Deductions- Basic Principles Flashcards
What are the two categories for deductions?
-For AGI and From AGI
What are the three mutually exclusive activity/transaction categories?
- Personal
- Trade/Business
- Investment
Are personal activity expenses deductible?
-No unless specifically provided for in IRC
What are requirements for trade/business and investment activities to be deductible?
-Ordinary, necessary, and reasonable
What does ordinary, necessary, and reasonable mean?
- Ordinary and necessary: expenditure is customary and appropriate under the circumstance
- Reasonable: expenditure cannot be extravagant in amount
When are personal legal expenses deductible?
-Only when related to tax planning or tax preparation services
Can we expense expenditures benefiting more than one period?
-No they must be capitalized
Where are lobbying expenses deductible and not deductible?
- Deductible at city and county level
- Not deductible at state or federal level
For public companies, is CEO and executive compensation above $1 million deductible?
-Only if part of a performance based compensation plan
What are 3 specific disallowed deductions from previous exams?
- Life insurance premiums
- Funeral expenses
- Disability insurance premiums
Can prepaid expenses be deducted immediately? Prepaid interest?
- Only if benefits don’t extend 12 months or more
- Prepaid interest must always be amortized over life of loan
What is the requirement to deduct accrued expenses for future goods and services to be received?
-Recipient has received goods or services
Under accrual method of accounting, when can taxpayer deduct refunds, rebates, awards, prizes, provision of warranty, taxes, and insurance premiums?
-When actually paid
What is the requirement for deducting vacation pay and bonuses?
-They be paid within two and a half months of close of tax year
If it adapts the property to a new or different use, is it a capital expenditure or a repair?
-Capital expenditure
