Valuation discounts are increasingly challenged by the IRS. Gone are the days when assets could be dropped into a family limited partnership with some transfer restrictions and forgotten about until a valuation discount was needed to reduce a gift or estate tax bill.  A recent U.S. District Court case, Fisher v. U.S., reminds us that times have changed.  Often, placing assets in a business entity is no longer enough to justify a valuation discount—the entity must be run like a business to justify the discount.   Read the analysis by our experts Robert Bloink and William Byrnes located at AdvisorFX Journal Valuation Discounts: Only for a Bona Fide Business

For some good news about valuation discounts, see our article in AdvisorFX Advisor’s Journal on the Jensen case.

From a tax perspective see Tax Facts Q 613. How is a closely held business interest valued for federal estate tax purposes?

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is This Topic Important to Wealth Managers? Today we discuss one issue that is a concern to most taxpayers. The Tax Gap—The difference between the amount of taxes due and those actually paid. The blogticle provides information and facts which makes for interesting discussion among wealth managers and clients.

The Government Accountability Office (GAO) recently released a report on the tax gap and taxpayer compliance and complexity. The report summarizes that the tax code compliance issues caused by complexity resulted in an increase to the overall tax gap.

It is no surprise that the federal tax system contains complex rules. These rules may be necessary, for example, to ensure proper measurement of income, target benefits to specific taxpayers, and address areas of noncompliance. However, these complex rules also impose a wide range of recordkeeping, planning, computational, and filing requirements upon businesses and individuals.

It has been shown in the past and is also no secret that complying with these requirements costs taxpayers time and money. In 2005 GAO reported that even using the lowest available compliance cost estimates for the personal and corporate income tax, combined compliance costs would total $107 billion (roughly 1 percent of gross domestic product) per year; other studies estimate costs 1.5 times as large. In addition, economic efficiency costs, which are reductions in economic well-being caused by changes in behavior due to taxes, are estimated to be even larger.

Although many taxpayers have simple forms of income, others do not—especially those who receive income from capital gains, rents, self-employment, international and other sources—and they may be required to do complicated calculations and keep detailed records.

Tax expenditures add to tax code complexity in part because they require taxpayers to learn about, determine their eligibility for, and choose between tax expenditures that have similar purposes. Tax expenditures also complicate tax planning because taxpayers must “predict” their own future circumstances as well as future tax rules to make the best choice among provisions.

Taxpayer errors also contribute to the tax gap. For example, in 2001 taxpayers underreported $6.3 billion in net income due to misreported Individual Retirement Arrangement (IRA) distributions. In addition, taxpayers may underclaim benefits to which they are entitled. According to GAO’s past  analysis, of tax filers who appeared to be eligible for a higher-education tax  credit or tuition deduction in tax year 2005, about 19 percent, representing  about 412,000 returns, failed to claim any of them.

The Internal Revenue Service (IRS) has estimated that the gross tax gap—the difference between taxes owed and taxes paid on time—was $345 billion in 2001.

The gross tax gap is an estimate of the difference between the taxes—including individual income, corporate income, employment, estate, and excise taxes—that should have been paid voluntarily and on time and what was actually paid for a specific year.

Of the estimated $345 billion tax gap for tax year 2001, IRS estimated that it would eventually recover about $55 billion of that through late payments and enforcement actions, for a net tax gap of $290 billion.

The estimate is an aggregate of estimates for the three primary types of noncompliance: (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; and (3) nonfiling, which refers to the failure to file a required tax return altogether or on time.

Tomorrow’s blogticle will discuss issues related to life insurance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle represents part three of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

The Marital Deduction

A 100-percent marital deduction generally is permitted for estate and gift tax purposes for the value of property transferred between spouses.[1] Transfers of ‘‘qualified terminable interest property’’ are eligible for the marital deduction. ‘‘Qualified terminable interest property’’ is property: (1) that passes from the decedent; (2) in which the surviving spouse has a ‘‘qualifying income interest for life’’[2]; and (3) to which an election applies. [3]

In other words, the marital deduction allows spouses to deduct unlimited amounts for property that passes from a decedent to his or her surviving spouse. [4]

Portability of the DSUEA

Fittingly, as Benjamin Franklin notes there are two certainties in life; death and taxes.[5] Eventually the surviving spouse too will die and a tax on the combined estate will be imposed. Nevertheless, the Tax Relief Act of 2010 introduces a new estate tax concept for 2011 and 2012—the deceased spouse unused exclusion amount (DSUEA). Essentially, the DSUEA allows a surviving spouse to utilize the unused exclusion amount of the first spouse to die.

