Chapter5_Lecture - Chapter 5 Business Deductions Trade or...

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Chapter 5 Business Deductions Trade or Business Deductions In order for expenses to be deductible, they must be: o Ordinary : normal, usual, or customary for others in similar business, and not capital in nature o Necessary : prudent businessperson would incur same expense o Reasonable : question of fact o Incurred in conduct of business Methods of Accounting The method of accounting affects when deductions are taken o Cash: expenses are deductible only when paid o Accrual: expenses are deductible when incurred Apply the all events test and the economic performance test Exception to the economic performance test for recurring items Disallowance Possibilities The tax law disallows the deduction of certain types of expenses for a variety of reasons o e.g., May restrict taxpayer attempts to deduct certain items that, in reality, are personal expenditures Certain disallowance provisions are a codification or extension of prior court decisions o e.g., After courts denied deductions for payments in violation of public policy, tax law was changed to provide specific authority for the disallowance Expenditures Contrary To Public Policy Deductions are disallowed for certain specific types of expenditures that are considered contrary to public policy o Examples: penalties, fines, illegal bribes or kickbacks, two-thirds of treble damage payments for violation of anti-trust law Legal Expenses Incurred In Defense Of Civil Or Criminal Penalties To deduct legal expenses o Must be directly related to a trade or business, an income producing activity, or the determination, collection, or refund of a tax e.g., Corporate officer’s legal fees in defending against price-fixing charges e.g., Landlord’s legal fees associated with eviction of tenant Expenses Relating To An Illegal Business Usual expenses of operating an illegal business are deductible o However, deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments are disallowed Trafficking in controlled substances: only cost of goods sold can reduce gross income
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Political Contributions And Lobbying Activities Generally, no business deduction is allowed for payments made for political purposes or for lobbying o Exceptions are allowed for lobbying: To influence local legislation, To monitor legislation, and De minimis in-house expenses (limited to $2,000) If greater than $2,000, none can be deducted Excessive Executive Compensation For publicly held corporations: o Deduction for compensation of CEO and four other highest compensated executives is limited to $1 million each o Does not include: Performance-based compensation and commissions Payments to qualified retirement plans Payments excludible from gross income Capital Expenditures Amounts are capitalized Asset may be subject to depreciation (or cost recovery), amortization, or depletion Investigation Of A Business Investigation expenses -
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This note was uploaded on 03/23/2010 for the course ACC 410 taught by Professor Su during the Spring '10 term at University of Nevada, Las Vegas.

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Chapter5_Lecture - Chapter 5 Business Deductions Trade or...

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