Business Deductions.pdf

Business Deductions.pdf - Golden Gate University TA 318...

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Golden Gate University www.ggu.edu 1 TA 318 Business Deductions Key Code Sections § 162 Business expenses § 195 Start up expenses § 262 Personal, living and family expenses § 263 Capital expenditures § 274 meal and entertainment limitations § 280G Golden Parachute Payments 2
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Golden Gate University www.ggu.edu 2 Deductions - Four Step Process 1. First determine whether there is a provision allowing for the deduction §§ 161 224 2. Next determine whether there is a limitation or exception to the apparent deductibility §§ 261 - 280H 3. To the extent you have a deduction allowable in whole or in part, determine whether above the line or below the line 4. If below the line, determine whether it is a regular or a miscellaneous itemized deduction 3 Categories of Deductible Expenses Trade of Business - § 162 Activity engaged in for profit (but not related to a trade or business) - § 212 Neither of the above (often referred to as a Hobby) - § 183 4
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Golden Gate University www.ggu.edu 3 Problem 1 Accounting firm, during the heat of tax season, hired an ordained minister to raise the tax staff's emotional and spiritual awareness level to help them better serve their client's needs. Does the expense constitute an ordinary and necessary business expense? 5 Problem 1 (cont'd) What do we learn from Welch v. Helvering? 6
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Golden Gate University www.ggu.edu 4 Problem 1 (cont'd) What do we learn from Welch v. Helvering? Taxpayer worked for a grain business that went bankrupt. Decided to open his own business. In order to establish good will, he paid some of the debts of his former employer. He had no legal obligation to do so. The issue was whether this expenditure was an ordinary and necessary business expense. 7 Problem 1 (cont'd) They are ordinary if we know from experience that these types of expenses are common and accepted in this type of business. They are necessary if it is appropriate and helpful, rather than absolutely essential. The standard set up by the statute is not a rule of law, it is rather a way of life. Life in all its fullness must supply the answer to the riddle. 8
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Golden Gate University www.ggu.edu 5 Problem 1 (cont'd) Does hiring an ordained minister meet the test of an ordinary and necessary business expense? 9 Problem 1 (cont'd) What is ordinary and necessary varies from industry to industry and changes over time Computers in 1970 v. today The deductibility of a similar expenditure by a wood products broker was denied in Lionel Trebilcock , 64 T.C. 852 (1975), aff'd, 557 F.2d 1226 (6th Cir. 1977). Google workplace spirituality and you get over 7 million hits (and growing) 10
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Golden Gate University www.ggu.edu 6 Problem 2 Singer made a payment out of his personal account to reimburse the shareholders of his failed restaurant corporation. The corporation had filed for bankruptcy and Singer was under no legal obligation to make any payment to the former shareholders. What are the tax consequences to Singer of this payment?
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