Determine how each of the following expenses would be deducted for tax purposes. If the expense is not deductible, explain why not.
- Chander paid $500 in interest on a loan he used to purchase equipment for his retail business.
- Peter paid $500 in interest on a loan he used to purchase 1,000 shares of Pickled Pepper stock.
- Portia paid $500 in interest on a loan she used to purchase her personal automobile.
d. Jordan’s primary source of income is his wholesale warehousing business. During the current year, he paid $8,000 in state income taxes
- Alphonse is a professional golfer who likes to race cars in his spare time. He spent $60,000 on expenses related to racing cars during the current year.
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- Barry is an insurance agent. He bought a golf cart and had his insurance company logo put on the golf cart to attract customers while he played golf.
- Chander paid $500 in interest on a loan he used to purchase equipment for his retail business.
The interest is related to a trade or business and is fully deductible. If the business is a sole proprietorship, it will be a deduction for adjusted gross income.
- Peter paid $500 in interest on a loan he used to purchase 1,000 shares of Pickled Pepper stock.
The interest is related to an investment. Investment interest expense is deductible as an itemized deduction. It is limited to the amount of the taxpayer’s net investment income (see Chapter 8).
- Portia paid $500 in interest on a loan she used to purchase her personal automobile.
The interest is related to a personal use asset and is not deductible.
- Jordan’s primary source of income is his wholesale warehousing business. During the current year, he paid $8,000 in state income taxes.
State income taxes are a personal expense that is allowed as an itemized deduction.
- Alphonse is a professional golfer who likes to race cars in his spare time. He spent $60,000 on expenses related to racing cars during the current year.
The expenses are not related to his trade or business as a golfer. To determine the proper treatment of the expense, it would have to be determined whether Alphonse’s involvement in the race car business meets the criteria for a trade or business. Based on the facts as given, it would appear that the activity has a significant pleasure element that would disqualify the activity as a trade or business. If so, it would most likely be a hobby. Hobby deductions are limited to hobby income and are only deductible as miscellaneous itemized deductions.
- Barry is an insurance agent. He bought a golf cart and had his insurance company logo put on the golf cart to attract customers while he played golf.
The cost of the golf cart would not be a deductible business expense since it is not used in Barry’s trade or business. The cost of the logo is a form of advertising that is deductible as a business expense.
