 Hello and welcome to this session. This is Professor Farhad in which we will discuss deductions and losses for and from adjusted gross income known as AGI. The first thing we want to understand is there is no difference from a tax perspective between deductions and losses in what sense? In a sense that they both reduce income which is good. In taxes we like deductions, we like losses. Why? Because from a tax perspective as your losses and your deduction goes up your tax bill goes down so they do help in reducing your tax bill. Therefore knowing the deductions and losses whether they are for AGI or from AGI is an important concept in taxation because adjusted gross income determines many other credits deductions and your taxable income overall. So here are some general rules you want to be aware of. Deduction for AGI also known as deduction above the line or deduction above the line. What is that line? We're going to see what that line is. We're going to specifically talk about those deductions but if you see it or if you heard about deductions for AGI is above the line so there's a line and there's a line and that line is adjusted gross income. Any deduction that is above that line it's called for AGI and we need to know what those deductions are. We're going to look at them separately. Then we have deductions from AGI deductions from AGI deductions that takes place below the line from AGI so that's why it's called for and from AGI. Where is this imaginary line coming from? We're going to look at the tax form it's on the tax form itself. So we're going to look at the line and look at the deductions that are for AGI look at the deduction that are from AGI and understand how it works. Again AGI is important because it determines many other determination of your credits deductions and taxable income. So let's go ahead and get started and let's look at more specific details. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. Deduction for and from AGI. Well there are two broad categories deductions for AGI remember what's for AGI if this is adjusted gross income this is for AGI they're above the line and we can have two broad categories. What are those two broad categories? Any profit motive deductions like business expense on schedule C for example or schedule E. Now bear in mind we have to have a profit motive we cannot have a hobby we're going to be discussing hobby in a separate session so as long as you have a legitimate business legitimate means it's a schedule C business not a hobby and you are incurring deductions and there are many many deductions which we're going to see on schedule C or if you have a rental property schedule E or you have if you are a partner in a partnership you have a form 1065 or 1120s we're going to look at all of those shortly. So business deductions think of them as you have a business you are involved in a business whether that business is a sole proprietorship partnership or an S corporation you're going to have many business deductions and those deductions comes for AGI I'm going to show it to you physically how it comes to be above AGI. Now bear in mind business deduction has to be ordinary necessary and reasonable now because those three terms are important because for a business expense for a business deduction to be deductible it has to be ordinary necessary and reasonable I'm going to have a separate recording for this but the point is it's a business expense business deduction in addition to the business deduction so this is category one category two is adjustments and we're going to have a list of those adjustments which I will show you again I will show you the list on the form itself then guess what we're going to have a separate recording for each list on that adjust each item on that list separate recording for for example student loan deduction we're going to have a separate recording for educator expense so on and so forth we're going to look at those adjustments in a moment then we have the deduction from AGI what are the deductions from AGI those are below the line simply put those are allowable personal deductions and simply put we are discussing here schedule A which I will show you schedule A as well so this way you can see what everything fits so this is the big picture now we're going to look at the details on the next slide now you want to make your life easier on the CPA exam and your accounting course you want to know the difference between for AGI and from AGI I'm going to first take a look at form 1040 and specifically I'm going to have the highlighting the adjusted gross income line which happens to be for this particular year okay that could change the location could change happened to be line 11 so you see here line 11 this is the line that we are discussing any deduction that goes above the line any deduction that's above the line those are those are let me put it in a different thread those are for AGI and any deduction that goes below that line from AGI okay now we're going to look at what are those deductions in a moment but I just want to show you the line that we are looking at now and in a separate year this could be a separate line doesn't have to be line 11 but you want to look for adjusted gross income so so what could be above the line deduction above the line deduction let's take a look at some some issues let me draw the line one more time above the line so let's take a look here for example here we have line 8 it says other income from schedule 1 line 10 so we need to go to schedule 1 line 10 to see what type of deduction we can have well let's take a look at this this is schedule 1 and this is line 10 what goes under line 10 so let's take a look if we look a little bit closer business income attach schedule C it means what's gonna happen is this first you are going to complete your schedule C and this is schedule C business income you're gonna list your income your revenues then you're gonna list your deductions so any deductions that takes place here such as advertising car and truck expense depletion depreciation interest interest basically business interest legal and professional services office expense travel and meals those are business deductions any business deductions they're gonna be listed here they're gonna be listed on schedule C then from schedule C they're gonna be transferred to schedule 1 and from schedule 1 they're gonna be transferred to line 8 so simply put business deductions notice here business deductions are absorbed in this line that's why they are for AGI that's why they are for AGI so business deduction I'm gonna choose another one rental real estate if you have a rental real estate you have to prepare schedule E when you prepare schedule E you're gonna have revenues but you're gonna have also expenses deductions and this is a list