Business Deductions SA.pdf

Business Deductions SA.pdf - SECTION XII BUSINESS...

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SECTION XII BUSINESS DEDUCTIONS SUGGESTED ANALYSIS 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? This problem addresses the general question of the meaning of “ordinary and necessary business expenses under § 162(a). Whether expenses are ordinary and necessary is a factual issue. To be deductible the expense must be both ordinary and necessary. They are necessary if they are appropriate and helpful, rather than absolutely essential. They are ordinary if “we know from experience” that these types of expenses are “common and accepted” in this type of business. Welch v. Helvering. Therefore what is ordinary and necessary varies by industry and changes over time. “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.” Welch 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). However, there have been recent news stories of businesses providing similar services to improve the work quality of its employees. Google workplace spirituality today and you get over 7 million hits and a very interesting discussion in Wikipedia detailing the development of the workplace spirituality movement since 1920. The answer to this question is uncertain. 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? This problem requires us to compare the court’s decision in Welch v. Helvering with that of Jenkins v. Commissioner. In both cases the taxpayer made payments he was not legally obligated to make because he thought it was necessary for his business. In Welch the payments were on behalf of a company with which he was previously employed. In Jenkins the payments
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were made to shareholders who invested in one of his business ventures which subsequently went bankrupt. Paying someone else’s debt is generally not deductible. While Welch was denied the deduction, Jenkins was allowed it. Why? A cost which would otherwise be deductible under § 162 cannot be deducted if it is a capital expenditure. Under § 263, an expense which will yield benefits in future years in the taxpayer’s business or income-producing activities, must be deducted, if at all, over it’s useful life.
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