Mixed Personal

1
Mixed Personal Business Deductions
2
162(a)Trade or Business Expenses

• (a) In general. There shall be allowed as a
  deduction all the ordinary and necessary expenses
  paid or incurred during the taxable year in
  carrying on any trade or business . . .

3
262(a)Personal, Living, Family Expenses

• Except as otherwise expressly provided in this
  chapter, no deduction shall be allowed for
  personal, living, or family expenses.

4
Traveling Expenses

• Section 162(a)(2) includes within the ambit of
  ordinary and necessary business expenses
• Traveling expenses (including amounts expended
  for meals and lodging other than amounts which
  are lavish or extravagant under the
  circumstances) while away from home in the
  pursuit of a trade or business.

5
Flowers Traveling Expenses

• To deduct traveling expenses
• The expenses must be reasonable and necessary,
• The expenses must be incurred while away from
  home, and
• The expenses must be incurred in pursuit of
  business (i.e, there must be a direct connection
  between the expenditure and the carrying on of
  the trade or business of the taxpayer or of his
  employer).

6
Rev. Rul. 75-432 Sleep or Rest Rule

• IRS position on sleep or rest rule
• The business trip must last substantially longer
  than an ordinary days work
• The employee must not reasonably be expected to
  make the trip without being released from duty
  for sufficient time to obtain substantial sleep
  or rest while away from the principal post of
  duty and
• The release from duty must be with employers
  tacit or express acquiescence, or must be
  required by regulations of a governmental agency
  regulating the activity involved.

7
Rev. Rul. 93-86IRS Position on Tax Home

• A taxpayers home for purposes of 162(a)(2)
  is located at
• The taxpayers regular or principal (if more
  than one regular) place of business, or
• If the taxpayer has no regular or principal place
  of business, then at the taxpayers regular place
  of abode in a real and substantial sense.
• Taxpayers not falling into either of these
  categories are itinerants who have no tax home to
  be away from.

8
Rev. Rul. 99-7

• A taxpayer may deduct daily transportation
  expenses incurred in going between the taxpayer's
  residence and a temporary work location outside
  the metropolitan area where the taxpayer lives
  and normally works.
• If a taxpayer has one or more regular work
  locations away from the taxpayer's residence, the
  taxpayer may deduct daily transportation expenses
  incurred in going between the taxpayer's
  residence and a temporary work location in the
  same trade or business, regardless of the
  distance.
• If a taxpayer's residence is the taxpayer's
  principal place of business within the meaning of
  280A(c)(1)(A), the taxpayer may deduct daily
  transportation expenses incurred in going between
  the residence and another work location in the
  same trade or business, regardless of whether the
  other work location is regular or temporary and
  regardless of the distance.
• Temporary 1 year or less.

9
274(a)(1)(A) Entertainment Expenses

• An expenditure for entertainment, amusement, or
  recreation is not deductible unless the taxpayer
  establishes that it was
• Directly related to the active conduct of the
  taxpayers trade or business, or
• Associated with the active conduct of the trade
  or business and directly preceded or followed a
  substantial and bona fide business discussion.

10
274(d) Substantiation

• To be entitled to a deduction for entertainment
  expenses under 274(a), a taxpayer must
  substantiate by adequate records or by sufficient
  evidence corroborating the taxpayers own
  statement
• The amount of the expense,
• The time and place of the expense,
• The business purpose of the expense, and
• The business relationship to the taxpayer of the
  persons entertained.

11
Education Treas. Reg. 1.162-5

• To be deductible, educational expenses must pass
  one of two positive tests
• Maintains or improves skills required by the
  individual in his employment or other trade or
  business or
• Meets the express requirements of the
  individuals employer, or the requirements of
  applicable law or regulations, imposed as a
  condition to the retention by the individual of
  an established employment relationship, status,
  or rate of compensation.

12
Education Treas. Reg. 1.162-5

• The educational expenses must also avoid both of
  the following negative tests
• The education must not be required in order to
  meet the minimum educational requirements for
  qualification in the taxpayers employment or
  other trade or business, and
• The education must not be part of a program that
  will lead to qualifying the taxpayer for a new
  trade or business.

13
212 Expenses for production of income.

• In the case of an individual, there shall be
  allowed as a deduction all the ordinary and
  necessary expenses paid or incurred during the
  taxable year--   (1) for the production or
  collection of income   (2) for the management,
  conservation, or maintenance of property held for
  the production of income or   (3) in connection
  with the determination, collection, or refund of
  any tax.

