Income Tax
EMPLOYEE VS. INDEPENDENT CONTRACTOR
Expenses of self employed individuals are deductible for AGI
Reported on schedule C (profit or loss from business) of form 1040
Employee business expenses are generally deductible from AGI as miscellaneous itemized deductions
From 2018-2025 the deduction for miscellaneous itemized deductions is suspended
The following items provided to a worker established an employee-employer relationship:
Furnishing tools or equipment and a place of work
Providing support services, including the hiring of assistants to help do work
Training the worker for needed job skills
Allowing participation in various workplace fringe benefits
Paying for services based on time rather than task preformed
STATUTORY CONTRACTORS
The workers who are not common law employees are treated as employees for employment tax purposes
Include certain drivers, life ins. Sales agents, home workers and all other salespersons
Allowed to claim their business-related expenses as deductions for AGI by using schedule C
Wages or commissions paid to statutory employees are NOT subject to fed income tax but are subject to social security tax
Any payment from a individual contractor - providing a service - over $600
FORM 1099 EQUIVILANT TO A W2
EMPLOYEE RELATED EXPENSES
Fall into one of the following categories
Transportation
Travel
Moving
Education
Entertainment
Other (including office in the home and miscellaneous expenses)
EXAMPLE
Mason preforms services for bella. In determining whether mason is an employee or a independant contractor, comment on the revekance of each scenario:
Mason preforms services only for bella and does not work for anyone else
Employee
Mason sets his own schedule
independent contractor
Mason reports his job-related expenses on a sched C
independent contractor
Mason obtained his job skills from bellas training program
Employee
Mason preforms services at bellas business location
Could be both
Mason is paid based on time worked rather than task preformed
Employee
TRANSPORTATION EXPENSES
Qualified expenses
Transportation expenses include only the cost of transporting the self-employed taxpayer (or employee) from one place to another in the course of business when the taxpayer is not in travel status
It includes taxi fares, automobile expenses toll and parking
Commuting expenses
Commuting between home and ones employment is a personal nondeductile expenses
Automatic mileage method
65.5 cents per mile for business miles for 2023
Plus parking fees and tolls
Adequate documentation of mileage required
Actual cost method
Must keep adequate records of all expenses and depreciation is limited
Which method is better? It depends on the business/person
TRAVEL EXPENSES
Defined
Expenses while “away from tax home”
Avoids duplication of living expenses where the taxpayer incurs expenses while at home and while working away from home
Includes transportation, meals and lodging, and incidental expenses while working away
Away from home expenses
“Overnight” need not be a 24-hour period but it must be a period substantially longer than ordinary day’s work and must require rest, sleep or a relief-from-work period
Being “away” should be a temporary situation (not in excess of 1 year)
The “tax Home” is the area in which the taxpayer works
Conventions
No deduction for travel unless directly related to taxpayers trade or business
Example
Doctor attending out of town seminar on estate planning would not have deductible expenses
Restrictions apply to the deductibility of travel expenses of the tax payers spouse or dependent
Generally, there must be a business reason for the spouse or dependent to attend
The expenses must be otherwise deductible
Education
Travel as the form of education is not deductible
If, however, the education qualifies as a deduction, the travel involved is allowed
Domestic for business and pleasure
If the business/pleasure trip is entirely within the United States, the transportation expenses are deductible only if the trip is primarily for business
Meals, lodging and other expenses are allocated between business and personal days
If the trip is primarily for pleasure, no transportation expenses qualify as a deduction
Foreign travel for business and pleasure
Transportation expenses must be allocated between business and personal unless:
The taxpayer is away from home for seven days or less, or
Less than 25 percent of the time was for personal purposes
If trip is primarily for pleasure, no transportation expenses are deductible