Under the provision, any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 (the ‘‘deceased spousal unused exclusion amount’’), generally is available for use by the surviving spouse, as an addition to such surviving spouse’s applicable exclusion amount.[6]

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last such deceased spouse. A surviving spouse may use the predeceased spousal carryover amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at death.

A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise is required to file an estate tax return.

The applicable exclusion amount is the sum of two components: the basic exclusion amount and the DSUEA. The basic exclusion amount for estates of decedents dying in 2011 and 2012 is $5 million. The second part of the equation, the DSUEA, is the amount of the first-to-die spouse’s exclusion amount that is not used by that spouse’s estate. Note that a surviving spouse’s DSUEA is equal to the unused exclusion amount of the surviving spouse’s last deceased spouse.

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] A ‘qualifying income interest for life’’ exists if: (1) the surviving spouse is entitled to all the income from the property (payable annually or at more frequent intervals) or has the right to use the property during the spouse’s life; and (2) no person has the power to appoint any part of the property to any person other than the surviving spouse.

[3] See generally IRC Secs. 2056 & 2523.

[4] IRC Secs. 2056 & 2523.; AMAFX-AUS Main Library. The Federal Estate Tax.

[5] Benjamin Franklin. Letter to Jean Baptiste La Roy 1789. “But in this world nothing can said to be certain except death and taxes.’

[6] See generally IRC Sec 2010(c)(4).

Why is this Topic Important to Wealth Managers? This blogticle discusses a proposal to eliminate the Federal income, estate and gift and employment taxes. This is obviously not great news for wealth managers. However unlikely it may be that the proposed legislation will pass, it is important for those in the industry to be aware of potential legislation that would completely eradicate many uses for financial planning.

The somewhat radical Fair Tax Act of 2011, [1] a Bill introduced in the House earlier this year, intends to repeal the income tax, employment tax, and estate and gift tax.  It would also redesignate the Internal Revenue Code of 1986 as the Internal Revenue Code of 2011.

Since the income tax, under the proposed bill would be eliminated, a new source of tax revenue would have to be raised to support government operations.  Who is going to pay for all that interest after all? The House Bill supporter’s plans…impose a national sales tax.

The proposed legislation would impose a national sales tax on the use or consumption in the United States of taxable property or services. The sales tax rate determined by the drafters has been set at 23% in 2013, with adjustments to the rate in subsequent years. But the tax is only on consumers and the proposed bill would allow exemptions from the tax for property or services purchased for business, export, or investment purposes, and for state government functions.

How do the drafters of the legislation envision the collection process to work?  The states would have the primary authority for the collection of sales tax revenues with the responsibility of remittance of such revenues to the Treasury. The legislation also sets forth administrative provisions relating to: (1) the filing of monthly reports and payments of tax, (2) accounting methods, (3) registration of sellers of goods and services responsible for reporting sales, (4) penalties for noncompliance, and (5) collections, appeals, and taxpayer rights.

The legislation even addresses spending:  it directs the Secretary of the Treasury to allocate sales tax revenues among: (1) the general revenue, (2) the old-age and survivors insurance trust fund, (3) the disability insurance trust fund, (4) the hospital insurance trust fund, and (5) the federal supplementary medical insurance trust fund.

The proposed Bill goes one step further by prohibiting the funding of the Internal Revenue Service (IRS) after FY2015. In its stead the Bill would establish in the Department of the Treasury: (1) an Excise Tax Bureau to administer excise taxes not administered by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), and (2) a Sales Tax Bureau to administer the national sales tax.

Interestingly enough the Bill self terminates the sales tax imposed by the Fair Tax Act if the Sixteenth Amendment to the U.S. Constitution (authorizing an income tax) is not repealed within seven years after the enactment of the proposed Act.

All this thanks to Rep. Rod Woodall from Georgia, the introducer of the proposed Bill. There are a number of arguments why a national sales tax is not the best approach to collect revenues.  The most striking is the underground economy and barter systems that would ensue would negate any real ability to tax consumer goods.

Tomorrow’s blogticles will discuss topics relating to insurance and financial planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blog presents discussion on generally unsound tax positions. Wealth managers who hear clients discussing positions herein or similar arguments should be cautious, warning their clients of the severity in which the Government goes after tax “protesters”, which the government perceives as just another form of tax evasion.  Thus, diligent wealth managers should be aware of common myths regarding the tax code.

