Chapter 14 – Business Deductions without Homework

Chapter 14 – Business Deductions without Homework

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Chapter 14 – Business Deductions §63 Defines taxable income: Gross income minus the deductions provided in various statutes. Important since the tax rate is applied to taxable income, not gross income.
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Business Deductions Deductions are a matter of “legislative grace” Meaning that we only get to use those deductions that Congress sees fit to allow us. Mainly means deductions related to your business of generating income. NO constitutional right to ANY deduction.
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Section 162 §162 is the general section where we start for trade or business deductions. Later, we will see how §212 allows us to take deductions related to our “for profit activities” which are not quite a trade or business.
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Section 162 §162 reads, in part: (a) In general There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
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Section 162 Note the NON-exhaustive list of deductions (and the similarity to §61). Key phrases in §162: Ordinary and necessary Expenses Paid or incurred During the taxable year Carrying on any trade or business
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Ordinary and Necessary Does it have to be both? What is ordinary? What is necessary? How do we determine?
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Welch v. Helvering 290 U.S. 111 S.Ct. 8 (1933) Key Facts: Welch was an employee of a corporation that went bankrupt and had many of its debts discharged. Welch began his own business in the same line as that of his prior employer. In order to rebuild his reputation, he attempted to pay off certain of the old debts. IRS contended the payments were not deductible, but were capitalizable.
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Welch v. Helvering 290 U.S. 111 S.Ct. 8 (1933) Key Issue: The court felt the expenditures were necessary (they relied on the taxpayer’s judgment), but were they ordinary? Court concluded that the costs were necessary but NOT ordinary, therefore were not deductible (remember the AND test)
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Welch v. Helvering 290 U.S. 111 S.Ct. 8 (1933) The real key conclusions to this case: Ordinary does NOT mean that you have to regularly incur the costs in running your business (i.e. they can be one-time expenditures in the life of your particular business) AND There is no magic formula for determining whether an expenditure is ordinary and necessary, but each case will be determined based upon its own facts and circumstances.
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This note was uploaded on 09/27/2008 for the course BUS 1000 taught by Professor Professor during the Spring '08 term at Cal Poly.

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Chapter 14 – Business Deductions without Homework

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