ACC 331 Chapter 5 Flashcards
Business deductions
Trade and business expenses that are ordinary, necessary, and reasonable in amount
Ordinary
Normal, usually, or customary under regular business circumstances
Necessary
A profit motive behind incurring the expense
Reasonable in amount
Compared to FMV
Deduct expenses for cash method
In the year they are paid
Prepaid expenses
Apply the 12 month rule
Expenses related to issue of stock
Capitalized and deducted when the corporation is liquidated
Research and development expenses
Taxpayer has option to immediately expense, amortize, or capitalize and deduct when venture comes to an end
Deduct an expense accrual methods
Deduct the expenses when the expense meets both the all events test and economic performance test
All events test
All events have occurred to establish the taxpayers liability and the amount of the liability can be determined with reasobable accuracy
Economic performance test
Underlying activity generating the liability has occurred. When economic performance occurs depends on the activity
Economic performance for purchase of goods and services from vendors
When goods or services are relievers/prodvided to business or upon payment if taxpayer reasonably expects vendor to perform within 3.5 months of payment
Economic performance for renting or leasing property
Expense is deducted over the rental/lease period
Economic performance for provided goods or services to customers
Taxpayers deducted expense as costs are incurred
Contingent liabilities
Taxpayers cannot deduct until payments are made
Exceptions to economic performance
Recurring item exception and the 12 month rule
Recurring item exception
Expenses that are expected to persist in the future years can be deducted when accrued if the amount is not material, the all expense test is met at year end and economic perform occurs in 8.5 months
12 month rule for prepaid
Deduct if contract period does not last more than one year and contract does not extend beyond the end of the tax year
Cannot deduct
Expenditures against public policy, political contributions, or lobbying expenditures, excessive executive compensation, meals and entertainment, investigation of a business
Exceptions for lobbying
Influencing local legislation, monitoring legislation, and in house lobbying less than 2000
Research and experimental expenditures
Deduct in year paid or incurred, defer and amortize, capitalize
Charitable contribution
Deduct in year paid unless the board says yes by end of year and paid with 2.5 months of the following year