In the mist of the tax filing season, the Internal Revenue Service last week released the 2011 version of its discussion of many of the more common “frivolous” tax arguments made by individuals and groups that oppose compliance with federal tax laws. [1]

The Service suggests that “anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read their 84-page document, The Truth About Frivolous Tax Arguments.”  Here at AdvisorFYI, we are not contemplating any particular legal grounds for not paying a “fair share of taxes”, whatever that may be, but rather are interested in presenting some of the frivolous positions argued and how the Government generally responds. We’ve presented a few select ones below.

The 2011 IRS document explains many of the common “frivolous” arguments made in recent years and it presents a legal position that attempts to refute these claims.  The IRS claims, the document “will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.”

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000.[2] The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

Here are some of positions we found to be commonly marketed to the public, and how the IRS responds to the positions:

Contention:  The filing of a tax return is voluntary.

Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary.  Proponents note the Supreme Court’s opinion in Flora v. United States [3], which is often quoted for the proposition that “[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint.”

The IRS Response:  The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset.  The requirement to file an income tax return is not voluntary and is clearly set forth in the Code.

Any taxpayer who has received more than a statutorily determined amount of gross income is obligated to file a return.  Failure to file a tax return could subject the non-complying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.

Contention:  Only foreign-source income is taxable.

Some maintain that there is no federal statute imposing a tax on income derived from sources within the United States by citizens or residents of the United States.

The IRS Response: The premise for this argument is a misreading of sections 861, et seq., and 911, et seq., as well as the regulations under those sections.  For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. [4] Further, Treas. Reg. § 1.1-1(b) provides, “[i]n general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.”  These frivolous assertions, the IRS states, are clearly contrary to well-established legal precedent.

And our favorite “frivolous” tax position of 2011 goes to:

Contention:  Federal Reserve Notes are not income.

Some assert that Federal Reserve Notes currently used in the United States are not valid currency and cannot be taxed, because Federal Reserve Notes are not gold or silver and may not be exchanged for gold or silver.

The IRS Rebuttal:  This argument misinterprets Article I, Section 10 of the United States Constitution. Congress is empowered “[t]o coin Money, regulate the value thereof, and of foreign coin, and fix the Standard of weights and measures.” [5] Article I, Section 10 of the Constitution prohibits the states from declaring as legal tender anything other than gold or silver, but does not limit Congress’ power to declare the form of legal tender.  [6] In United States v. Rifen, [7] the court affirmed a conviction for willfully failing to file a return, rejecting the argument that Federal Reserve Notes are not subject to taxation.  “Congress has declared federal reserve notes legal tender . . .  and federal reserve notes are taxable dollars.”

To determine the tax liability of a transaction, individual, business, trust or estate, please see AdvisorFX Main Libraries, Income Taxes.

Tomorrow’s blogticle will present discussion on planning tips.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] The Tax Relief Health Care Act of 2006 amended section 6702 to allow

imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous

submissions other than return

[3] 362 U.S. 145, 176 (1960),

[4] Citing, I.R.C. § 61.

[5] Citing, U.S. Const. Art. I, § 8, cl. 5.

[6] Citing 31 U.S.C. § 5103; 12 U.S.C. § 411.

[7] 577 F.2d 1111 (8th Cir. 1978).

Why is this Topic Important to Wealth Managers? This topic presents discussion on the individual and nonbusiness deductions offered under the Internal Revenue Code.  Since April 15^th is fast approaching, it is important to review common tax positions with regards to client planning. 

In addition this blogticle presents a excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com).   Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly.  The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas.  We look forward to helping you secure your next sale.  

An expense of an individual may be business, nonbusiness, or personal, depending upon which of the individual’s spheres of activity gave rise to the expense.  This Blogticle discusses personal and nonbusiness expenses generally. 

Personal Expenses

Personal expenses are all expenses incurred by an individual that are not business or nonbusiness expenses. These would include, for example, food and clothing for the individual and his family, repairs on the family home, and premiums paid on the individual’s personal life insurance. Generally, no deduction is permitted for personal expenses. [1] By specific statutory provision, however, deductions are allowed for some personal expenses, such as certain personal taxes, a limited amount of charitable contributions, medical expenses, certain interest on a principal residence, and alimony.

