Introduction to Taxation
ACCT 330 – TEST 2
CHAPTER 6 – DEDUCTIONS AND LOSSES
Criteria for deducting business and investment expenses – must be… * Related to a profit-motivated activity of the taxpayer * Ordinary, necessary, and reasonable in amount * Properly documented * An expense of the taxpayer
Expenditure is not deductable if it is… * A capital expenditure * Expense related to tax-exempt income * Illegal or in violation of public policy, or * Specifically disallowed by tax law
Business or investment activity? – requirements have two parts * Activity must be engaged in for profit * Trade or business vs. investment classification – distinction important only to individuals * Expenses incurred in a trade or business are deductions for AGI * Investment expenses, other than those incurred to produce rents and royalties are deductions from AGI
Legal and accounting fees – may deduct if incurred in conduct of trade or business or for the production of income * Deductions for AGI if incurred in trade or business and any fees incurred in the determination or collection of taxes * All other legal and acct fees incurred by taxpayer are from AGI * Cannot deduct legal fees incurred in the acquisition of property (these are capitalized)
Ordinary expense – reasonable in amount, bears reasonable and proximate relationship to the income-producing activity or property * Does not mean the property must be producing income currently
Necessary expense – appropriate and helpful in the taxpayer’s business
Reasonable – compensation does not exceed the value of work put in
Expenses and losses incurred directly by the taxpayer – taxpayers may not take a deduction for a loss or expense of another person * In order for a business to deduct personal employee expenses one of two things must happen… * The employee must report additional compensation, or * The employee must reimburse the company for the compensation
CHAPTER 6 – DEDUCTIONS AND LOSSES
Criteria for deducting business and investment expenses – must be… * Related to a profit-motivated activity of the taxpayer * Ordinary, necessary, and reasonable in amount * Properly documented * An expense of the taxpayer
Expenditure is not deductable if it is… * A capital expenditure * Expense related to tax-exempt income * Illegal or in violation of public policy, or * Specifically disallowed by tax law
Business or investment activity? – requirements have two parts * Activity must be engaged in for profit * Trade or business vs. investment classification – distinction important only to individuals * Expenses incurred in a trade or business are deductions for AGI * Investment expenses, other than those incurred to produce rents and royalties are deductions from AGI
Legal and accounting fees – may deduct if incurred in conduct of trade or business or for the production of income * Deductions for AGI if incurred in trade or business and any fees incurred in the determination or collection of taxes * All other legal and acct fees incurred by taxpayer are from AGI * Cannot deduct legal fees incurred in the acquisition of property (these are capitalized)
Ordinary expense – reasonable in amount, bears reasonable and proximate relationship to the income-producing activity or property * Does not mean the property must be producing income currently
Necessary expense – appropriate and helpful in the taxpayer’s business
Reasonable – compensation does not exceed the value of work put in
Expenses and losses incurred directly by the taxpayer – taxpayers may not take a deduction for a loss or expense of another person * In order for a business to deduct personal employee expenses one of two things must happen… * The employee must report additional compensation, or * The employee must reimburse the company for the compensation