Travel days are considered business days
Weekends, legal holidays and intervening days are considered business days, provided both the day before and the day after were business days
EDUCATION EXPENSES
Education expenses of a self-employed taxpayer are deductible if they are incurred:
To meet the specific legal requirements to keep their job, or
To maintain or improve existing skills required in the present job
Education expenses are not deductible if the education is:
To meet the minimum educational standards for qualification in the taxpayer’s existing job
To qualify the taxpayer for a new trade or business
OTHER BUSINESS EXPENSES
Home office deduction
Most expenses for personal use assets are not deductible
Office in the home expenses is allowed for self-employment individuals when a portion of the residence is used exclusively on a regular basis as either:
The principle place of business for any trade or business of the taxpayer or
A place of business used by clients
From 2018 through 2025, employees are not allowed an office in the home deduction
Deduction for moving expenses has been suspended from 2018 through 2025
However, during this period, the moving expense deduction is retained for members of the Armed Forces (or their spouse or dependents) on active duty who move because of a military order that relates to a permanent change of station
The rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowanc
Deduction can be determined in either of two ways:
The Regular (actual expense) Method
Direct expense + indirect expenses
The Simplified (safe harbor) Method
Square footage of office multiply by 5$
Can take up to $1500
EXAMPLES
Jayda maintains an office in her home that compromised 200 sq feet 8% of total floor space gross income for her business is $42000 and her resident expenses are:
Real property taxes $2400
Interest on mortgage $4000
operating expenses $2200
Depreciation $450
Actual method
1138
(8% 2400+ 8% 4000+8% * 2200)+450=
Simplified method
200*$5= 1000
OTHER BUSINESS EXPENSES
Entertainment and meal expense
No deduction is allowed with respect to
An activity generally considered to be entertainment, amusement, or recreation
Membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes, or
A facility (or portion thereof) used in connection with any of the above items
Taxpayers may still deduct some or all of the food and beverage expenses associated with operating their trade or business
Example: a business meal with a current or potential client, or meals consumed by employees on work travel
In general, only 50 % of food and beverage expenses can be deducted
Business gifts are deductible only to the extent of $25 per donee per year
EXAMPLES
In each of the following situations indicate whether the 50% reduction for meals applies assume the year is 2023
A ) no
B) Yes because it is a subsudized eating facilities
C) No reasonable activity
D) No
E) No
Jose a self-employed technology consultant gave gifts how much is deductible?
To haley at christmas ( personal assistant ) $36
25 - LIMIT
To daryl ( a client ) - 3$ was for wrapping $53
Allowed 28 =25 +3$ wrapping
To daryls wife a homemaker on her birthday $20
Nondeductible
To veronica his office manager at christmas $30
25$
In addition he had taken haley to lunch with a cost of 82 how much can he deduct?
41 $ - 50%
CONTRIBUTIONS TO RETIREMENT ACCOUNTS
Retirement plans fall into two major classification depending on who is covered
For employees - usually follow one of two income tax approaches
Most plans allow an exclusions for income for the contributions the employee makes to the plan
Alternatively using the approach followd by a traditional ira , the contributing employee is allowed a deduction for A G I
Maximum deduction of $6,500 in 2023 ($6,000 in 2022) or $7,500 in 2023 ($7,000 in 2022) for those age 50 and older
Retirement plans for self-employed taxpayers
Called Keogh (or H.R. 10) plans • Follow the deduction approach of traditional I R As
Amounts contributed under a plan are deductible for A G I • Other options include
Solo or individual § 401(k) plans,
Simplified employee pension (S E P) plans, and
Savings incentive match plans for employees (S I M P L Es)
401 K PLANS
Employee elects to receive cash (taxed currently ) or have amount contributed (pre tax) to a qualified plan
Limit for 2023 on employee contributions is $22500
Amount is reduced by other tax-sheltered salary reduction plabs
Person whose age is 50 or over by year end may make catch-up contributions of up to 7500 for 2023
