Liberty Tax Service Online Basic Income Tax Course. Lesson 13

1. Liberty Tax Service Online Basic Income Tax Course.Lesson 13

2. Chapter 12 - Homework HOMEWORK 1: Find the total 2008 depreciation for each of the following problems. Use one depreciation worksheet to figure the depreciation for all of the problems. For prior and current year property, assume special depreciation was taken unless it is stated that the taxpayer elected out. The “depreciation prior year” column in the worksheet is for record keeping. Do not complete it for this exercise. All property was placed in service on the purchase date. 1. Office furniture (cost $800), a copier (cost $3,500), and file cabinets (cost $300) all purchased April 2, 2006 and used 100% for business. In 2006, a $1,000 section 179 deduction was taken for the copier. A computer (cost $2,500) bought August 10, 2008 and used 75% for business (no section 179 deduction).

3. Chapter 12 - Homework 2. A house used as rental property (purchase price $109,000, land value $9,000, title insurance and transfer taxes $1,000) purchased on July 12, 2000. Replacement of all the shrubbery surrounding the house (cost $3,000) in June 2007. An addition to the house (cost $15,000) completed in October 2008. 3. A passenger automobile purchased on August 11, 2006 for $32,000 and driven 60% for business (26,000 total miles including 15,600 business miles) in 2008. 4. A safe bought in January 2005 (purchase price $3,670, sales tax $300, shipping charges $30) used 100% for business and sold in September 2008. 5. An office building (purchase price $167,000, land value $12,000) purchased June 4, 1992.

4. Chapter 12 - Homework 6. A copier (cost $3,000) purchased March 12, 2007 and office furniture (cost $5,000) purchased November 20, 2007 all used 100% for business. A computer system (cost $22,000), used 100% for business, purchased and placed in service on September 27, 2008 (no section 179 deduction).

5. Homework 1

6. Chapter 12 - Homework HOMEWORK 2: Complete a depreciation worksheet and Form 4562 for the following: Al Katz (SSN 155-22-1221) owns a shoe store called “Al the Shoe Man”. His net income from shoe sales and repairs in 2008 was $280,000. Al has been in business since 2005 when he made the following purchases: Building 8/15/2005 $150,000 ($12,000 land value) Shelving 9/18/2005 $25,000 On 3/3/2006, Al purchased a mini-van for $10,000. The van is used 100% to make deliveries for the business and is parked at the store when not in use. In 2008, Al drove the van 17,000 miles making shoe deliveries(9,100 miles from January 1 through June 30 and 7,900 miles from July 1 through December 31).Al has a vintage Ford Fairlane he uses for personal purposes.

7. Chapter 12 - Homework On 7/20/2008, Al purchased a computer system for $3,500 exclusively for business use. He wants to expense $1,500 under section 179 and depreciate the remainder. Also in July, Al started a major store renovation project which was ready for use by 7/28/2008. It cost him $25,000. On 8/15/2008, Al purchased a carpet for the entire store for $8,000 and paid an additional $700 for delivery. He wants to take a section 179 deduction for this. Once the carpet was in place, Al had new store furniture brought in at a cost of $10,000. It was purchased and delivered 8/25/2008.

8. Chapter 12 - Homework Homework 2

9. Chapter 12 - Homework

10. Chapter 12 - Homework

11. Chapter 12 - Homework

12. Chapter 12 - Homework

13. Chapter 13: Other Itemized Deductions Chapter Content • Casualty and Theft Losses • Job Expenses • Travel Expenses • Entertainment Expenses • Gifts • Local Transportation • Car Expenses • Job Related Education Expenses • Most Other Miscellaneous Deductions • Key Ideas Objectives • Understand How to Figure and Report Casualty and Theft Losses on Schedule A • Determine What Job Expenses an Employee Can Deduct on Schedule A • Know How to Complete Form 2106

14. Other Itemized Deductions CASUALTY AND THEFT LOSSES are losses suffered because of damage to or loss of your nonbusiness property, such as your home. JOB EXPENSES AND MISCELLANEOUS DEDUCTIONS are deductions for ordinary and necessary business expenses you incur as an employee and for expenses related to producing or managing income or paying taxes. Only expenses that exceed 2% of your adjusted gross income are deductible.

