain is reduced (offset) by the seller's previously disallowed loss.

Topic 4: Casualty Loss Rules for Personal vs. Business Property (§165)

Personal property: Deductible ONLY in Federally Declared Disasters; Loss = (Lesser of Basis or Decrease in FMV) - Insurance - $100 floor - 10% AGI. Business property: Completely destroyed = Adjusted Basis - Insurance; Partially destroyed = (Lesser of Basis or Decrease in FMV) - Insurance. Deductible For AGI.

Topic 5: Tax Treatment of §1244 Small Business Stock Gains and Losses

Gains are capital gains. Losses convert from capital loss to an Ordinary Loss (For AGI) up to $50,000/year for Single ($100,000/year for Married Filing Jointly). Excess loss above the cap retains capital loss character.

Topic 6: Investigation & Startup Expenses Rules

Same line of business: 100% deductible immediately (acquired or not). Different line & NOT acquired: 0% deductible. Different line & IS acquired: Up to $5,000 immediately deductible (reduced dollar-for-dollar over $50,000 total costs); remainder amortized over 180 months.

Topic 7: Trade or Business Expenses Core Criteria & Disallowances (§162)

Must be Ordinary, Necessary, and Reasonable in amount (deductible For AGI on Schedule C). Non-deductible: bribes/kickbacks, illegal fines/penalties, lobbying/political contributions, and executive compensation over $1,000,000 for covered officers in public corporations.

Topic 8: Expenses for Illegal Drug Business (§280E)

Under §280E, businesses trafficking in controlled substances (e.g., marijuana) are denied ALL ordinary and necessary business expense deductions (rent, wages, utilities). ONLY Cost of Goods Sold (COGS) is allowed as a return of capital.

Topic 9: Hobby vs. Business Rules & Presumptive Profit Test (§183)

Business if profitable in >=3 out of 5 consecutive years (2 of 7 for horses). Hobby gross revenue is 100% included in gross income; hobby expenses are 100% non-deductible under current tax law (2018–2025).

Topic 10: Personal, Rental, and Mixed-Use Property Rules (Vacation Homes)

Topic 11: Qualified Business Income (QBI) Deduction Concept (§199A)

Deduction From AGI of up to 20% of QBI for eligible sole proprietorships, partnerships, and S-Corps. Ceiling is the lesser of 20% of QBI OR 20% of Modified Taxable Income (Taxable Income minus net capital gains). Tested conceptually only (no math).

Topic 12: Employee vs. Independent Contractor Classification Factors

Determined by Behavioral Control, Financial Control, and Relationship Type. Employee: 50% FICA paid by employer, no unreimbursed expense deductions. Independent Contractor: 100% Self-Employment Tax (Schedule SE), Schedule C business expense deductions For AGI.

Topic 13: Vehicle Expenses — Actual Cost Method vs. Standard Mileage Rate

Standard Mileage Rate uses a set IRS cent-per-mile rate plus parking/tolls. Actual Cost Method accumulates gas, oil, repairs, insurance, depreciation, and tolls. Commuting between home and work is personal and non-deductible; business travel between job sites is deductible.

Topic 14: Home Office Deduction Criteria & Methods

Requires Exclusive and Regular use as principal place of business, management site, or meeting clients. Regular Method: Allocates direct + indirect expenses by sq. ft. ratio (cannot create business loss). Simplified Method: $5/sq. ft. up to 300 sq. ft. ($1,500 max cap).

Topic 15: Business Gifts Deduction Limitations

Deductible up to $25 per recipient per tax year. Exceptions: Promotional items costing $4 or less (with company name permanently imprinted) and incidental costs like gift wrapping are fully deductible beyond the $25 cap.

Topic 16: Personal/Business Travel Expenses Rules

Must be away from tax home overnight. Domestic airfare is 100% deductible if trip is PRIMARILY for business (0% if primarily personal); lodging and meals allocated by business days (meals 50% deductible). Foreign travel airfare allocated by business day ratio.

Topic 17: Traditional IRA vs. Roth IRA Tax Consequences

Traditional IRA: Contributions up to $7,000 deductible For AGI (subject to active participant phase-out); distributions 100% taxable as ordinary income. Roth IRA: Contributions non-deductible (after-tax); growth and qualified distributions 100% tax-free.

Topic 18: Business Entertainment vs. Business Meals Rules

Entertainment expenses (golf, tickets, club dues) are 100% NON-DEDUCTIBLE. Business meals with clients are 50% deductible. Employer-provided social/recreational events for employees (e.g., holiday party) are 100% deductible.

Topic 19: Moving Expenses Deduction Rules

Suspended/disallowed for almost all taxpayers under current law (2018–2025). ONLY active-duty members of the U.S. Armed Forces moving pursuant to military orders for a permanent change of station can deduct moving expenses.