Deductions: General Concepts and Trade or Business Deductions
Chapter 6 _____Deductions: General Concepts and Trade or Business Deductions
SUMMARY OF CHAPTER
Tax deductions are allowed to taxpayers only if specifically authorized by the Internal Revenue Code. Deductions allowable to individual taxpayers fall into three categories: trade or business deductions, production of income deductions, and personal deductions. This chapter is also concerned with business deductions as they appear on a sole proprietor 's Schedule C, which is included as part of the taxpayer 's individual income tax return.
Categories of Allowable Deductions
¶6001 Classification of Tax Deductions
The three categories of tax deductions allowable to individual taxpayers are (1) trade or business expenses (including the business-related expenses of employees); (2) production of income expenses (including expenses incurred for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income, and in connection with the determination, collection, or refund of any tax); and (3) personal deductions. In addition, taxpayers are allowed deductions for certain losses.
¶6011 Trade or Business Deductions
In general, taxpayers are allowed a tax deduction for all the ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. In determining whether an expenditure is an allowable tax deduction for a trade or business, certain criteria must be met. These criteria are that the expense (1) must be ordinary and necessary, (2) must be reasonable in amount, (3) must be related to a trade or business, (4) must be for a business-related purpose rather than a personal expenditure, (5) cannot be a capital expenditure, (6) cannot be related to the generation of tax-exempt income, and (7) cannot frustrate public policy. Certain employment-related expenses of employees are also allowed by the Code as trade or business tax deductions. In order to be deductible
SUMMARY OF CHAPTER
Tax deductions are allowed to taxpayers only if specifically authorized by the Internal Revenue Code. Deductions allowable to individual taxpayers fall into three categories: trade or business deductions, production of income deductions, and personal deductions. This chapter is also concerned with business deductions as they appear on a sole proprietor 's Schedule C, which is included as part of the taxpayer 's individual income tax return.
Categories of Allowable Deductions
¶6001 Classification of Tax Deductions
The three categories of tax deductions allowable to individual taxpayers are (1) trade or business expenses (including the business-related expenses of employees); (2) production of income expenses (including expenses incurred for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income, and in connection with the determination, collection, or refund of any tax); and (3) personal deductions. In addition, taxpayers are allowed deductions for certain losses.
¶6011 Trade or Business Deductions
In general, taxpayers are allowed a tax deduction for all the ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. In determining whether an expenditure is an allowable tax deduction for a trade or business, certain criteria must be met. These criteria are that the expense (1) must be ordinary and necessary, (2) must be reasonable in amount, (3) must be related to a trade or business, (4) must be for a business-related purpose rather than a personal expenditure, (5) cannot be a capital expenditure, (6) cannot be related to the generation of tax-exempt income, and (7) cannot frustrate public policy. Certain employment-related expenses of employees are also allowed by the Code as trade or business tax deductions. In order to be deductible