Most deductible personal expenses are “itemized deductions” and thus may be taken only if the taxpayer chooses to itemize his deductions instead of claiming the standard deduction.

Nonbusiness Expenses

A nonbusiness expense is generally an investment expense incurred in connection with the production of income, other than a trade, business or profession. Expenses of this type would include, for example, fees for tax or investment advice, and the cost of a safe deposit box used to store taxable securities. The deduction of nonbusiness expenses is governed by Code section 212. Specifically, Section 212 allows a deduction for expenses incurred in connection with: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for production of income; or (3) the determination, collection or refund of any tax.

The deductibility of nonbusiness expenses may be limited or deferred if they arise in connection with a “passive activity” or are interest expenses. Very generally, a “passive activity” is any activity which involves the conduct of a trade or business in which the taxpayer does not “materially participate.” [2] A passive activity also includes any rental activity, without regard to whether the taxpayer materially participates in the activity. Special rules apply to rental real estate activities. Aggregate losses from “passive activities” may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken only against tax liability allocated to passive activities. Disallowed losses and credits may be carried over to offset passive income in later years. [3]

Once other limitations have been applied to the deductibility of nonbusiness expenses (e.g., the passive loss rule), they are generally deductible only to the extent that the aggregate of these and other “miscellaneous itemized deductions” exceeds 2% of adjusted gross income. “Miscellaneous itemized deductions” are deductions from adjusted gross income other than deductions for (1) interest, (2) taxes, (3) non-business casualty losses and gambling losses, (4) charitable contributions (including charitable remainder interests), (5) medical and dental expenses, (6) impairment-related work expenses for handicapped employees, (7) estate taxes on income in respect of a decedent, (8) certain short sale expenses, (9) certain adjustments under the Code’s claim of right provisions, (10) unrecovered investment in an annuity contract, (11) amortizable bond premium, and (12) certain expenses of cooperative housing corporations. [4]

A nonbusiness expense must also be “ordinary and necessary” to be deductible. [5] It must, therefore, be reasonable in amount and must bear a reasonable and proximate relation to (a) the production or collection of taxable income, or (b) the management, conservation, or maintenance of property held for the production of income. [6]

Tomorrow’s blogticle will discuss important planning aspects of 2011. 

We invite your opinions and comments by posting them below, or by calling the Panel of Experts 

[1] IRC Sec. 262(a).

[2] IRC Sec. 469(c).

[3] IRC Sec. 469(b). 

[4] IRC Sec. 67(b).

[5] IRC Sec. 212.

[6] Treasury Reg. §1.212-1(d).

Written by the foremost experts in the field - Professor William H. Byrnes, Esq., LL.M, and Robert Bloink, Esq., LL.M

Understand the Act’s Implications for You and Your Clients

• Analyzes important insurance, estate, gift, and other elements of the Act
• Provides pertinent information on other important 2010 tax developments
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Summary Table of Contents

• Analysis of the Tax Relief Act of 2010
  • Income Tax Provisions
  • Estate Tax Provisions
  • Generation Skipping Transfer Tax
  • Deduction for State and Local Sales Taxes
  • Alternative Minimum Tax
  • Tax Credits
  • Payroll Tax Holiday
  • Wage Credit for Employees who are Active Duty Members of the Military
  • Charitable Distributions from Retirement Accounts
  • Bonus Depreciation and Section 179 Expensing
  • Basis Reporting Requirements for Brokers and Mutual Funds
  • Regulated Investment Company Modernization Act of 2010
  • Health Care Act
  • Form 1099 Reporting Requirement for Businesses
  • American Jobs and Closing Tax Loopholes Act of 2010
  • Requirements for Tax Return Preparers

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) extended the income tax deduction for state and local sales taxes through December 31, 2011.  The deduction expired on January 1, 2009, but Congress amended the provision retroactively, which will allow taxpayers to take the deduction on their 2010 taxes.  The deduction, which has been slated to expire a number of times, has been revived by Congress repeatedly since it was introduced but has not yet been made a permanent part of the Code.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & 2010 Estates: To Elect or Not to Elect (CC 10-124).

For in-depth analysis of income tax deductions, see Advisor’s Main Library: B4—Business Income and Deductions.

We invite your questions and comments by posting them or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? We examine the IRS requirements set out in its Publication 587 for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

Yesterday we opened the discussion by what authority of the Code a taxpayer may be allowed to deduct a business expense for use of part of his home in the pursuit of a trade or business.  Today we turn to the following questions: What type of residence qualifies for this deduction? And the requirements for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.

