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
What is a simplified home office deduction
$5 per square foot but no more than $1,500. It doesn’t include a deduction for depreciation
Entertainment
Deduction is allowed if they are not considered entertainment depending on the industry.
Also exceptions are for company-wide events.
business meals 50%
Business meals
Meals provided in-office for meetings of employees, stockholders, agents, or directors
Employee meals at a company cafeteria if the annual revenue of the facility is equal to or greater than the costs
Food items, such as soda, coffee, or snacks, for employees
Meals while traveling for work
Meals at a conferences
100% Deductible business meals
Food for recreational employee events, such as holiday parties, summer picnics, or team-building events
Food provided to the public to promote goodwill (e.g., snacks or coffee for customers)
Food for events in support of a charitable cause
Meals that are an essential part of your business function (for example, if you’re a food critic or food blogger)
Meals provided to the employees for the convenience of the employer (e.g., dinner for employees who work late at the office)
Meals included as taxable compensation to employees or independent contractors
Meals sold to a client or customer
Per Diem
taxpayers can choose to use a per diem, an annually updated tax deduction for meals and incidental expenses incurred while traveling away on business. The amount allowed varies depending on the location of travel. To be eligible, a business owner or employee must be traveling away from home for business.
In 2023, the meal per diem is $74 a day for high-cost areas in the continental United States and $64 a day for lower-cost areas
Travel expenses
100% if it is carrying on a genuine business activity. Records must be kept with exception to small expenses (other than lodging) which are less than $75
Per diem travel
Self employed can only use a per diem cost for meal cost. Per diem expenses are not included in wages. The employee must file the expense report within 60 days. If not, the expenses are taxable to him.
Transportation Expenses
Self-employed can choose either standard mileage rate or actual car expenses.
Corporations generally cannot use the standard mileage rate but they can reimburse expenses. In corporations any amounts reimbursed in excess of the standard mileage rate are reportable on the employee’s Form W2 as wages
Is a daily log of miles is mandatory
yes
Parking fees and tolls
Deductible in addition to standard mileage rate
Standard mileage rate in 2023
65.5 cents per business mile driven
When a business is prohibited from using the standard mileage rate?
- > 5 cars
- depreciation other than straight-line
- claimed a section 179 deduction
- claimed actual car expenses for a car that is leased
Business gifts
25$ given + packaging, insurance and mailing costs
Promotional Gifts exceptions
an item with its business name that costs <$4
noncash gifts to employees are deducted
promotional material that are used on the premises of the recipient
Cash and gift cards are considered compensation and included in wages.
Charitable contributions
Only C corporations can deduct charitable contributions
Additional Business Expenses Deductible
- advertising
- credit card convenience fees
- certain franchise or trademark fees
- education or training for employees
- internet-related
- interview expense for candidates
- outplacement services to employees
license and regulatory fees paid annually to state or local gvmts
penalties paid for late performance or nonperformance - repairs to business and rental property
-subscriptions to professional magazines and membership to professional organizations
supplies and and materials used over the year
-legal and accounting fees
utilities
