Deductions (Business and Investment Expenses)

Question 1

Capital Asset

Answer 1

Purchase that will yield benefits beyond one year

Ex: Printer

Question 2

Expense

Answer 2

Purchase that will yield benefits for one year or less

Ex: Printer paper

Question 3

Capital Assets vs. Expense

Answer 3

Business expenses are deductible during the tax year

Capital assets are depreciated over “useful life” of asset

Question 4

Tax Treatment of Expenses

Answer 4

Always ask: “Does the expense relate to a business, investment, or personal activity?”

Question 5

Business Expenses

Answer 5

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

(1) ORDINARY and NECESSARY;
(2) Paid or incurred in CARRYING ON;
(3) A TRADE or BUSINESS

Question 6

Examples of Deductible Business Expenses

Answer 6

(1) Compensation paid to employees
(2) Rent for office space
(3) Insurance costs related to the business
(4) Business travel (transportation, lodging, 50% of meals)

Question 7

Examples of Non-Deductible Business Expenses

Answer 7

(1) Entertainment expenses
(2) Fines paid to government for violation of law
(3) Illegal bribes and kickbacks

Question 8

Investment Expenses

Answer 8

Deductible in year paid or incurred if expense is both:

(1) ORDINARY and NECESSARY; and
(2) expense is for: (a) production or collection of income; (b) management of property held for the production of income; or (c) determination, collection, or refund of any tax.

Question 9

Personal Expenses

Answer 9

Generally not deductible