Deductions

Question 1

What is an outlay?

Answer 1

Any payment of money (cash, check, etc.)

Question 2

What categories could an outlay be in?

Answer 2

1. Capital expenditure
2. Expense

Question 3

What is a capital expenditure?

Answer 3

A cost that produces a benefit that will last longer than a year.

Question 4

What is an expense?

Answer 4

A cost that is not a capital expenditure; will not last more than a year.

Question 5

What is the practical difference between a capital expenditure and an expense?

Answer 5

Capital expenditures can almost never be deducted. Expenses can sometimes be deducted.

Question 6

What are the three types of activities?

Answer 6

Personal, business, and investment.

Question 7

How does the categorization of the outlay interact with the type of activity?

Answer 7

1. Capital expenditures can almost never be deducted, whether as personal, business, or investment activities.
2. Expenses cannot be deducted for personal activities, but can be deducted for business and investment activities.
3. Realized losses cannot be deducted for personal activities, but can be deducted for business and investment activities.

Question 8

What qualifies as a business expense?

Answer 8

An expense that is

1. ordinary and necessary
   
   1. common and helpful in that particular type of business
2. paid or incurred in carrying on
   
   1. as opposed to starting or launching
3. a trade or business
   
   1. as opposed to an investment or hobby activity
   2. an activity the taxpayer conducts on regular, continuous, and substantial basis.

Question 9

What are some things that are not deductible as business expenses?

Answer 9

1. Education expenses that qualify the taxpayer for new business or are unrelated to job skills
2. Clothing expenses for clothing suitable for general use
3. Entertainment expenses
4. Fines paid to the government
5. Illegal bribes and kickbacks
6. Net losses from activities in which the taxpayer does not materially participate.

Question 10

What are investment expenses?

Answer 10

An expense that is both:

1. ordinary and necessary AND
   
   1. common and helpful in that particular industry or to that particular type of business
2. for one of the following
   
   1. the production or collection of income,
   2. the management of property held for the production or collection of income; OR
   3. the determination, collection, or refund of any tax.

Question 11

What is the difference between an investment expense and a business expense?

Answer 11

Investment expenses: below-the-line deductions.

Business expenses: above-the-line deductions.