Exam2 - CH.9 Business Income Deductions and Acct Methods IRC Section 162 There shall be allowed as a deduction all the ordinary and necessary expenses

Exam2 - CH.9 Business Income Deductions and Acct Methods...

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CH.9 Business Income, Deductions, and Acct. Methods: IRC Section 162: “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.” • A “trade or business” is an activity that is carried on to generate profit. If an activity does not meet the “for profit” requirement, then it’s considered a hobby (for individual T/Ps).• Revenues are included in gross income.• Related expenses (to the extent of gross income) are deducted as miscellaneous itemized deductions, subject to the 2% of AGI floor. (Political contributions and most lobbying costs not deductible) Business must capitalize exp. For tang & Intang. Assets that have >1 yr useful life (costs recovered through future depr. And amortized deductions) Expenses associated w/ prod. of tax-exempt income are NOT tax deductible. Includes: Interest expense related to municipal bond interest income. • Insurance premiums paid for life insurance policies on key employees .• The firm is typically the beneficiary of a “key employee” life insurance policy. Proceeds from life insurance policies are tax-exempt income to the firm. Deduct 50 % of business meals and entertainment expenses (empl.cust,advisors) Transportation: sole proprietors can deduct cost of transp. Either cost of op. vehicle + depr. OR stnd. Amount for each bus. Mile driven (54¢ in 2016 but standard is 57.5 cents) Registration fee deduct.for bus conference (EX: meals for $800 & Tax rate is 25%...after tax pmt??? 800*.5=400*.25=100 SO 800-100= $700 after tax pmt..IF 7/10 days spent on bus trip, then .7*cost of flight is deductible Bad Debt Exp: accrual T/Ps deduct BD when deemed worthless or uncollectible, non-bus BD are deductible as short-term capital losses in yr. they become completely worthless (no deduction for partial worthlessness) DomesticProductionActivitiesDeduction:DPADT /Ps deduct 9% of lower of : Qualified Prod. Activities Income OR TI before DPAD (MAGI for individuals) & this deduction limited to 50% of wages (Revenues-Costs = QPAI but don’t include sale of food/bev) Bus. Assets & Prop held for Inv . • Completely destroyed: Deduct = Insurance proceeds minus adjusted tax basis of the asset Partially destroyed : Deduction = Insurance proceeds minus the lesser of 1) the asset’s adj tax basis, or 2) its decline in value due to the casualty or theft. (Same as personal use) If damaged, can only deduct up to price of equipment. Office supplies, can be taxed if used within next yr. L uxenburg: 1,600 companies 1 employee Property used in business (including rental – basis = FMV and royalty property)• Individual T/Ps recognize “for AGI” deduction. Property used for the production of income (investment). Individual T/Ps recognize “miscellaneous itemized deduction,” NOT subject to 2% of AGI floor• Property used for personal purposes: Individual T/Ps recognize an itemized deduct. Is subject to $100 per event floor & 10% of AGI total floor limitation Sole Prop: Use calender yr-end, Partnerships & S Corps: use tax

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