Individual And Small Business Deductions

<div class="Section1">The 2017 tax reform legislation created a special rule to allow partnerships to carry forward certain disallowed business interest (the rule does not apply to S corporations or other pass-through entities, although the new law specifies that similar rules will apply).&nbsp;The general rules governing carrying forward disallowed business interest (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) do not apply to partnerships.<div class="Section1"><br /> <br /> Instead, disallowed business interest is allocated to each partner in the same manner as non-separately stated taxable income or loss of the partnership.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;The partner is entitled to deduct his or her share of excess business interest in any future year, but only:<br /> <blockquote>(1)&nbsp;&nbsp; against excess taxable income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) attributed to the partner by the partnership, and<br /> <br /> (2)&nbsp;&nbsp; when the excess taxable income is related to the activities that created the excess business interest carryforward.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> Such a deduction also requires a corresponding reduction in excess taxable income. Further, if excess business interest is attributed to a partner, his or her basis in the partnership interest is reduced (not below zero) by the amount of the allocation even though the carryforward does not permit a partner&rsquo;s deduction in the year of the basis reduction.&nbsp;The partner&rsquo;s deduction in a future year for the carried forward interest will <em>not</em> require another basis adjustment.<br /> <br /> If the partner disposes of the partnership interest after a basis adjustment occurred, immediately before the disposition the partner&rsquo;s basis will be increased by the amount that any basis reduction exceeds the amount of excess interest expense that has been deducted by the partner.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has released proposed regulations stating that business interest is first accounted for at the partner level, and then allocated to the partners. A partner cannot later include his or her share of the partnership&rsquo;s business interest income for the year except to the extent of the partner&rsquo;s share of the excess of (i) the partnership&rsquo;s business interest income over (ii) the partnership&rsquo;s business interest expense (excluding floor plan financing). A partner cannot include his or her share of floor plan financing interest in determining his or her individual business interest expense deduction limitation.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the general rules governing the corporate deduction for business interest.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B)(iii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Notice 2018-28.<br /> <br /> </div></div><br />

<div class="Section1">Medical expenses of a decedent paid out of the estate within one year from the date of death are considered paid by the decedent at the time the expenses were incurred.<a href="#_ftn1" name="_ftnref1">¹</a> A decedent’s medical expenses cannot be taken as an income tax deduction unless a statement is filed waiving the right to deduct them for estate tax purposes. Amounts that are not deductible under IRC Section 213 may not be treated as deductible medical expenses for estate tax purposes. Thus, expenses that do not exceed the 7.5 percent floor are not deductible.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 213(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 77-357, 1977-2 CB 328.<br /> <br /> </div>

<div class="Section1">If an extension to pay federal estate tax over a period of time is in effect, the interest portion of the payment is deductible.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 163(h)(2).<br /> <br /> </div>

<div class="Section1">Generally, personal interest is not deductible. However, in defining personal interest, all of the types of interest described Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8530">8530</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8540">8540</a> are not considered personal interest, and, thus, are deductible subject to the limitations discussed therein. Generally, non-deductible personal interest includes, but is not limited to, consumer credit card interest, car loans and interest on tax deficiencies.</div><br />

<div class="Section1">Generally, medical expenses are deductible only in the year they are paid, regardless of when the expenses are incurred. Despite this, in <em>Zipkin v. U.S.</em>, expenses incurred by a taxpayer to build a home to meet his wife’s special health needs were properly deducted in the year the home became habitable, even though the costs had been paid in earlier years.<a href="#_ftn1" name="_ftnref1">¹</a> Costs paid by parents to modify a van used to transport their handicapped child were deductible in the year those costs were paid; however, the court held that depreciation was not a deductible medical expense.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  2000-2 USTC ¶ 50,863 (D. Minn. 2000).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  <em>Henderson v. Commissioner</em>, TC Memo 2000-321.<br /> <br /> </div>

<div class="Section1"><br /> <br /> For 2025, the standard deduction for an individual who may be claimed as a dependent by another taxpayer is the greater of $1,350 or the sum of $450 and the dependent’s earned income.<a href="#_ftn1" name="_ftnref1">¹</a>  These dollar amounts are adjusted for inflation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Self-employed taxpayers and small business owners may be able to shift income taxable at their higher tax brackets to their lower tax bracket children by employing them in the business. This way the children’s wage income would be taxed at their lower rates. The work must be legitimate and the pay must be reasonable, although it can be at the higher end of the reasonable scale.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 63(c)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 63(c)(4).<br /> <br /> </div>

