Business and Investment Expenses Deductions

Question 1

Difference between Capital Expenditures and Expenses

Answer 1

Capital expenditures: costs that produce a benefit that extends beyond one year

Expenses: all other outlays

ex: printer versus printer paper

Question 2

Tax Treatment of Capital Expenditures

Personal

Business

Investment

Answer 2

all: no deduction, but taxpayer gets additional basis

personal: see above

business: and the taxpayer may be able to recover the cost over time

investment: and the taxpayer may be able to recover the cost over time

Question 3

Expenses

Personal

Business

Investment

Answer 3

personal: generally no deduction

business: deduction

investment: deduction

Question 4

Realized Losses

personal

business

investment

Answer 4

personal: generally no deduction

business: deduction

investment: deduction

definition: loss recognized upon the sale, exchange, or other disposition of an asset

Question 5

Business Expenses

Answer 5

Deductable in the year that the expense is paid or incurred if the expense is:

• ordinary and necesary–common or helpful in that industry/ business
• paid or incurred in carrying on–as opposed to starting
• a trade or business–activity that taxpayer conducts on regular, continuous, substantial basis as opposed to a hobby

Question 6

Examples of Common Business Expenses

Answer 6

Deductible:

• compensation to eployees
• rent for office
• insurance costs
• business travel (transportation, lodging, 50% meals)

Not Deductible:

• education expenses to qualify for new business or skilled unrelated to job
• clothing expenses for clothes that are suitable fo rgeneral use
• entertainment expenses
• fines paid to gov
• illegal bribes and kickbacks
• net losses from activities in which taxpayer does not materially participate (~$500 per year)

*Usually ATL deductions

Question 7

Investment Expenses

Answer 7

Deductible in year expense is paid if:

• Ordinary and necessary; and
• Expense is forL
  
  • production or collection of income
  • management of property held for production of income
  • deterination, collection, or refuld of any tax

*Usually itemized deductions

Question 8

Capital Expenditures

Answer 8

Generally not currently deductible; instead either creates or adds to taxpayer’s basis in an asset

Question is if you can depreciate or amortize the basis overtime, or if you have to wait until you sell the asset to recover the basis

Question 9

Depreciation

Answer 9

For capital expenditures: write off during period of time, generally equal to the asset’s useful life

Applies to tangible property that is

• subject to wear and tear; and
• held for either business or investment purposes

**Taxpayer can treat up to $1 million of tangible personal property used in business as an expense instead of capital expenditure

Question 10

Amortization

Answer 10

For capital expenditures: applies to intangible assets held for business or investment purposes

examples: goodwill, patent, copyrights, franchise, license, covenant not to compete

Generally over a 15 year period the cost is recovered ratably over that time ($15,000 write off $1,000 per year)