Joshua, a head of household, has income and expenses from the following sources for 2019: Net loss from his small business $ 9,500 Wages from unrelated business 6,000 Interest income 8,000 Itemized deductions 7,500 How much is Joshua’s net operating loss, if any? How is any net operating loss treated?

QUESTION

1. Joshua, a head of household, has income and expenses from the following sources for 2019:

Net loss from his small business $ 9,500

Wages from unrelated business 6,000

Interest income 8,000

Itemized deductions 7,500

How much is Joshua’s net operating loss, if any?

How is any net operating loss treated?

3. Greg flew from Kansas City to Boston on Thursday to attend business on Friday. He could have flown home Friday evening with no additional airfare. He stayed over Saturday through Monday to attend a sporting event and vis­it the historic sights. Greg paid airfare of $300, meals of $26 per day (after reduction to 50 percent) and lodging of $59 per day. Greg may deduct how much?

4. Maryam is a very successful self-employed hair stylist who incurred the following expenses in her trade or business:

Meals with clients where business was discussed $ 2,000

Meals with clients where business was not discussed 750

Meals served at employee meetings 400

Employee meals while away from home overnight

(reimbursement given to employees) 500

Maryam’s meals while away from home overnight 500

Tickets to dramatic performance with clients associated with business 300

How much of the above may Maryam deduct?

5. Mesab owned a special purpose boat for use in a fishing business. The boat originally cost $4,000 and had a basis of $-0-. The boat that was worth $3,200 at the time was totally destroyed when it was blown by strong winds into large rocks. How much can Mesab deduct related to this casualty? Is this a deduction for AGI or from AGI?

ANSWER

Understanding Tax Deductions: Examples and Guidelines

Introduction

In this essay, we will delve into several scenarios related to tax deductions and explore how they are treated under the U.S. tax system. We will discuss net operating losses, deductions for business travel expenses, deductions for meals and entertainment expenses, and casualty deductions. By understanding these concepts, taxpayers can optimize their deductions and potentially reduce their overall tax liability.

Net Operating Loss (NOL)

Joshua, as a head of household, has income and expenses from various sources. Given the information provided, Joshua incurred a net loss of $9,500 from his small business. To determine his net operating loss, we need to consider the other income and deductions. In this case, Joshua had wages of $6,000 from an unrelated business and interest income of $8,000. He also claimed itemized deductions amounting to $7,500. To calculate the net operating loss, we subtract the total income from the total deductions: ($9,500 + $6,000 + $8,000) – $7,500 = $16,000. Therefore, Joshua’s net operating loss is $16,000.

Net operating losses can be carried forward or carried back to offset income in other tax years. If Joshua has no taxable income in the current year, he can carry the net operating loss forward to future years and deduct it against any taxable income he generates in those years. This provides a potential tax benefit by reducing his tax liability in subsequent years.

 Business Travel Expenses

Greg flew from Kansas City to Boston for business purposes but decided to stay over the weekend to attend a sporting event and explore the city’s historic sights. The deductible expenses for business travel include airfare, lodging, and meals.

In this case, Greg’s airfare of $300 is fully deductible because it was incurred solely for business purposes. However, the additional expenses incurred during his extended stay, such as meals and lodging, can only be partially deducted. The IRS allows a deduction of 50% of the cost of meals, meaning Greg can deduct $13 per day ($26 per day * 50%) for the three days he stayed beyond his business obligations. For lodging expenses, he can deduct the full amount of $59 per day for the days he stayed due to business.

To calculate Greg’s total deductible expenses, we add the deductible portions: $300 (airfare) + $39 ($13 per day for meals) + $177 ($59 per day for lodging) = $516.

Meals and Entertainment Expenses

Maryam, a self-employed hair stylist, incurred various expenses related to her trade or business. Let’s analyze the deductibility of these expenses:

1. a) Meals with clients where business was discussed ($2,000): These expenses are 50% deductible as long as they are directly related to the active conduct of her business. Therefore, Maryam can deduct $1,000.
2. b) Meals with clients where business was not discussed ($750): These expenses are not deductible because they do not meet the requirement of being directly related to the active conduct of her business.
3. c) Meals served at employee meetings ($400): These expenses are 50% deductible, provided they are ordinary and necessary business expenses. Thus, Maryam can deduct $200.
4. d) Employee meals while away from home overnight (reimbursement given to employees) ($500): Since the reimbursement was given to employees, Maryam cannot deduct this expense.
5. e) Maryam’s meals while away from home overnight ($500): If Maryam incurred these expenses while away from home for business purposes, they are 50% deductible. Hence, she can deduct $250.
6. f) Tickets to dramatic performance with clients associated with business ($300): If the ticketswere directly related to the active conduct of Maryam’s business, they are 50% deductible. Therefore, she can deduct $150.

The total deductible expenses for Maryam are $1,550 ($1,000 + $200 + $250 + $150).

 Casualty Deduction

Mesab, who owned a special purpose boat for a fishing business, experienced a casualty when the boat was destroyed due to strong winds. The boat originally cost $4,000, but its basis was $0.

To determine the deductible amount, we compare the fair market value (FMV) of the boat before the casualty ($3,200) to its adjusted basis ($0). Since the FMV is less than the adjusted basis, Mesab can deduct the lesser of the two amounts. Therefore, Mesab can deduct $3,200.

Casualty deductions are generally deducted from adjusted gross income (AGI) rather than being deducted for AGI. This means that the casualty deduction can reduce the taxpayer’s overall taxable income, potentially resulting in a lower tax liability.

Conclusion

Understanding the rules and guidelines for tax deductions is essential for optimizing tax planning. In the scenarios discussed above, we explored net operating losses, deductions for business travel expenses, deductions for meals and entertainment expenses, and casualty deductions. By adhering to the IRS regulations and keeping accurate records, taxpayers can ensure they claim the appropriate deductions and potentially minimize their tax liability. However, it’s important to consult with a tax professional or accountant for personalized advice based on individual circumstances.