Individual Retirement Accounts (IRA)
Employees not covered by another qualified plan can establish their own tax-deductible
I R As are a popular device for retirement savings; almost 50 million individuals own some type of I R A
Contribution ceiling for 2022 is the smaller of $6,500 ($13,000 for spousal I R As) or 100 percent of compensation
Person age 50 or over by year end may make catch-up contributions
Max contribution limit is increased by $1,000 each year
Deductible I R A contribution may be reduced if taxpayer is an active participant in another qualified plan
Distributions before age 59½ subject to 10 percent penalty tax except to pay for:
Medical expenses in excess of 10 percent of A G I
Qualified higher education expenses
Qualified first-time home buyer expenses up to $10,000
Health insurance premiums for a person (and family) who has received unemployment compensation for at least 12 consecutive weeks
Rollovers and Conversions
Distribution from qualified plan transferred within 60 days to I R A (or another qualified plan) not includible in gross income
One tax-free rollover from I R A within 12-month period
Unlike a traditional I R A, which requires withdrawals at age 73, there are no required withdrawals from a Roth I R A
Taxation of Benefits
A participant has zero basis in the deductible contributions of a traditional IRA because the contributions were deducted
Therefore all withdrawals from a deductible IRA are tazed as ordinary income in the year of receipt
A participant has a basis equal to the contributions made for a nondeductible traditional IRA
therefore , only the earnings component of withdrawals is included in gross income
Such amounts are taxed as ordinary income in the year of receipt
EXAMPLE
juan , age 41, earns a salary of 58000 and is not an active participant in any other qualified plan. His wife , agnes, generates no earned income. What is the maximum total deductible contribution to their IRAs??
A ) 6500
Abby, age 29, reports earned income of $45,000, and her husband, Sam, reports earned income of $4,600. They are not active participants in any other qualified plan. What is the maximum contribution to their IRAs?
B) 13000-both 6500 limitation
Leo's employer makes a contribution of $3,500 to Leo's simplified employee pension plan. If Leo is single, he reports earned income of $70,000, and his AGI is $55,000, what amount, if any, can he contribute to an IRA?
C) can take up to 6500
Roth IRAs
Contributions are nondeductible
Maximum allowable annual contribution for 2022 is the lesser of
$6,500 ($13,000 for spousal I R As) or
100 percent of the individual’s compensation for the year
Qualified distributions are tax-free after an initial five-year holding period if:
Made on or after age 59½
Made to beneficiary on or after participant’s death
Participant becomes disabled
Used to pay for qualified first-time home buyer’s expenses ($10,000 limit)
Other distributions may be taxable
Distributions first treated as nontaxable return of capital to extent of contributions
Remaining distribution treated as taxable payout of earnings
RETIREMENT FOR SELF-EMPLOYED
Keogh (H.R 10) plan
Retirement plans for self-employed and their employees
Plan rules are similar to corporate provisions
Plan must be established before the end of the tax year, but contributions may be made up to the due date of the return
Contribution limitations
Solo § 401(k) plans
Designated for self employed individuals with no employees
Compensation deferred as part of a § 401(k) plan does not count toward the 20 percent limit for Keogh plans
Proprietor can defer the maximum amount of compensation under the § 401(k) plan and contribute an additional 20 percent of self employment income to the Keogh plan
Employers with 100 or fewer employees who do not maintain another qualified retirement plan may establish a savings incentive match plan for employees (SIMPLE plan)
In form, §401(k) or an I R A
Avoids nondiscrimination rules
Employees make elective contributions up to $15,500 in 2023 ($14,000 in 2022) to plan
Contributions made as percentage of compensation, not as a fixed dollar amount
Employers generally required to match contributions up to 3 percent of compensation or provide 2 percent nonmatching contributions
Person age 50 or over by year end may make catch-up contributions of up to $3,500 in 2022 ($3,000 in 2022 )
S E Ps
Retirement plans that allow the proprietor to deduct up to 20 percent of self-employment income
