Chap.6.BusinessOperations

Chap.6.BusinessOpera - Federal Income Taxation CHAPTER 5 BUSINESS OPERATIONS Taxable income from business operations = gross income less expenses

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Federal Income Taxation CHAPTER 5 BUSINESS OPERATIONS Taxable income from business operations = gross income less expenses Gross income is income from whatever source derived. Thus: all income is included unless specifically excluded by law. Also: income can be realized in any form. There are 2 provisions, which provide the framework for many expense deductions . IRC Sec 162 Trade or Business Expenses which are ordinary and necessary and paid/incurred during the taxable year in carrying on the trade or business are deductible. What is a trade or business? Per Courts, primary purpose must be profit motive; IRC Sec 212 Ordinary and Necessary expenses for the production of income are deductible. For the collection of income. Examples would include counseling fees, subscriptions to investment journals, and other similar expenses associated with the earning of investment income. For the management, conservation, or maintenance of property held for the production of income. Includes expenses associated with rental income such as interest, repairs, advertising, and depreciation. Expenses associated with the determination, collection, or refund of tax. The most common example is tax planning and preparation fees, and tax audit fees. o Ordinary & Necessary
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o Related to carrying on a trade or business or an income producing activity. o Reasonable o Paid or incurred during the taxable year. Ordinary and Necessary. Ordinary, as interpreted by the courts, has taken on two meanings: Customary in that activity or trade/business. That is, it does not have to be incurred regularly by the taxpayer; but its occurrence is likely within the industry. As a contrast to capital expenditures. That is, expenditures which will be used up within the year as opposed to long-term assets, which will be depreciated or amortized.
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This note was uploaded on 05/19/2008 for the course ACCT 3531 taught by Professor Ryan during the Spring '08 term at Temple.

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Chap.6.BusinessOpera - Federal Income Taxation CHAPTER 5 BUSINESS OPERATIONS Taxable income from business operations = gross income less expenses

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