Chapter 5 - Chapter 5 Business Deductions Trade or Business...

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Chapter 5 Business Deductions Trade or Business Deductions For expenses to be deductible it must be o Incurred in conduct of a trade or business o Ordinary; normal, usual, or customary for others in similar business, and not capital nature o Necessary: prudent businessperson would incur same expense Expenditures Contrary to Public Policy Deductions are disallowed for certain specific types of expenditures that are considered contrary to public policy o Penalties, fines, illegal bribes or kickbacks, two-thirds of treble damage payments for violation of anti-trust law Expenses Relating To An Illegal Business Usual expenses of operating an illegal business are deductible o However, deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments are disallowed Trafficking in controlled substances: only cost of goods can reduce gross income Political Contributions And Lobbying Activities Generally, no business deduction is allowed for payments made for political purposes or for lobbying o Exceptions are allowed for lobbying To influence local legislations To monitor legislation, and De minimis in-house expenses (limited to $2000) Excessive Executive Compensation For publicly held corporations: o Deduction for compensation of CEO and four other highest compensated officers is limited to $1 million each
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