As with Keogh and Solo §401(k) plans, the maximum deduction allowed is $66,000 in 2023 ($61,000 in 2022)
S E P s are as easy to administer as deductible I R As but have a higher annual contribution limit
Limitation on Itemized Deductions
From 2018 through 2025, the deduction for miscellaneous itemized deductions subject to the 2%-of-A G I floor has been suspended
All § 212 expenses, except expenses of producing rent and royalty income• All unreimbursed employee business expenses, after the 50 percent limit for meals, if applicable
Professional dues and subscriptions
Union dues and work uniforms
Employment-related education expenses
Expenses of job hunting (including employment agency fees and résumé-writing expenses)
Home office expenses of an employee or outside salesperson
Legal, accounting, and tax return preparation fees• Hobby expenses (limited to hobby income)
Investment expenses, including investment counsel fees, subscriptions, and safe deposit box rental
Custodial fees relating to income-producing property or a traditional I R A or a Keogh plan
Appraisal fees paid to determine a casualty loss or charitable contribution
HOMEWORK SOLUTIONS
Parking 140
Insurance 1300
Dues 180
Tolls 200
oil/tune up 210
Repairs 160
Deprivation 2850
Fines 320
Gas 2800
Actual Method
Parking - 100% = 140
Tolls = 100%= 200
All others 90% - Excludes fines
$7090
Automobile Mileage method
(14000*65.6)
140
200
= 9510
What records must he maintain?
Log of miles
Dates
Location of travel
Food and beverage you can take limit of 50%
900
39.
A- Not deductible
B- Not deductible
C- Not deductible
D- Not deductible
E- from AGI
F- Not deductible
G- For AGI
H- not deductible
I- Not deductible
TAX RETURN ASSIGNMENT
FILL OUT THE INFORMATION IN EVERY BOX
CAN DO IT WITH A PARTNER BUT FILL BOTH OURS OUT
PROBLEM 1 FROM APPENDIX F
MEDICAL EXPENSES
Taxpayer has the option to take standard deduction or itemized deductions
Medical expenses are deductible to the extent of unreimbursed medical expenses and, in total, exceed 7.5 percent of the taxpayers AGI
The threshold percentage (floor) is used to restrict deductions because expenses below floor are not deductible
For the :
Diagnoses
Cure
Prevention
Treatment of disease
Does not include the cost of items such as:
Unnecessary cosmetic surgery
General health items
Nonprescription drugs
Nursing Home expenses - if primary reason for being in nursing home to get medical care, the costs of care (including meals and lodging) qualify
Full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense
Expenditures are only subject to the AGI floor, the increase in the home’s value is deemed to be zero
Looking for the medical resoning behind it
Taxpayer may deduct cost of medical care for a spouse and for a person who was a dependent at the time the expenses were paid or incurred
Dependents need not to meet gross income or joint return tests
Divorced persons with children, a special rule applies to the noncustodial parent
Deduction for lodging expenses cannot exceed $50 per night for each person
Transportation costs to and from a point of treatment for medical care are deductible (subject to the A G I floor)
Mileage allowance of 22 cents per mile for 2023 may be used instead of actual out-of-pocket automobile expenses
Premiums paid for medical care insurance are deductible medical expenses subject to the A G I floor
If the employer pays all or part of taxpayer’s medical insurance premiums, the amount paid by the employer is
Not included in gross income by employee
Not deductible by the employee as medical expense
Medical expenses are deductible only in the year paid
Used in conjunction with a high-deductible medical insurance policy
Taxpayer’s contributions to H S A are a deduction for A G I and earnings on H S As are not subject to taxation unless distributed
Deductible contributions are limited to an amount that depends on whether the taxpayer has self-only coverage or family coverage
$3,850 for self-only ($7,750 for family coverage) in 2023
EXAMPLE:
Barbara incurred the following expenses in 2023 : $840 dues at a health club she joined at the suggestion of her physixian to improve her general physical condition. $240 for multiple vitamins and antioxidant vitamins, $3500 for a smoking cessation program, $250 for nonpresecription nicotine gum, $2600 for insulin, and 7200 for funeral expenses for her mother who passed away in june. Barbara’s AGI for 2023 is 54000. What is her medical expense deductions for 2023?