15. Other Itemized Deductions Schedule A

16. CASUALTY AND THEFT LOSSES • This is a limited deduction for expenses incurred from theft of or damage to personal property (your home, your personal car, or other non-business property). 1. Determine whether the loss results from a casualty or theft under IRS rules. 2. Complete Form 4684 to figure the amount of the loss and the amount you can deduct. 3. Enter the deduction on line 20 of Schedule A.

17. CASUALTY AND THEFT LOSSES Casualty Loss B. A casualty is damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual such as: 1. Car accidents 2. Earthquakes 3. Fires 4. Floods 5. Terrorist attacks 6. Storms 7. Hurricanes, tornadoes 8. Vandalism. • A sudden event is one that is swift, not gradual or progressive. • An unexpected event is one that is ordinarily unanticipated and unintended. • An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

18. CASUALTY AND THEFT LOSSES C. Casualty losses do not include damage from progressive deterioration (e.g., damage caused by termites) or damage caused by ordinary accidents or willful acts or negligence. All of Sue’s plants and shrubs were destroyed by an unusual and unexpected infestation of beetles. Because this loss was sudden, unexpected, and unusual it would qualify as a casualty loss. Damage to her plants over time by the usual insects and pests native to her area would not qualify as a casualty loss.

19. CASUALTY AND THEFT LOSSES D. To prove a casualty loss your records must show all the following: 1. The type of casualty 2. The date the casualty occurred 3. The loss was a direct result of the casualty 4. You owned the property, or were contractually liable for the loss for leased property.

20. CASUALTY AND THEFT LOSSES Theft Loss E. A theft is the illegal taking and removing of money or property with the intent to deprive the owner of it. Theft includes crimes such as: 1. Blackmail 2. Burglary 3. Embezzlement, extortion 4. Kidnapping 5. Robbery

21. CASUALTY AND THEFT LOSSES F. To prove a theft loss your records must show all the following: 1. The date you discovered the property was missing. 2. That your property was stolen. 3. That you were the owner of the property. The best record is a police report. Notify the police of any theft of your property.

22. AMOUNT OF LOSS A. The amount of your casualty or theft loss is the smaller of : 1. The adjusted basis of the property before the casualty or theft, or, 2. The decrease in the FMV of the property as a result of the casualty or theft minus any insurance or other reimbursements you receive or expect to receive. B. Adjusted basis is the basis increased or decreased by items such as improvements and previous casualty loss claimed. C. Decrease in FMV is the difference between the value of the property immediately before and immediately after the casualty or theft.

23. AMOUNT OF LOSS – Problem 1 Nick’s wallet containing $700 is stolen. He reported the theft to the police. The decrease in the value of his property is $700. He can claim a loss of $700. Nick ran his car into a pole. Before the accident his car was worth $6,200. After the accident the FMV was $2,000. The decrease in the value of the car is $4,200 ($6,200-$2,000). If Nick had paid $12,000 for the car, what is the amount of loss Nick can claim? a. $12,000 b. $ 4,200 c. $ 6,200

24. AMOUNT OF LOSS – Problem 1 Nick ran his car into a pole. Before the accident his car was worth $6,200. After the accident the FMV was $2,000. The decrease in the value of the car is $4,200 ($6,200-$2,000). If Nick had paid $12,000 for the car, what is the amount of loss Nick can claim? b. $ 4,200 The amount of his loss would be $4,200 which is the smaller of the adjusted basis or the decrease in FMV.

25. AMOUNT OF LOSS Figuring the Decrease in FMV D. To figure the decrease in fair market value, you generally need an appraisal. E. You can use the cost of clean up and repairs to measure the decrease in value if: 1. The repairs are necessary to bring the property back to its condition before the casualty. 2. The amount spent for the repairs is not excessive 3. The repairs are only to take care of the damage 4. The repairs do not increase the value of the property to more than its value before the casualty.

26. AMOUNT OF LOSS Gloria and Jim’s living room furniture was damaged in a fire. The furniture was worth $2,300 immediately before the fire. They paid $800 to repair the damage. They can use the $800 figure as the decrease in the FMV as a result of the fire. Sandy’s deck was damaged in a tornado. The deck was worth $1,400 immediately before the damage. Sandy decided to not only repair the damage but also to enlarge and improve the deck and she paid $1,200 to do this. She cannot use $1,200 to measure the decrease in FMV.

27. AMOUNT OF LOSS F. If your car is damaged or stolen, the books issued by automobile organizations that list your car may be used in figuring the value of your car. You can modify the book’s retail value by such factors as mileage and the condition of your car.