<div class="Section1">A passive activity is generally an activity that involves the conduct of a trade or business in which the taxpayer does not materially participate, or any rental activity.<a href="#_ftn1" name="_ftnref1">¹</a> Generally, the deductibility of passive expenses is limited to the amount of the taxpayer&rsquo;s passive income for the year.&nbsp;The excess, passive loss, is not deductible. Instead, it is carried over to subsequent tax years for potential deductibility against passive income generated in those years.&nbsp;The same rules apply to the deductibility of interest related to a passive activity. As a result, to the extent that otherwise deductible interest is related to a passive activity, some or all of the interest deductions that are allocated to those passive activities may be disallowed.<a href="#_ftn2" name="_ftnref2">²</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8010">8010</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8704">8704</a> for a detailed discussion of the passive loss rules.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;469.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;469,&nbsp;Treas. Reg. &sect;&nbsp;1.163-8T.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform legislation increased the 50&nbsp;percent AGI limitation on cash contributions to public charities and certain private foundations to 60&nbsp;percent.&nbsp;This provision is effective for tax years beginning after December&nbsp;31, 2017 and before January&nbsp;1, 2026.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> If an individual makes a charitable contribution to a public charity (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8542">8542</a>) of property that, if sold, would have resulted in long-term capital gain (other than certain tangible personal property, <em><em>see</em></em> below), the taxpayer is generally entitled to deduct the full fair market value of the property, but the deduction will be limited to 30&nbsp;percent of adjusted gross income.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <em>Long-term capital gain property.</em> &ldquo;Long-term capital gain&rdquo; means &ldquo;gain from the sale or exchange of a capital asset held for more than one year, if and to the extent such gain is taken into account in computing gross income.&rdquo;<a href="#_ftn3" name="_ftnref3">³</a><br /> <blockquote><em>Example:</em> Asher owns raw land he purchased five years ago for $100,000.&nbsp;The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, the amount deductible would be limited to 30&nbsp;percent of his adjusted gross income.</blockquote><br /> If any portion of a gift of long-term capital gain property to a public charity is disallowed as a result of the adjusted gross income ceiling, the taxpayer may carry the deduction over for five years subject to the same 30&nbsp;percent ceiling.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> In lieu of a full fair market value contribution of property subject to the 30&nbsp;percent ceiling, a taxpayer may elect to take a lesser contribution of the property&rsquo;s basis subject to the 50 (or 60)&nbsp;percent ceiling. Once made, such an election applies to all contributions of capital gain property during the taxable year (except unrelated use gifts of appreciated tangible personal property, as explained below).&nbsp;The election is generally irrevocable for the year in which it is made.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example:</em> Asher owns raw land he purchased five years ago for $100,000.&nbsp;The fair market value of the land is $500,000. If Asher were to sell the land, he would recognize $400,000 long-term capital gain. Because the land is long-term capital gain property, if Asher contributes the land to a public charity, he would be entitled to a $500,000 charitable deduction. However, if Asher elects to limit his charitable deduction to $100,000 (the land&rsquo;s basis), the amount deductible would be 50 (or 60)&nbsp;percent of his adjusted gross income.</blockquote><br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8546">8546</a> for the rules regarding contribution of property to private foundations.<br /> <br /> <em>Tangible Personal Property</em>.&nbsp;The treatment of a contribution of appreciated tangible personal property (i.e., property which, if sold, would generate long-term capital gain) depends on whether the use of the property is related or unrelated to the purpose or function of the (public or governmental) organization. If the property is related use property (e.g., a contribution of a painting to a museum), generally the full fair market value is deductible, subject to the 30&nbsp;percent ceiling. However, if the property is unrelated to the purpose or function of the charity, the deduction is generally limited to the donor&rsquo;s adjusted basis.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <em>Other Gifts of Property</em>.&nbsp;The deduction for any charitable contribution of property is reduced by the amount of gain that would <em>not</em> be long-term capital gain if the property were sold at its fair market value at the time of the contribution.<a href="#_ftn7" name="_ftnref7">⁷</a> In other words, the amount of such gifts are limited to the basis in the property.<br /> <br /> In the case of a gift of S corporation stock, special rules (similar to those relating to the treatment of unrealized receivables and inventory items under IRC Section&nbsp;751) apply in determining whether gain on such stock is long-term capital gain for purposes of determining the amount of a charitable contribution.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(G)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1222(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C)(ii).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(C)(iii); <em>Woodbury v. Commissioner</em>,&nbsp;TC Memo 1988-272, <em>aff&rsquo;d</em>, 90-1 USTC &para;&nbsp;50,199 (10th Cir. 1990).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;170(e)(1)(B), 170(b)(1)(C);&nbsp;Treas. Reg. &sect;&nbsp;1.170A-4(b).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1)(A).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform legislation increased the 50&nbsp;percent AGI limitation on cash contributions to public charities and certain private foundations to 60&nbsp;percent.&nbsp;This provision is effective for tax years beginning after December&nbsp;31, 2017 and before January&nbsp;1, 2026.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Most private foundations are family foundations subject to restricted contribution limits. Certain other private foundations (i.e., conduit foundations and private <em>operating</em> foundations), which operate much like public charities, are treated as public charities (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8542">8542</a>).<a href="#_ftn2" name="_ftnref2">²</a> A private foundation is a charitable organization other than an organization described in IRC Sections 509(a)(1) through 509(a)(4). More specifically, a private foundation is usually a charitable organization that is: 1) funded from a limited group such as an individual, family or company; 2) its expenses tend to be paid from investment earnings rather than regular charitable contributions; and 3) under certain circumstances it makes contributions to other charitable organizations.&nbsp;The term &ldquo;private foundations&rdquo; as used under this heading refers to standard private (e.g., family) foundations.<br /> <br /> The amount of the deduction for a contribution of appreciated property (tangible or intangible) contributed <em>to</em> or <em>for the use of</em> private foundations generally is limited to the donor&rsquo;s adjusted basis. However, certain gifts of qualified appreciated stock made to a private foundation are deductible at their full fair market value.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em>Qualified appreciated stock</em> is generally publicly traded stock which, if sold on the date of contribution at its fair market value, would result in a long-term capital gain.<a href="#_ftn4" name="_ftnref4">⁴</a> Such a contribution will not constitute qualified appreciated stock to the extent that it exceeds 10&nbsp;percent of the value of all outstanding stock of the corporation. Family attribution rules apply in reaching the 10&nbsp;percent level.<a href="#_ftn5" name="_ftnref5">⁵</a>&nbsp;The IRS has determined that shares in a mutual fund can constitute qualified appreciated stock.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Donor advised funds are an increasingly popular way for a donor to obtain more choice and control over how and when taxation occurs. A donor can wait to make a charitable contribution until the end of the calendar year, after the donor knows how much the donor wants (and is able) to deduct, make a gift to a public charity, and then decide the recipients of the donation at a future date.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> From a tax perspective, it is not advisable to donate an investment expected to generate a tax loss.&nbsp;This is because the transfer of loss property to a charity does not allow for the taxpayer to claim the loss. In this situation, the taxpayer should consider selling the investment to claim the loss; and, then make a deductible charitable contribution of the proceeds from the sale.<br /> <br /> <hr><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(b)(1)(G)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;170(b)(1)(F), 170(b)(1)(A)(vii).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(5).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(5)(C).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; Let. Rul. 199925029. See also Let. Rul. 200322005 (ADRs are qualified appreciated stock); Instructions for Form&nbsp;8283 (Rev. December&nbsp;2014).<br /> <br /> </div></div><br />