of all the deductions so any rental deduction any business rental deduction advertising cleaning and maintenance commissions insurance repairs supplies utilities taxes those are business deductions again you're gonna take those deductions here then they're gonna be transferred they're gonna be part of this rental real estate then they're gonna be part of line 10 then they are transferred to line 8 again rental expenses are for AGI business related okay now we can keep on going we can talk about partnership we can talk about S corporation the same concept apply what does that mean it means first they are deducted they are deducted on they are deducted those expenses those deductions are deducted here they are business related think of a partnership partnership is no more than what no more than a sole proprietorship but multiple sole proprietorship same concept they get deducted here and they get transferred to schedule one then they get transferred to 1040 same concept with 1120 S we have many that business deductions here you are operating as an S corporation you have business deduction and you will transfer those to schedule one so basically we cover the first categories for deductions for AGI any profit motive any profit motive that you are undertaken and you incur business expenses whether it's a schedule C schedule E you know you're you're operating as a partnership or an S or an S corporation those are for AGI then you have what we call adjustments let's take a look at the adjustments first on schedule on schedule on form 1040 so notice here there is a line that says line 10 here it says adjustment to income schedule one okay line 26 so if we go to schedule one and um let me go go to schedule one if we go to schedule one this is schedule one page two and on schedule one page two they're saying add up all the adjustments and take that deduction what are those adjustments again we're gonna we're gonna select there's a lot of them we're gonna select few and we're gonna cover in details for the CPA example your accounting course you can't cover everything for example educator expense certain business expenses of reservists health savings account deduction moving expense for members of the armed forces deductible part of the self-employment tax penalty on early withdrawal student loan interest deduction IRA deduction i'm just you know giving you a list giving you a list so all these deductions you add them up and whatever the total equal to notice here if we go back to form 1040 they are deducted right here on line 10 line 10 becomes before line 11 so in addition to the business expenses we have those adjustments so now we know what goes for agi for agi two broad categories as i mentioned business deductions all sorts of business deduction and adjustments a list of adjustments that they are that the IRS the government allows you to deduct now now we're done with four from agi the only thing we're going to see from agi for now is the itemized deduction we're going to look at qualified business deduction and a separate recording but we're going to be discussing here itemized deduction what is itemized deduction well when you file your taxes you have two options you can take the standard deduction notice here it says standard or itemized deduction the standard deduction is based on your filing status so if you're filing single for this particular year the standard deduction is 12950 so you can take the standard deduction or you can take your itemized deductions what are your itemized deductions well itemized deductions are from agi just like the standard deduction from agi so itemized deductions are listed on form schedule a so if you go to form schedule a you have medical and dental expenses taxes you paid state and local uh taxes state and local personal property interests you paid home mortgage interest endpoints home mortgage interest not reported on form 1098 gifts to charities casualty theft and losses and other itemized deductions so what you do is you fill out if you have those deduction you fill out this schedule a and when you fill out this schedule a you're gonna get a total as a single you again we're gonna have separate recording for each one of these sections you're gonna have a total for this section so when you go back you go back and you would say well my the government gives me 12950 when i add up all my itemized deduction i'm getting 18510 which deduction would you would like you will take the schedule a deduction because it's higher than the standard deduction that's given to you as a single individual then you will take the itemized deduction but those are from agi not for agi now knowing the difference between for and from agi is important now which deduction do taxpayers prefer so the taxpayer is can have two deductions which one they should prefer they should prefer for agi why why for agi because when you have a deduction for agi like a business deduction or an adjustment you don't have to bunch all your deductions together if you have a deduction for agi you will take it you will take it on your business such as schedule c or schedule e or you will take it as a as an adjustment however deductions from agi may not be used why because for agi from agi deduction to work you have to bunch them you have to add them all because they by themselves they're not good enough and the total has to be greater than your standard deduction whatever it happens to be that's the only way you can use a deduction if it's from agi therefore deductions for agi are more beneficial because they reduce your income without competing with any other figures so if you have them you can use them so the difference between deductions for agi and from agi is an important topic extremely important some of the cpa exam questions or some of your exam questions basically they want you to know the difference between for and from let me just if i want to summarize this for agi are your business expenses whatever business you are undertaken in which form and adjustments that's given a list of adjustments it says both of them they're basically looking at schedule one so look at schedule one then from agi you're looking at schedule a personal deductions it's if i want to summarize this in a nutshell what should you do now go to farhat lectures work mcq's true false questions that's gonna solidify your knowledge about these topic what i'm gonna do next because when you have a business deduction it has to be ordinary necessary and reasonable so i have to explain what does it mean to be ordinary necessary and reasonable because you cannot take any business expense because sometime you may have a hobby not a business so it has to be a business and the expense that you are incurring ordinary necessary and reasonable good luck study hard and of course stay safe