28. AMOUNT OF LOSS Reimbursements G. You must reduce the amount of your loss by any reimbursement you receive or expect to receive even if you will not receive it until a later tax year. 1. The most common type of reimbursement is an insurance payment 2. If your property is insured, you must file a claim in order to take the deduction. Eve’s car is damaged in an accident. Under her insurance policy, she is responsible for the first $500 of damages to her car. Eve can claim a casualty loss of $500 (subject to the deduction limits) on Schedule A even if she does not file an insurance claim.

29. AMOUNT OF LOSS H. If a single casualty or theft involves more than one item of personal property, you must figure the loss on each item separately. Then combine the losses to figure your total loss from that casualty or theft. To figure the loss on personal use real property, treat the entire property (buildings, trees, shrubs, improvements) as one item.

30. DEDUCTION LIMITS Once you have figured the amount of your loss, you must apply two limits to the loss to determine the amount you can deduct. The limits are referred to as the $100 rule and the 10% rule. These limits may prevent you from deducting any part of your loss. The $100 Rule • Reduce each casualty or theft loss caused by a single event by $100 (the $100 rule), and The 10% Rule B. Reduce the total of all your losses (after reducing each by $100) by 10% of your AGI (the 10% rule).

31. DEDUCTION LIMITS A tornado damaged Rich’s home and car. The tornado is a single event, which causes damage to the two items. Rich figures the loss on the home and car separately and then combines the losses and reduces the combined amount by $100. Earlier in the year Rich’s wallet, containing $1,000, was stolen. This is a loss from a separate event. Rich must also reduce the $1,000 loss by $100.

32. DEDUCTION LIMITS Rich had an AGI of $32,000. His total loss from the tornado event was $1,000. He applies the deduction limit rules as follows: Tornado Theft Loss $10,000 $1,000 Minus $100 100 100 Loss after $100 rule $ 9,900 $ 900 Total loss $10,800 Minus 10% of AGI $ 3,200 Amount of deduction $ 7,600

33. FIGURING THE CASUALTY AND THEFT DEDUCTION C. Use Section A of the Form 4684 to figure your deduction for a casualty or theft loss of personal-use property. 1. Use a separate Form 4684 to figure the loss caused by each casualty or theft event 2. Apply the $100 limit to each loss 3. Combine the gains and losses on one Form 4684 and reduce the combined loss by 10% of your AGI 4. Complete Form 4684 with the combined totals and file all Forms 4684 with your return.

34. FIGURING THE CASUALTY AND THEFT DEDUCTION

35. FIGURING THE CASUALTY AND THEFT DEDUCTION

36. FIGURING THE CASUALTY AND THEFT DEDUCTION When To Deduct A Loss D. Deduct a theft loss in the year you discover the theft; deduct a casualty loss for the year the casualty occurs. • Different rules apply to losses of personal use property attributable to federally declared disasters. • The net disaster loss is not subject to the 10% of adjusted gross income limit • You can deduct a net disaster loss even if you do not itemize your deductions. You do this by completing Form 4684 and entering the net disaster loss on line 6 of the Standard Deduction Worksheet – Line 40 in the Form 1040 instructions. • Your net disaster loss is the excess of – a. Your personal losses attributable to a Federally declared disaster area over b. Your personal casualty gains.

37. FIGURING THE CASUALTY AND THEFT DEDUCTION If you suffer a casualty in a Federally declared disaster area, you can deduct the loss for either the year the casualty occurred or for the immediately preceding year. In March of 2008, Mallory suffers a casualty loss from a flood. Her town is declared a federal disaster area as a result of the flood. Mallory can deduct the loss on her 2007 tax return due in April 2008 or on her 2008 tax return due in April 2009. If Mallory had already filed her 2007 tax return she could file an amended return.

38. JOB EXPENSES A. As an employee you can claim unreimbursed expenses that are: 1. Paid or incurred during the tax year 2. For carrying on your job as an employee 3. Ordinary (common and accepted) and necessary (appropriate and helpful) business expenses. B. These deductions are entered on line 21 of Schedule A and included in the total on line 27. 1. You can only deduct the amount that exceeds 2% of AGI 2. You must complete Form 2106 if you are claiming certain expenses.