What type of residence qualifies for this deduction? Many taxpayers narrowly consider that the “home office” deduction only applies for the traditional house with the white picket fence.  But the Code’s section does not use the word “home”.  Yesterday we noted that Congress chose the phrase “dwelling unit”.  So what is a dwelling unit?  The Section toward its end contains this definition: “The term ”dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property ….”  Thus, taxpayers who are homeowners, condo-owners, renters of apartments, even a boat owner or renter, may potentially leverage this deduction.

What constitutes a “portion” of the dwelling unit?

IRS Publications, such as number 587 describing when taxpayers may leverage the home office deduction, tend to use plain English.  Thus, instead of using what Congress actually wrote: a “portion” of the dwelling unit, the publication restates it as: “to deduct expenses for business use of your home, you must use part of your home…”

Publication 587 describes a “part”:

“…you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.”

Exclusive Use?

This “part” though, according to the Code Section 280A, must be “exclusively used on a regular basis”.  Exclusive use in this context means not also for personal use.  The Publication describes exclusive use in the negative – “You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.”  An example it provides is that of a taxpayer lawyer who uses his living room to ‘write legal briefs and prepare clients’ tax returns’.  In the scenario, the lawyer’s family also uses the living room for recreation such as to watch television.   The IRS concludes that the lawyer is not exclusively using the living room in his profession and thus cannot claim the deduction.

Read the key information you need to know and relate to your client at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber):

Tax Facts 7537. How are business expenses reported for income tax purposes?

Section 19. Income Taxes B4—Business Income And Deductions

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Americans are increasingly using their personal residence as their office.  This trend has picked up much steam since the financial crisis began.  Businesses cut costs during this period by not just allowing, but requiring, employees to telecommute.  In fact, government, including the IRS, has also jumped on the bandwagon.

Yesterday we opened the discussion of when may a taxpayer be allowed to deduct a business expense from his gross income.  That article noted that Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code.  Treasury, being the Internal Revenue Service in this case, promulgated such regulations for Section 162 to guide taxpayers through its morass, and provide some example scenarios and the IRS’ application of the Code to those scenarios.

By example, Treasury’s Regulation for Section 162 states that: “Among the items included in business expenses are management expenses, commissions …, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business …, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.”

Home Office Deduction

Many wealth managers and insurance agents form part of the group of 20 million Americans that operate their consultancy practice from their personal residence as sole proprietorships.  And just a few are part of the small percentage of this group that actually chooses to take a deduction for the expenses related to the use of their home as an office (generally known as the “home office” deduction).  In fact, less than 15% of this sole proprietorship group leverages the home office deduction.  Thus, most taxpayers, and therefore wealth managers, are receiving less ‘take home’ from their business than they would if they recognized the actual cost of doing business from their residence.

But many taxpayers believe that taking the home office deduction will place their returns into a higher risk audit category, because of the home office deduction.  However, experts have debunked this “belief” as popular folklore by using statistical analysis of IRS audits of returns.

However, it is understandable why taxpayers, on first glance, have developed this belief.  The Code Section written by Congress that specifically allows the Home Office Deduction is contained in a “part” of the Code (Part IX) titled: “Items not deductible”.  The first Section (161) contained in this part states that “…no deduction shall in any case be allowed in respect of the items specified in this part”.  There following lies Section 280A titled “Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.”  But overlooked is that Congress uses the word “certain”.  Thus, not all expenses may be disallowed.

So which expenses incurred in connection associated with the business use of home may be allowable?  Yesterday we saw with Section 162 that Section may contain exceptions, exceptions to exceptions, and limitations. Section 280A has such an exception:  (c) Exceptions for certain business or rental use; limitation on deductions for such use

(1) Certain business use

Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis–

(A) [as] the principal place of business for any trade or business of the taxpayer.

(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or

(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

Tomorrow, we will address the questions of (1) what type of “dwelling unit” (that is the home or residence) qualifies for this deduction?  Can a yacht be a dwelling unit, by example?  A condominium?  Then we will examine the phrase: “a portion of the dwelling unit” and “exclusively used” and “regular basis”.

Read the key information you need to know and relate to your client at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber):

Tax Facts 7537. How are business expenses reported for income tax purposes?

Section 19. Income Taxes B4—Business Income And Deductions

We invite your questions and comments by posting them below, or by calling the Panel of Experts.