May 05 mgmt127a

May 05 mgmt127a - May 5, 2008 MGMT 127A SHIFT FROM INCOME...

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May 5, 2008 MGMT 127A SHIFT FROM INCOME TO DEDUCTIONS Four types of deductions -Business -Investment -Employee -Personal We have already covered personal and employee deductions and will now cover business and investment deductions excluding depreciation, which we will come back to later. BUSINESS DEDUCTIONS- “A taxpayer may claim as a deduction, all ordinary and necessary expenses incurred while carrying on a trade or business.” Example: You own grocery chain and you have huge delivery trucks that occasionally run some people over. Your driver hits two girls, and they sue for damages. Either you go to court, or you settle the claim. Is there any reason why you wouldn’t be able to write off this expense? The question can be asked, “Is this ordinary and necessary?” Is running people over while delivering produce a part of business? It’s not ordinary to run people over. Is it an ordinary event to have a car accident? Yes. The second question is whether it is necessary to run people over when delivering produce? No.
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Is the law asking whether it is an ordinary and necessary event or an ordinary and necessary expense? It is asking whether or not the expense is ordinary and necessary. Is it necessary once you hit people, to satisfy court judgments or to reach a settlement outside of court? That might be a necessary cost of business. Supreme Court said that you could deduct all costs that are a reasonable cost of business. Is it a reasonable cost of business to write off the expense of an accident in this case? Yes, with any delivery business, there is always a chance that you might hit someone or something. When are things not considered reasonable? When you are violating the law, expenses are not considered reasonable. Example If you were a pimp, wouldn’t you want to have certain street corners for yourself? You could bribe the police to have control of certain corners. It could be a very good expenditure, because bribing the police is the ultimate monopoly. Is this a reasonable business expense as a justified cost to produce revenue? It is from this sense. However, any violation of the law prevents you from writing off your expense. Bribes and kickbacks cannot be written off. Example You are a UPS delivery driver who works in Manhattan, where it is impossible to find parking. Parking in a lot is very expensive, and inconvenient. You could make the decision to double park in front of the place you need to deliver and quickly get in and out. You can take the chance to get a parking ticket, and occasionally, you will get a parking ticket. Cost-benefit might well be there, but can you deduct the cost of that
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ticket? No, it is a violation of the law. However, had you put money in a meter, or paid to park in a structure, that cost would have been deductible. They are in a sense, substitutes, but one is tax deductible while the other is not. VIOLATION OF LAW IS NEVER TAX DEDUCTIBLE
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This note was uploaded on 10/27/2009 for the course ECON 183 taught by Professor Boustan during the Summer '09 term at UCLA.

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May 05 mgmt127a - May 5, 2008 MGMT 127A SHIFT FROM INCOME...

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