39. JOB EXPENSES Travel Expenses A. May be deductible if you temporarily travel away from your tax home for your job. 1. Your tax home is your regular place of business or post of duty 2. You are away from your tax home if you are required to be away from the general area of your tax home longer than an ordinary work day and you need to get sleep or rest 3. A temporary assignment is one that is expected to last (and does last) for one year or less.

40. JOB EXPENSES Shawn’s regular place of business is in Derby, a 4-hour drive from her home in Runyon. She chooses to rent a room in Derby and return to her family home on the weekends. Her tax home is in Derby. She cannot deduct any of her expenses related to travel between Derby and Runyon. Will drives a truck. He leaves the terminal and returns to it later the same day. He gets an hour off for lunch. Because the time off is not for necessary sleep or time for an adequate rest period, the trip is not travel away from home and his expenses are not deductible. Betty lives and works in Appleton, WI. Her employer requires that she attend a weeklong conference in Los Angeles. Because she will be gone longer than an ordinary workday and will have time off to get necessary sleep, her expenses are deductible.

41. JOB EXPENSES – Problem 1 Chris is a prison guard. His personal residence is in Rochester, NY. He is assigned to a prison located 300 miles from Rochester for two years. After the two-year period, he will be able to choose a prison which is in commuting distance from Rochester. He chooses to keep his home and family in Rochester and come home weekends. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home. Chris can deduct the expenses related to traveling to and living near his job as travel expenses. True or False?

42. JOB EXPENSES – Problem 1 Chris is a prison guard. His personal residence is in Rochester, NY. He is assigned to a prison located 300 miles from Rochester for two years. After the two-year period, he will be able to choose a prison which is in commuting distance from Rochester. He chooses to keep his home and family in Rochester and come home weekends. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home. Chris can deduct the expenses related to traveling to and living near his job as travel expenses. False, he cannot deduct the expenses. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home.

43. JOB EXPENSES DEDUCTIBLE TRAVEL EXPENSES B. Ordinary and necessary traveling expenses are deductible. 1. Refer to Table 13-1 for travel expenses you can deduct 2. To figure your meal expense you can use the actual cost or a standard meal allowance of $39 per day for 2008 for most small localities. There are higher rates for most major cities and some other localities in the continental United States. 3. Whichever method you use, you can deduct only 50% (unless subject to the “hours of service” limits of Department of transportation, then limit is 80%) of your unreimbursed meal expenses. 4. Transportation workers can claim a $52 standard meal allowance for most localities in the United States. The rate for areas outside the U.S. is $58.

44. JOB EXPENSES

45. JOB EXPENSES Entertainment Expenses A. You can deduct ordinary and necessary entertainment expenses only if they are either directly related to your business or associated with your business. 1. Entertainment meets the directly related test if it: takes place in a clear business setting or the main purpose of the entertainment was the conduct of business; you did in fact engage in business; and you had more than a general expectation of getting income or some other business benefit. 2. Entertainment meets the associated test if it: is associated with the active conduct of your trade or business; and directly precedes or follows a substantial business discussion.

46. JOB EXPENSES Gordon works for Giant Foods. One of his customers is in town and Gordon takes him to the theater. They discuss some business. Gordon cannot deduct the cost of the theater tickets. If, in the above example, Gordon and the customer had come from a negotiation session at Gordon’s office, the cost of the theater tickets would be a deductible entertainment expense for Gordon. The entertainment followed a substantial business discussion.

47. JOB EXPENSES THE 50% LIMIT B. In general, you can deduct only 50% of business related entertainment and meal expenses (including taxes, tips, etc.) 1. If you have one bill for meals, lodging, transportation, etc., you must allocate the expense between the cost of meals and entertainment and the cost of other services. C. Refer to Table 13-2 for a summary of the rules for the 50% limit.

48. JOB EXPENSES – Problem 2 Gordon bought the theater tickets through a ticket agent. His total cost was $170. The tickets were $75 each and the agent’s fee was $20. How much can Gordon deduct for entertainment expenses? a. $170 b. $150 c. $ 75

49. JOB EXPENSES – Problem 2 Gordon bought the theater tickets through a ticket agent. His total cost was $170. The tickets were $75 each and the agent’s fee was $20. How much can Gordon deduct for entertainment expenses? c. $75 His deduction cannot be more than $75 (50% of $150).

50. JOB EXPENSES – Problem 3 Opal is attending a three-day out-of-town business meeting. Her hotel bill includes the cost of several meals she ate at the hotel. Does Opal have to separate the cost of the meals from the charge for lodging? Yes or No?