AGI= $54000
Total medical = 6100
In excess of =4050 * 7.5% of AGI
Deductible = $ 2050
TAXES
Deduction is allowed for certainstate and local taxes paid or accrued by a taxpayer
Deductibility as a Tax
Important to understand the difference between a tax and a fee
Fees are not deductible unless incurred as a business expense or as an expense in the production of income
Taxes are defined as an enforced contribution, exacted pursuant to legislative authority in the exercise of taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes and not as payment for some special privilege granted or service rendered
State and Local Taxes—For A G I versus From A G I
State and local taxes imposed directly on business or rental property are deductible for A G I
Real property taxes imposed on an individual’s rental property are also deductible for A G I
Real property taxes imposed on an individual’s personal residence are deductible from A G I if the individual itemizes deductions
Real property taxes imposed on investment property are deductible as an itemized deduction
State, local, and foreign taxes on real property are generally deductible only by the person upon whom the tax is imposed
Deductible personal property taxes must be ad valorem
Motor vehicle tax based on weight, model, year, and horsepower is not deductible
Tax based on value and other criteria will be partially deductible
Individuals can elect to deduct either state and local income taxes or sales/use taxes
For state and local income taxes, deduct amounts paid during year:
Amounts withheld
Estimated tax payments
For sales/use taxes, deduct either:
Actual sales/use tax payments or
Amount from an I R S table
Table amount may be increased by sales tax paid on certain specific items (for example, purchase of motor vehicles, boats, etc.)
Deduction of interest expense is limited to:
Interest on qualified student loans
Investment interest
Qualified residence (home mortgage) interest
Personal interest expense is not deductible
Code § 170 allows individuals and corporations to deduct contributions made to qualified domestic organizations
A charitable contribution is defined as a gift of property made to a qualified organization
Major elements needed to qualify a contribution as a gift:
A donative intent,
The absence of consideration, and
Acceptance by the donee
The taxpayer has the burden of establishing that the transfer was made from motives of disinterested generosity as established by the courts
When a donor derives a tangible benefit from a contribution, the donor cannot deduct the value of the benefit (Benefit received rule)
No deduction is allowed for contribution of services
Unreimbursed expenses related to the services are deductible
Out-of-pocket transportation costs or a standard mileage rate of 14 cents per mile are deductible
Deductions are also permitted for transportation, reasonable expenses for lodging, and the cost of meals while away from home incurred in performing the donated services
The following items may not be deducted as charitable contributions:
Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
Cost of raffle, bingo, or lottery tickets
Cost of tuition
Payment for the right to purchase tickets for seating at an athletic event in a university stadium
Value of blood given to a blood bank
Donations to homeowners associations
Gifts to individuals
Rental value of property used by a qualified charity
To be deductible, contributions must be made to a
State or possession of United States (or any subdivision)
Corporation, trust, community chest, fund, or foundation located in the United States and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals
Veteran’s organization
Fraternal organization operating under the lodge system
Cemetery company
Gifts for needy individuals are not to a qualified organization, hence not deductible
Charitable contribution deduction is subject to a number of limitations
If the qualifying contributions for the year total 20 percent or less of A G I, they are fully deductible
If the qualifying contributions are more than 20 percent of A G I, the deductible amount may limited to 20 percent, 30 percent, 50 percent, or 60 percent of A G I, depending on the type of property and the type of organization
The maximum charitable contribution deduction may not exceed 60 percent of A G I for the tax year
Contributions that exceed the percentage limitations
Examples, which are currently deductible, include:
Gambling losses to the extent of gambling winnings
Impairment-related work expenses of a handicapped person
Federal estate tax on income in respect of a decedent