<div class="Section1">Small businesses that are not tax shelters are exempt from the business interest deduction limitations if they pass the gross receipts test by having average annual gross receipts of no more than $31 million for the past three tax years (in 2025, $30 million in 2024, $29 million in 2023, $27 million in 2022, $26 million in 2019-2021, $25 million in 2018).</div><br /> <div></div><br /> Related entities are generally aggregated if they aggregated for other tax code purposes. For example, if multiple businesses are treated as a single employer under the controlled group rules, they are aggregated for purposes of the gross receipts test. The same is true for businesses aggregated under the affiliated service group rules and Section 414(o).<br /> <br /> In past years, some small businesses were uncertain whether they fell into the definition of “tax shelter” because there was some uncertainty in the way “syndicate” was defined. Generally, the Section 448(d)(3) definition of tax shelter cross-references Section 461(i)(3), which partially defines tax shelter as a syndicate. Multiple definitions of the term “syndicate” apply in different tax code sections. For example, a “syndicate” is defined as a partnership or non-corporate entity where more than 35 percent of the entity’s losses are allocated to limited partners or limited entrepreneurs.<br /> <br /> The IRS clarified this by releasing proposed regulations stating that “syndicate” is defined using the Treasury Regulation Section 1.448-1T(b)(3) definition. Therefore, an “actual allocation” rule will apply. In other words, only small businesses that have passive investors who are actually allocated losses are treated as tax shelters that are ineligible.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Prop. Treas. Reg. § 1.1256(e)-2(a).<br /> <br /> </div>