Question 1

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days.Jorge is not required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

Since Jorge used the home for personal purposes for more than the greater of 14 days or 10% of the days it was rented (which is 36 days), he must allocate expenses between rental and personal use according to IRS rules for mixed-use property.

Question 2

To be deductible,business expenses must be directly related to a business activity.

Accepted Answer

Business expenses must have a clear and proximate connection to the taxpayer's business activity in order to be deductible.

Question 3

Compared to the Tax Court method of allocating expenses between rental use and personal use,the IRS method tends to allocate more expenses to personal use than does the Tax Court method.

Accepted Answer

The IRS method often allocates more expenses to rental use, as it typically allows for deductions based on the percentage of time the property is rented, whereas the Tax Court method may consider other factors that could result in a different allocation, potentially favoring personal use.

Question 4

Taxpayers who use a home for both personal and rental use generally must allocate expenses associated with the home to the personal use and the rental use.

Accepted Answer

This is true according to IRS rules. The portion of expenses that is allocated to the rental use can generally be deducted on the taxpayer's tax return, while expenses allocated to personal use cannot be deducted.

Question 5

When allocating expenses of a vacation home between personal use and rental use,the amount of depreciation expense allocated to the rental use is always the ratio of rental days over rental days plus personal use days.

Accepted Answer

This is known as the "Days Rented/Total Days" rule used to determine the percentage of expenses that can be allocated to rental use.

Question 6

All business expense deductions are claimed as "below the line" deductions.

Accepted Answer

"Below the line" deductions are taken from adjusted gross income (AGI) to arrive at taxable income, but business expense deductions are typically "above the line," meaning they are deducted from gross income to arrive at the AGI.

Question 7

Generally,losses from rental activities are considered to be active losses.

Accepted Answer

Losses from rental activities are generally considered to be passive losses, not active, because they typically do not involve the level of continuous, regular, and substantial involvement that active businesses do.

Question 8

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day.Jennifer is required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

According to the tax law, if a taxpayer rents a property for less than 15 days during the year and uses it for personal purposes for more than 14 days or 10% of the total days rented (whichever is greater), the property is considered to be a personal residence and is not subject to rental income or expense limitations. However, in this case, Jennifer rented the property for 364 days, so she is required to allocate expenses between rental and personal use.

Question 9

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

Accepted Answer

This is known as passive loss carryover, which allows taxpayers to carry forward their passive losses to offset future passive income.

Question 10

To qualify under the passive activity rental real estate exception,the taxpayer must (1)own at least 15 percent of the property and (2)participate in the process of making management decisions.

Accepted Answer

The passive activity rental real estate exception does not specify that the taxpayer must own at least 15 percent of the property. The key criteria are active participation and a specific level of material participation in the property's management, not a specific ownership percentage.

Question 11

Rental or royalty expenses are deductible "for" AGI.

Accepted Answer

Rental or royalty expenses are considered "above-the-line" deductions and are subtracted from gross income to arrive at adjusted gross income (AGI). Therefore, they are deducted "for" AGI, not "from" AGI.

Question 12

Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

Accepted Answer

Taxpayers who rent out a home or property must report the rental income and expenses on Schedule E of their tax return.

Question 13

All investment expenses are itemized deductions.

Accepted Answer

Investment expenses used to be deductible as itemized deductions, but as of the tax year 2018, they are no longer deductible due to changes in tax laws.

Question 14

A tax loss from a rental home is generally a passive activity loss.

Accepted Answer

Rental activities are generally considered passive activities for tax purposes, so any losses from such activities are considered passive activity losses.

Question 15

Expenses of a vacation home allocated to rental use are deductible for AGI.

Accepted Answer

Expenses related to rental use of a vacation home, such as mortgage interest, property taxes, utilities, repairs, and depreciation can be deducted for AGI on Schedule E of the tax return. However, the deduction may be limited based on the number of days the property is rented out and the personal use of the property.

Question 16

The phrase "Ordinary and necessary" means that an expense must be appropriate in and helpful for generating a profit.

Accepted Answer

The concept of "ordinary and necessary" is a key criteria used by the IRS to determine whether a business expense is eligible for tax deductions. An expense is ordinary if it is common and accepted in the trade or business. An expense is necessary if it is helpful and appropriate in the context of the trade or business being conducted. For an expense to be deductible, it must satisfy both the "ordinary" and "necessary" tests. Ultimately, the goal of this criteria is to ensure that deductions are only claimed for legitimate business expenses that actually contributed to the generation of income.

Question 17

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Accepted Answer

A loss from a passive activity is generally not fully deductible due to passive activity loss rules, which limit the deduction to the amount of income generated from passive activities, regardless of the taxpayer's tax basis in the activity.

Question 18

The profit motive distinguishes "business" activities from "personal" activities.

Accepted Answer

The profit motive, or the desire to make money, is the primary objective of business activities, while personal activities are generally motivated by personal needs or interests.

Question 19

In certain circumstances,a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

Accepted Answer

If the taxpayer rents out her personal residence for less than 15 days in a year, the rental income is tax-free and does not need to be reported on the tax return.

Question 20

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is defined as any activity in which the taxpayer does not materially participate, whether it be a trade or business or rental activity.

Quiz 6: Individual for Agi Deductions