Question 1

What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses.For this question,assume no personal use of the rental property.

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Question 2

Explain the three categories that a rental activity may fall under if used for both personal and rental purposes.How are the categories determined?

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Question 3

Which of the following entity(ies)is(are)considered flow-through entity(ies)?

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Question 4

Explain what is considered personal use of a rental property.

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Question 5

Earl and Sandra own and operate a restaurant as an S corporation.Each is a 50% owner.The business reports the following results for the year: $\begin{array}{lr}
\text { Revenue } & \$ 480,000 \
\text { Business expenses } & 398,000 \
\text { Investment expenses } & 32,000
\end{array}$ How do Earl and Sandra report these items for tax purposes on each of their individual returns?

Accepted Answer

The net income from the S corporation is $480,000 (revenue) - $398,000 (business expenses) = $82,000. This income is divided equally between Earl and Sandra, so each reports $41,000 on Schedule E, part of their individual tax returns. Investment expenses are not business expenses of the S corporation and are reported separately on Schedule A, but they are subject to various limitations. Since the question does not specify how these limitations apply, the simplest assumption is that each owner would report half of the investment expenses, or $16,000 each, on Schedule A.

Question 6

What must the owner of rental property do with respect to the rental activity to have it be considered: 1)material participation? 2)a trade or business?

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Question 7

Roger,Ellen,Drew and Cindy are equal partners in a local pub.The pub reports the following items for the current year: $\begin{array}{lr}
\text { Business revenue } & \$ 1,770,000 \
\text { Business expenses } & 1,000,000 \
\text { Investment expenses } & 160,000
\end{array}$ Each partner receives a Schedule K-1 with one-fourth of the preceding items reported to him/her.How must each individual report these results on his/her Form 1040?

Accepted Answer

The net income from the pub is calculated by subtracting the business expenses and investment expenses from the business revenue: $1,770,000 - $1,000,000 - $160,000 = $610,000. Each partner's share is one-fourth of this amount, which equals $152,500. This amount should be reported on Schedule E as income from partnerships. Investment expenses are not typically deductible on Schedule A for most taxpayers due to changes in tax laws that limit the deductibility of investment expenses. Therefore, the correct reporting would be $152,500 on Schedule E, and investment expenses would not be separately reported on Schedule A by the individual partners.

Question 8

Kirk and Amy live in Augusta,Georgia.Every year during the Masters Golf Tournament,they rent their primary personal residence for 10 days for $10,000 to a large corporation that uses it to entertain clients.The rest of year,they reside full-time in their home.How should Kirk and Amy treat the rental income? Explain.

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Question 9

What is meant by a passive activity? Why is a rental activity classified as a passive activity? Can a rental activity be classified as active? Explain.

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Question 10

What are the rules concerning the deductibility of travel as it relates to rental properties? How are travel expenses to and from rental properties calculated?

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Question 11

When reporting the income and expenses of a rental property,what determines the use of the Schedule C versus the Schedule E?

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Question 12

Meredith has a vacation rental house in the Sierra Mountains.During the year,she and her immediate family used the house for 12 days for a personal vacation.Meredith spent two more weekends (4 days in total)repairing the deck.The house was rented for 120 days.How should the cabin be categorized this year for tax purposes? Explain your answer.

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Question 13

Which of the following is not considered a flow-through entity?

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Question 14

What are the different types of income that may be reported on Schedule E?

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Question 15

What are the criteria that determine an amount as capital improvement rather than repair and maintenance expense? What is the proper tax treatment of a capital improvement for rental properties?

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Question 16

Explain the difference between the two methods available;the Tax Court's method and the IRS method,to allocate expenses between personal and rental use of property.

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Question 17

Define royalty income.What criteria determine which form is used and where the royalties are reported?

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Question 18

Meredith has a vacation rental house in the Sierra Mountains.During the year,she and her immediate family used the house for 12 days for a personal vacation.Meredith spent two more weekends (4 days in total)repairing the deck.Meredith also rented her house (at fair value)to her brother and his family for 9 days (in addition to her personal use).The house was rented for 180 days.How should the cabin be categorized this year for tax purposes? Explain your answer.

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