Chapter 9 - Business Deductions Flashcards
What is the code for deductions
there shall be allowed as a deduction all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business
What are the rules for business deductions
- business purpose
- Ordinary
- Necessary
- Reasonable
what does business purpose mean?
engaged in for profit
- need to be a trade or business
what do ordinary expenses mean?
normal, usual, or customary
- not capital in nature
- can be recurring or not recurring
What does it mean for an expense to be necessary
- a prudent business person would incur the same expense
- appropriate and helpful in taxpayers business
- doesn’t need to be indispensible
what does it mean for an expense to be reasonable?
expense should not be excessive
- like buying a super fancy thing that isn’t needed
Are expenditures contrary to public policy like parking tickets and fine deductible
no
are political contributions and lobbying expenses deductible?
no
if you pay an expense for someone else is it deductible
no it is not deductible to you or the person who was originally supposed to pay it
are federal income taxes deductible
no
are expenses and interest related to tax exempt income deductible?
no
What are the cash method requirements for deductions
expenses are deducted when they are actually paid
- you can use money from a note payable to pay an expense and it is deductible but just issuing the not doesn’t count as the actually paid requirement
when can capital expenditures be deducted under the cash method
only under amortization, depletion, and depreciation
What is the rule for prepayments in terms of deductions for the cash method
you are allowed a deduction in the current year when an expense covers more than the current year but less than the following tax year
*if the expense covers more than the following year prorate the whole expense
Under the cash method what is the exception for prepaid interest expense deductions
must be capitalized and deducted over the period which interest is actually charged even if prepayment is < next tax year
- do over life of the loan
Under the cash method what is the exception for prepaid rent expense deductions
only deductible when paid if prepayment are for 12 months or less
What is the rule for deductions under accrual method
expenses can be deducted when the all events test and the economic performance tests are met
what is the accrual expense deduction all events test
all the events have occurred to create the liability (ex: service complete) , and the amount is determinable
What is the economic performance test?
service, property, or use of property giving rise to the liability is actually performed or provided to the taxpayer
What are the exceptions to the economic performance test
we don’t have to wait for an economic test when…
prepayments for goods and services will pass the economic performance test within 3.5 months
what are startup costs
costs you incur to get the business up and running
how are business investigation costs for an already establish business treated in terms of tax effect
if they are expanding an already existing business then they are deductible if they open or not
if they are starting a completely new business not related to their current business then they are not deductible if it doesn’t work out and if they do start it then it becomes a start-up cost
what are the deduction rules for start-up costs
deduct 5000 and amortize rest over 15 years
if the total exceeds 50,000 reduce up front reduction by $1 for every amount over 50,000
What is bad debt
debt that will not be collected and is a deductible for the taxpayer if they will not be paid
