Lecture - 1. In the previous lesson we discussed the...

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1. In the previous lesson we discussed the exclusions for gross income. In this lesson, we will discuss deductions and losses, differentiate between deductions for and from adjusted gross income and understand why items are deductible and how they impact your taxable income. Next Slide: 2. This lesson deals with the classification of deductible expenses whether they are personal or business related and how they impact AGI or Adjusted Gross Income. It is important to classify deductible expenses as deductions for AGI or deductions from AGI. Business and certain non- business losses are also deductible, but with some limitations. Moreover, a number of disallowance possibilities exist where otherwise deductible items are not deductible in part or in full. There are a number of deductions where items are not deductible in full but only partially deductible depending on certain dollar limitations, the time frame which the expense occurred, and several other factors that can play into the amount that can be taxable. Next Slide: 3. After completing this lesson, you should be able to: Differentiate between deductions for and from adjusted gross income and understand the relevance of the differentiation. Describe the cash and accrual methods of accounting Apply the Internal Revenue Code deduction disallowance provisions. And Identify tax planning opportunities for maximizing deductions and minimizing the disallowance of deductions. Next Slide: 4. There are three categories of tax deductions that are allowable to individual taxpayers. Trade or business deductions Production of income deductions, and Personal deductions To understand and find out what deductions are available to an individual taxpayer, it is necessary to examine the role of section sixty-two. This will classify various deductions for AGI. If the deduction is not found within this section it is an itemized deduction, not a deduction for AGI. Itemized deductions are deducted on Schedule A in the individual’s tax return. Section one-sixty-two a permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. These include reasonable salaries paid for services, expenses for use of business property, and one-half of self-employment taxes paid. Such expenses are deducted for AGI. Next Slide: 5. Section one-sixty-five of the Internal Revenue Code in general lists the deductions that are allowed for losses sustained during the taxable year and not compensated for by insurance or any other means. For individual tax payers losses are limited to 3 categories: Losses incurred in transactions entered into for profit, though not connected with a trade or business Losses incurred in a trade or business, and Losses of property not connected with a trade or business as such losses arise from fire, storm, shipwreck, or other casualty, or from theft. To be deductible, a loss must be sustained or realized by the taxpayer during the taxable year. Unrealized losses
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This note was uploaded on 02/08/2010 for the course ACC317 adv. feder taught by Professor Man during the Spring '10 term at Strayer.

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Lecture - 1. In the previous lesson we discussed the...

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