Deduction for repayment of amounts under a claim of right, if more than $3,000
Unrecovered investment in an annuity contract when annuity ceases by reason of death
Prior to 2018, certain other personal expenses were deductible only to the extent, in total, they exceed 2 percent of A G I
Examples include:
Tax return preparation fees
Certain investment expenses
Expenses related to hobby income
Unreimbursed employee business expenses
From 2018 through 2025, these expenses are not deductible
Example Question 19 - 2023 11432(80,000*.1429)
2024 19592(80000*.2449)
DEPRECIATION AND COST RECOVERY
Property includes both realty (real property) and personalty(personal property)
Realty generally includes land and buildings permanently affixed to the land
Personalty is defined as any asset that is not realty
Personalty includes furniture, machinery, equipment, and any other asset that is movable or not permanently affixed to land
Personalty (or personal property) should not be confused with personal use property
Personal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activity
Cost recovery deductions are not allowed for personal use assets
Basis in an asset is reduced by the amount of cost recovery that is allowed and by not less than the allowable amount
Allowed cost recovery is cost recovery actually taken
Allowable cost recovery is amount that could have been taken under the applicable cost recovery method
If no cost recovery is claimed on property
The basis of the property must still be reduced by the amount that should have been deducted
That is, the allowable cost recovery
If personal use assets are converted to business or incomeproducing use
Basis for cost recovery and for loss is lower of
Adjusted basis or
Fair market value at the time property was converted
Decline in value that occurred while the property was a personal use asset is not eligible for cost recovery
MACRS
Under the modified accelerated cost recovery system (M A C R S), the cost of an asset is recovered over a time period that generally is shorter than the economic life of an asset
M A C R S provides separate cost recovery systems for realty and personalty
I R S provides tables that identify cost recovery allowances for personalty and for realty
Classification of Property
M A C R S provides that the basis of eligible personalty (and certain realty) is recovered over 3, 5, 7, 10, 15, or 20 years
Double declining balance is used for the 3-, 5-, 7-, and 10-year classes, with a switch-over to straight-line depreciation when appropriate
Cost recovery for the 15- and 20-year classes is based on the 150 percent declining-balance method, with an appropriate straight-line switchover
Half Year
Cost recovery in the year the asset is placed in service, as well as the year it is removed from service, is based on the assumption that the asset was used for exactly one half of the year, allowing a half-year of cost recovery
Midquarter
Applies if more than 40% of the cost of property other than real estate is placed in service during the last quarter of the year
If the mid-quarter convention applies, property acquisitions are grouped by the quarter of acquisition
Qualified Improvement
Nonresidential realty has a 39-year life, and any improvements made to this property would normally have a 39-year life
An exception to this general rule is provided for qualified improvement property
Qualified improvement property is recovered over a 15-year life using the halfyear convention and the straight-line method
Any improvement to an interior portion of nonresidential real property made after the property is placed in service
Including leasehold improvements
Does not include
Costs of an elevator or escalator or
Improvements that enlarge a building or modify its internal framework
Under M A C R S, the cost of most real property is recovered using the straight-line method
The recovery for residential rental real estate is 27.5 years
Residential rental real estate
Includes property where 80% or more of gross rental revenues are from residential units
Example: an apartment building
Hotels, motels, and similar establishments are not residential rental property
Nonresidential real estate is recovered over 39 years
Code § 179 general rules MACRS
Permits the taxpayer to deduct up to $1,160,000 in 2023 (1,080,000 in 2022) of the acquisition cost of specific types of trade or business property
Amounts that are expensed under § 179 reduce the asset’s basis for additional first-year depreciation and M A C R S cost recovery
§ 179 Not available for real property or for property used to produce income
Any elected § 179 expense is taken before additional first-year depreciation is computed