14
Treas. Reg. 1.212-1(b) Income

• The term income for the purpose of section 212
  includes not merely income of the taxable year
  but also income which the taxpayer has realized
  in a prior taxable year or may realize in
  subsequent taxable years and is not confined to
  recurring income but applies as well to gains
  from the disposition of property.
• Ordinary and necessary expenses paid or
  incurred in the management, conservation, or
  maintenance of a building devoted to rental
  purposes are deductible notwithstanding that
  there is actually no income therefrom in the
  taxable year, and regardless of the manner in
  which or the purpose for which the property in
  question was acquired.
• Expenses paid or incurred in managing,
  conserving, or maintaining property held for
  investment may be deductible under section 212
  even though the property is not currently
  productive and there is no likelihood that the
  property will be sold at a profit or will
  otherwise be productive of income and even though
  the property is held merely to minimize a loss
  with respect thereto.

15
Treas. Reg. 1.165-9(b) Loss on Sale of
Converted Property

• The loss is equal to the difference between the
  amount realized and the lesser of
• The fair market value of the property at the time
  of the conversion or
• The adjusted basis for purposes of calculating a
  loss at the time of conversion,
• Adjusted for depreciation, capital improvements,
  etc... taken or made after the conversion.

16
Example

• A bought a house for 60,000 in 1983.
• In 1985, when it was worth 40,000, A listed the
  house for sale or rent, and, shortly thereafter,
  succeeded in renting out the house.
• In 1986, A sold the house for 30,000.
• What is As loss?
• 10,000 (30,000 AR 40,000, which is the
  lesser of the 40,000 FMV or 60,000 AB at the
  time of the conversionignoring post-rental
  adjustments to basis).

17
280A(c)(1) Home Office

• A portion of the dwelling unit must be used
• As the principal place of business for any trade
  or business of the taxpayer
• As a place of business which is used by
  patients, clients, or customers in meeting or
  dealing with the taxpayer in the normal course of
  his trade or business or
• In the case of a separate structure that is not
  attached to the dwelling unit, in connection with
  the taxpayers trade or business.
• The portion of the dwelling unit
• Must be exclusively used for one of these
  enumerated purposes, and
• Such use must occur on a regular basis.

18
Commr v. Soliman

• Primary considerations in determining a
  taxpayers principal place of business
• The relative importance of the activities
  performed at each business location, and
• The time spent at each place.

19
Rev. Rul. 94-24, Situation 1

• A self-employed plumber installs plumbing in
  customers homes and offices.
• He spends 40 hours per week at customer locations
  and 10 hours per week in an office at home
  talking with customers on the telephone, deciding
  what supplies to order, and reviewing the books
  of the business.
• The plumber has a full-time employee who works in
  the home office performing administrative
  services.

20
Rev. Rul. 94-24, Situation 2

• A teacher is required to teach and meet with
  students at school and to grade papers and tests.
  
• In addition to a small shared office at school,
  the teacher maintains a home office for use in
  class preparation and for grading papers and
  tests.
• About 25 hours per week are spent at school and
  another 35 hours per week are spent at the home
  office.

21
Rev. Rul. 94-24, Situation 3

• An author uses a home office to write.
• The author spends 30-35 hours per week writing at
  home, and spends another 10-15 hours per week at
  other locations conducting research and other
  activities.

22
Rev. Rul. 94-24, Situation 4

• A retailer of costume jewelry orders jewelry from
  wholesalers and sells it at craft shows, on
  consignment, and through mail orders.
• About 25 hours per week are spent at home filling
  and shipping mail orders, ordering supplies, and
  keeping the books.
• Another 15 hours per week are spent at craft
  shows and consignment sale locations.
• A substantial amount of income is generated by
  each type of sales activity.

23
280A(c)(5) Example

• Deductions allowed because attributable to use of
  home as PPB cannot exceed 1,000, or the excess
  of
• 5,000 (gross income from the business) over
• 1,000 in interest and taxes deductible without
  regard to business use, and
• 3,000 of deductible expenses not connected with
  the dwelling

• Taxpayer uses 10 of home exclusively as PPB.
• Gross income of the business is 5,000.
• Interest and taxes on home are 10,000 (with
  1,000, or 10, allocable to the business use).
• Deductions for salaries, supplies, and other
  items not directly connected with the residence
  are 3,000.

24
183 Not Engaged in for Profit

• 183(c) any activity other than one described
  in 162 or 212(1) or (2)
• Treas. Reg. 1.183-2(a)
• The determination whether an activity is engaged
  in for profit is to be made by reference to
  objective standards, taking into account all of
  the facts and circumstances of each case.
• Although a reasonable expectation of profit is
  not required, the facts and circumstances must
  indicate that the taxpayer entered into the
  activity, or continued the activity, with the
  objective of making a profit.
• In determining whether such an objective exists,
  it may be sufficient that there is a small chance
  of making a large profit.
• Thus it may be found that an investor in a
  wildcat oil well who incurs very substantial
  expenditures is in the venture for profit even
  though the expectation of a profit might be
  considered unreasonable.

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List of Factors Treas. Reg. 1.183-2(b)

• Manner in which the taxpayer carries on the
  activity
• Expertise of the taxpayer or his advisors
• Time and effort expended by the taxpayer in the
  activity
• Expectation of appreciation in value of assets
  used in the activity
• Taxpayers success in similar activities
• Taxpayers history of income or losses with
  respect to the activity
• Relative amount of profit earned
• Taxpayers financial status and
• Presence of personal motives for engaging in the
  activity.

