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 four categories: trade or business expenses, expenses incurred for the production of income, losses, and personal expenses. In addition to discussing the general requirements for deductibility for each of the above types of expenses, this chapter also discusses the tax treatment of many commonly encountered expenses incurred by taxpayers, from trade or business expenses such as rent, insurance, interest, taxes, bad debts, etc. to employee business expenses (travel, transportation, etc.) to expenses that can best be categorized as adjustments to gross income (moving expenses, student loan interest, etc.). The chapter also discusses how capital expenditures are allocated across multiple taxable years in the form of depreciation, amortization, depletion, etc.
Categories of Allowable Deductions
¶6001 Classiﬁcation of Tax Deductions Four categories of tax deductions are allowable to individual taxpayers: (1) trade or business expenses (including the business-related expenses of employees); (2) expenses incurred for the production of income (including expenses incurred for the management, conservation or maintenance of income-producing property, and tax planning and compliance expenses); (3) losses incurred on the sale or disposition of business or investment property, or due to casualty or theft of any property (including personal use property); and (4) personal expenses, most of which are not deductible, but some of which are allowed under speciﬁc provisions of the Internal Revenue Code (alimony, health insurance for self-employed taxpayers, certain contributions to HSAs, interest on education loans, qualiﬁed tuition and fees, miscellaneous itemized deductions, etc.). ¶6101 Deductions “For” vs. “From” AGI Business and investment expenses are deductible “for” adjusted gross income. That is, they are deducted in computing a taxpayer’s AGI. In contrast, most personal expenses and losses, if deductible at all, are deductible “from” AGI as itemized deductions. This is an important distinction for several reasons. First, a taxpayer may claim either itemized deductions or the standard deduction, but not both; in contrast, deductions “for” AGI may be claimed in addition to the standard deduction. Moreover, because some itemized deductions are subject to a “ﬂoor” on deductibility computed as a percentage of AGI (e.g., medical expenses, miscellaneous itemized deductions), deductions “for” AGI often have the added advantage of increasing the amount of deductions allowed “from” AGI. Finally, certain tax beneﬁts (such as the ability to contribute to a Roth IRA) are available only to taxpayers whose AGIs do not exceed speciﬁed levels—deductions “for” AGI may help many taxpayers to meet these eligibility requirements. ¶6115 Deductions “For” AGI Deductions “for” AGI include all trade or business expenses, and losses incurred on the sale of business or investment property. In addition, a limited number of personal expenses are deductible in computing AGI. Personal expenses allowed “above the line” include contributions to Health Savings Accounts and Medical Savings Accounts, as well as medical insurance premiums paid by self-employed taxpayers. In addition, alimony payments, payments of qualiﬁed student loan interest and qualiﬁed tuition and fees, and moving expenses are deductible for AGI.
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CCH Federal Taxation—Comprehensive Topics
¶6125 Deductions “From” AGI—Itemized Deductions In contrast, investment expenses, employee business expenses, and those personal expenses that are deductible generally must be deducted “from” AGI. Investment expenses and employee business expenses are deducted as miscellaneous itemized deductions, while...