Ceiling amount
cannot exceed an annual ceiling amount $1,160,000 in 2023 •
Property placed in service maximum
The § 179 deduction ceiling amount ($1,160,000 in 2023) is reduced dollar for dollar when § 179 property placed in service during the taxable year exceeds a specified maximum amount ($2,890,000 in 2023)
In 2023, a taxpayer who places in service $4,050,000 or more of qualifying property ($1,160,000 + $2,890,000) cannot claim a § 179 deduction
The § 179 deduction allowed for a taxable year cannot exceed the taxpayer’s business income for the year
Bonus Depreciation
In 2023, taxpayers are allowed to deduct 80 percent cost recovery of any qualified property that is placed in service (100 percent in 2022)
Qualified property includes most depreciable assets other than buildings with a recovery period of 20 years or less
Bonus depreciation applies to both new and used property
Additional first-year depreciation is taken in the year in which the qualifying property is placed in service
It is computed after any immediate expense (§ 179) deduction is claimed
After the additional first-year depreciation is determined, the regular M A C R S cost recovery deduction is calculated by multiplying the remaining cost recovery basis by the appropriate M A C R S percentage
A taxpayer may elect not to take additional first-year depreciation
AUTOMOBILES AND LISTED PROPERTY
Listed property includes the following:
Passenger automobile
Other property used as a means of transportation
Property used for entertainment, recreation, or amusement
To be considered as predominantly used in business, business use must exceed 50%
The law places further limits on the annual cost recovery deductions for passenger automobiles
A passenger automobile is any four-wheeled vehicle manufactured for use on public streets, roads, and highways with an unloaded gross vehicle weight (G V W) rating of 6,000 pounds or less
The acquisition made in 2023, the initial-year cost recovery limitation increases from $12,200 to $20,200 ($12,200 + $8,000)
Special limitation for Sport-Utility Vehicles (S U Vs)
Some sport-utility vehicles (S U Vs) are not considered passenger automobiles and, therefore, are not subject to the luxury automobile limitations
However, in 2023, a $28,900 limits applies for the § 179 deduction when the luxury auto limits do not apply ($27,000 in 2022)
The limit is in effect for S U Vs with an unloaded G V W rating of more than 6,000 pounds and not more than 14,000 pounds
Automobiles and other listed property not used predominantly in business
If asset is not used predominantly in business in the year of acquisition, (i.e., 50 percent or less)
Must use straight-line method
Under this system, the straight-line recovery period for automobiles is five years
Leased automobiles
Taxpayers who lease rather than purchase a passenger automobile for business purposes are not subject to the luxury auto limits
To prevent taxpayers from circumventing the luxury auto limits by deducting the full amount of rental payments associated with a luxury automobile leased for business
Law requires these taxpayers to report an inclusion amount in gross income
The inclusion amount (determined from an I R S table) is based on the fair market value of the automobile
Report cost recovery and deductions appropriately
Sole proprietors engaged in a business file a Schedule C, Profit or Loss from Business, to accompany Form 1040
The top part of page 1 requests certain key information about the taxpayer
Part I provides for the reporting of items of income
Part II allows for the reporting of deductions
Part III – use of inventories and computation of cost of goods sold
If depreciation is claimed, Form 4562 should be completed
AMORTIZATION
Taxpayers can recover the costs of certain intangible assets through an amortization deduction
Deduction is determined by amortizing the adjusted basis of these intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired
Amortizable § 197 intangibles include
Most intangibles acquired after August 10, 1993
Acquired in connection with the acquisition of a business, including goodwill, going-concern value, franchises, trademarks, copyrights, patents, and covenants not to compete
Self-created intangibles are not § 197 intangibles
Startup expenditures are partially amortizable
Treatment is available only by election
Allows the taxpayer to deduct the smaller of:
Startup expenditures related to the trade or business, or
$5,000, reduced by the amount startup expenditures in excess of $50,000
Any amounts not deducted may be amortized ratably over a 180-month period, beginning in the month trade or business begins