deduction limits for OIH, not for profit activities, etc

Activities not engaged in for profit are governed by Section 183. I am not aware of any rule that allows for carryover of unused expenses. The code, regs and court cases are quite clear about that. Maybe you are thinking about passive activities.

Robert Wood a tax attorney with Wood & Porter in San Francisco (also is a mjor contributor to Forbes Tax Column) has an excellent explanation of section 183 and not for profit activities in the Tax Management Real Estate Journal. What's really nice about the article, is that it is full of citations.

Here is an excerpt:

A taxpayer may deduct expenses for §183 activities only to the extent that he has gross income from the activity during a particular taxable year.4 Losses attributable to §183 activities not engaged in for pro?t are disallowed, and they do not carry forward to the next taxable year.5

Here is the Footnote 5 citations:

5 See §183(b)(2);see also Bunney v. Comr., T.C. Memo 2003-233; Garbini v. Comr., T.C. Summ. Op. 2004-7; Hastings v. Comr., T.C. Memo 2002-310; Bush v. Comr., T.C. Memo 2002-33; Thomas v. Comr., T.C. Memo 2002- 200; Baldwin v. Comr., T.C. Memo 2002-162.

Here is the link to the full article:

Forgot you also asked about OIH. I suppose you would have to see the congressional reports on the legislation to find the reasoning. I do know that there is no basis adjustment until you actually take the depreciation. That by itself may be why they isolated depreciation in the third tier.

[...]

I am guilty of oversimplifying. I was thinking specifically of not-for-profit rentals and OIH when I mentioned carryovers of unallowed expenses. Yes, I realize that hobbies do not have carryover. (I'm relying on my memory about not-for-profit rentals).

My real focus was on the three categories of expense. This same three-category pattern shows up repeatedly in various pubs, as I recall it also applies even to most miscellaneous 2%-of-AGI deductions on schedule A.

You may have answered it with the point on unallowed depreciation not reducing basis until it is allowed in some future year. I guess it's good to remember, when looking at a typical depreciation worksheet, that not necessarily all of the "prior year depreciation" shown has actually been allowed yet, that info may be buried on a Form 8829, for example.

Misc. itemized deductions subject to the 2% floor are governed by sections 212 and 67. There is nothing in there about tiered expenses. You just add up the expenses and subtract 2% of AGI. The form (Schedule A) does ask that you separate those expenses into 3 categories but there are no tiers in the same sense that OIH expenses have tiers that could be disallowed.

First, I do believe that neither suspended OIH expenses nor non-business activity (hobby) expenses are deductible when the activity ends.

Second, the intent of the law is to minimize the deduction of items that wouldn't be deductible on Schedule A (or Schedules C, E, F) anyway. This is accomplished by first moving Schedule A deductions to those other schedules.

First, I do believe that neither suspended OIH expenses nor non-business activity (hobby) expenses are deductible when the activity ends.

Second, the intent of the law is to minimize the deduction of items that wouldn't be deductible on Schedule A (or Schedules C, E, F) anyway. This is accomplished by first moving Schedule A deductions to those other schedules.

=============OIH expenses/depreciation are NOT deductible because the activity ends. It is quite possible to continue filing a form 8829 even after the business which generated them concluded or that the residence involved was sold, until business income (including a profit on the sale of the property) offsets its remainder. If the activity in question is passive, only the suspended passive loss comes out when the activity is disposed of.

Section 280A distinguishes between expenses and depreciation because expenses are not recapturable while depreciation may be as section

1250/1252/1254 gain. The situation gets alot worse if one has pre-May-5-1998 allocable depreciation in the accumulation (which is not recognized - by an act of Congress) and the offsetting gain doesn't use all of the accumulated depreciation (i.e. is the deferred depreciation used in a FIFO manner or LIFO, or is it considered allocable to the year where it is actually used and not its originating/generating year from which it was carried).

The adjusted basis is not reduced until the depreciation is actually permitted as a deduction. Under the "allowed or allowable" concept, depreciation carried forward under section 280A is considered as zero for the current (generating) year because it was not allowed to be deducted in the tax year which sourced it.

As for what happens when both sections 280A and 183 apply, see 280A(f)(3).

Yes, you have parsed my convoluted wording correctly. :)

Thanks all for setting me straight on what happens to carry-forward of operating expenses and depreciation for certain activities when they end.

To save face a little, I can safely say that I wouldn't have actually filed a return including these items without double-checking; in my original post, I was just taking an educated guess which it turns out was wrong.