26
21 Dependent Care Credit

• Credit is equal to specified percentage of
  expenses
• Incurred for household services or in caring for
  qualifying individual,
• If expenses are incurred to enable individual to
  be gainfully employed, and
• To the extent the expenses do not exceed earned
  income of individual (or spouse, if lower).
• Specified percentage is now 35 (phased down to
  20 if AGI is over 15,000)
• Creditable expenses are capped at
• 3,000 for one dependent, and
• 6,000 for more than one dependent.
• Creditable expenses are reduced by exclusion
  under 129.

27
129 Dependent Care Assistance Programs

• An employee excludes from gross income amounts
  paid or incurred by employer for dependent care
  assistance.
• Cap on amount excluded is 5,000.
• The amount excluded cannot exceed the earned
  income of the employee (or the employees spouse,
  if lower).

28
Interaction of 21 and 129

• W earns 40,000 and H earns 6,000.
• W receives a childcare allowance of 5,000, and
  they spend 10,000 on qualified expenses for two
  children.
• They have no above-the-line deductions.
• How much of the childcare allowance can be
  excluded from gross income under 129 and what
  portion of the expenses will be creditable under
  21?

29
Interaction of 21 and 129

• How much of the childcare allowance is excludible
  under 129?
• 5,000 (Hs earned income exceeds the statutory
  cap)
• How does this impact the computation of the
  credit under 21?
• Dollar cap on employment-related expenses is
  1,000 (6,000 maximum - 5,000 exclusion under
  129)
• Applicable percentage is 20 ((46,000 AGI -
  15,000)/2,000 15.5, rounded to 16 35 - 16
  points 19 applicable percentage can in no
  event be reduced below 20)
• 20 x 1,000 200 non-refundable tax credit

30
Deduction v. Credit

• Low-Income Individual
• 5,000 of dependent care expenses
• What is the benefit of excluding the 5,000 from
  income under 129 if marginal rate is 15?
• 750
• What is the benefit of a credit under 21,
  assuming that the applicable percentage is 35?
• 1,750

• High-Income Individual
• 5,000 of dependent care expenses
• What is the benefit of excluding the 5,000 from
  income under 129 if marginal rate is 40?
• 2,000
• What is the benefit of a credit under 21,
  assuming that the applicable percentage is 20?
• 1,000

31
IndividualsCategories of Interest Expense

• Trade or business interest
• Investment interest
• Qualified residence interest
• Educational loan interest
• Personal interest

32
Limitations on Deduction for Educational Loan
Interest

• Maximum deduction is 2,500.
• Sixty-month limitation has been eliminated
  (subject to sunset).
• Deduction is phased out for taxpayers with
  modified adjusted gross income in excess of
  55,000 (115,000 for joint filers) (higher
  threshold for phase-out also subject to sunset).
• Deduction is fully phased out for taxpayers with
  modified adjusted gross income in excess of
  70,000 (145,000 for joint filers).
• Phase-out adjusted for inflation beginning in
  2003numbers above are for 2008.

33
Home Mortgage Interest

• Qualified residence
• Principal residence
• 1 other residence
• Acquisition indebtedness
• Incurred to acquire, construct, or substantially
  improve, and is secured by residence
• 1 million aggregate cap
• Home equity indebtedness
• Cannot exceed fair market value of qualified
  residence less acquisition indebtedness on the
  residence, and must be secured by residence
• 100,000 aggregate cap

34
Interest Free LoanFrom Employer to Employee
Employer loans money
Employee is not required to pay interest
35
Recharacterization under 7872 Step 1
Employer loans money
Employee agrees to pay interest at the
statutorily prescribed rate (the applicable
federal rate)
36
Recharacterization under 7872 Step 2
Employer makes an additional payment of
compensation equal to the foregone interest on
the loan
37
Effect of Recharacterization Under 7872

• Employer
• Additional payment of compensation may be
  deductible under 162.
• Deemed payments of interest includible in income.

• Employee
• Additional payment of compensation includible in
  income.
• Deemed payments of interest may be deductible,
  but must test under 163.

38
Interest-Free Loan From Mother to Child
Mother loans money
Child is not required to pay interest
39
Recharacterization under 7872 Step 1
Mother loans money
Son agrees to pay interest at the statutorily
prescribed rate (the applicable federal rate)
40
Recharacterization under 7872 Step 2
Mother makes a gift equal to the foregone interest
41
Effect of Recharacterization Under 7872

• Mother
• Gift equal to foregone interest may be subject to
  gift tax.
• Deemed payments of interest includible in income.

• Son
• Gift equal to foregone interest is excluded from
  income under 102.
• Deemed payments of interest may be deductible,
  but must test under 163.