Unit 4 Business Expenses Flashcards
To be deductible expenses must be both …?
ordinary and necessary.
An ordinary expense is …
common and accepted in the taxpayer’s industry
A necessary expense is …
helpful and appropriate for the particular trade or business
What personal and living expenses can be deductible?
If they are used partly for business and partly for personal use, then the taxpayer may divide the total cost between the business and personal use
What should apply to deduct or capitalize expenses under the accrual method
- “all events” have occurred that fix the fact of liability, and the liability can be determined with reasonable accuracy;
- economic performance has occurred; the property or services are provided.
however, with the exception for recurring items
Requirements for recurring items?
- The all-events test;
- Economic performance occur by the earlier of the following dates:
- 8.5 months after the close of the year; or
- the date the taxpayer files a timely return; - The item is recurring;
- and either:
- the item is not material; or
- accruing the item in the year in which all-events test is met results in better match against income.
A new expense can be treated as recurring if the taxpayers reasonably expects to incur it regularly in the future
Which costs related to new business can be deducted as current expense?
- up to $5000 to organize a corporation, partnership, or LLC, and
- up to $5000 of start-up costs
What is start-up costs?
they are incurred before a business actually begins operations. They generally do not include: deductible interest, taxes, or research and experimental costs.
What if start-up costs exceed $50,000?
there is a dollar-for-dollar reduction in the available deduction. The remaining amount that is currently deductible must amortized over 180 moths (15 years)
Example: 56,000 start-up costs. 5,000 allowable deduction - 1,000 of excess = 4,000 (deductible). 47,000 (51,000-4,000) is amortized over 180 months.
What are the organizational costs? How much is deductible?
that directly relate to a business formation, up to 5,000 and amortize the remainder over 180 months. If more than 50,000 - dollar-for-dollar reduction
What if a taxpayer completely disposes of a business before the amortization period ends?
The taxpayer can deduct any unamortized start-up costs or organizational costs as long as they qualify as a loss
How incurred costs can be deducted if an individual taxpayer attempts to go into a business but fails
they are are treated as personal and thus undeductible. if it was a bona-fide attempt to purchase a specific business, then there is a capital loss limit of 3,000 per year (capital loss on Schedule D, Form 1040)
What are the rules for a corporation in relation to incurred costs related to unsuccessful attempt?
It can deduct ALL of its investigatory costs as a business loss
How the real estate taxes can be deducted?
The taxing authority must calculate tax based on the assessed value of the real estate. The taxes charged for the improvement and local benefits cannot be deducted, but they increase the basis of its property by the amount of the assessment
Deductibility of property taxes?
they are deductible
state income taxes. Are they deductible?
Yes for corporations. A self-employed individual (Schedule C) can deduct up to $10,000 ($5,000 for MFS)
business excise taxes?
deductible expense
Will cash-basis business have deductible business bad debts?
No, since cash-basis business does not report any income of sales made on credit
What is the tax treatment for health insurance premiums for every entity type?
For sole proprietor - is not deductible on Schedule C, but deductible on Schedule 1 of Form 1040. Only if it has profit
For partnership - deductible as guaranteed payments to partners. Only if it has profit
For S-Corp - deduct them and then include in shareholders’ wages subject to federal income tax withholdings. Only if it has profit
For C-Corp - can deduct even if it has loss.
How interest is deductible depending on the cash or accrual method
Cash - deduct interest paid
Accrual - deduct interest accrued. Cannot deduct interest owned to a person who uses cash method in interest is not paid yet.
What is the difference between business and investment interest?
Investment interest is interest paid on money borrowed to purchase taxable investments. This interest deduction is limited to the net investment income.
How business interest is deducted for large businesses (>27 million of receipts)
it is limited to 30% of ATI (earnings before interest and taxes)
How the rent is treated for deduction?
cost of acquiring lease is amortized not deducted
if rented property used both for business and personal purpose - the portion is deducted
Home office deduction
may be able to deduct if:
- its the taxpayer’s principal place of business
- the place is used to meet with clients
- a separate structure is not attached to home to be used as business
Space used for both personal and business purposes cannot be deducted
A taxpayer can choose a simplified home office deduction
