Deductions and Losses Flashcards
Deductions for AGI
Claimed whether or not the taxpayer itemizes
Deductions from AGI
Result in tax benefits only if the taxpayer’s standard deduction. If itemized deuctions are less than standard, they provide no benefit
What is not classified as trade or businesses expenses
Charitable contributions/gifts, illegal bribes and kickbacks and certain treble damage payments, fines and penalties.
Foreign bribes aer deductibe unless they are unlawful under foreign corrupt practices act of 1977
To be deductible, any trade or business expense must be “ordinary and necessary” and for a “reasonable” amount in section 162 and 212
Ordinary= normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature. The expense need not be recurring to be deductible as ordinary.
Necessary= a prudent businessperson would incur the same expense and the is appropriate and helpful in the taxpayer’s business
Reasonability with respect to salaries
Usually a problem between shareholders and the closely held company. If excessive payments for salaries and rents are closely related to the percentage of stock owned by the recipients, the payments are generally treated as dividends. Because dividends are not deductible by the corporation, the disallowance results in an increase in the corporate taxable income. Deductions for reasonable salaries will not be disallowed solely because the corporation has paid insubstantial portion of its earnings as dividends to its shareholders.
Schedule E
Rent, royalty, partnerrship, and fiduciary deductions
Schedule F
Farming expenses
Schedule C
business expenses
Keogh plan
A tax deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined contribution. Contributions are generally tax deductible up to 25% of annual income with a limit of $47,000 (as of 2007). Keogh plan types include money-purchase plans (used by high-income earners), defined-benefit plans (which have high annual minimums) and profit-sharing plans (which offer annual flexibility based on profits).
Also known as an HR(10) plan, Keogh plans can invest in the same set of securities as 401(k)s and IRAs, including stocks, bonds, certificates of deposit and annuities.
Schedule B
interest and dividends
Schedule D
Capital Gains and Losses
Schedule A
Itemized Deduction
Importance of Taxpayer’s method of Accounting
Major factor determining taxable income. The method used determines when an item is includible in income and when deductible on the return. The IRS only requires that taxpayers choose the method that clearly reflects income and that items be handled consistently.
Paid refers to cash basis
Incurred refers to accrual basis
Accrual Method requirements for deducting an expense
The all events test—- all events have occurred to create liability and the amount can be determined with reasonable accuracy
AND
Economic performance test=when service, property, or use of property giving rise to the liability is actually performed for, provided to, or used by the taxpayer.
Capitalization versus Expense
When an expenditure is capitalizes rather than expensed, the deduction is at best deferred and at worst lost forever. If the expenditure is for a tangible asset that has an ascertainable life, it is capitalized and may be deducted as depreciation (cost recovery) over the life of the asset or over the statutory period (for ACRS and MACRS). Land is not subject to depreciation because it does not have an ascertainable life.
If the expenditure is for an intangible asset (eg copyright, patent, covenant not to compete, and goodwill), the capitalized expenditure can be amortized regardless of whether the intangible asset has an ascertainable life).
These are amortized over a 15-year statutory period using the straight-line method.
