Ch5tax1 - Taxation of Business Entities Business Deductions Text Chapter 5 C5 1 Learning Objectives Understand the meaning and application of the

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C5 - 1 Taxation of Business Entities Business Deductions Text: Chapter 5
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C5 - 2 Learning Objectives Understand the meaning and application of the ordinary, necessary, and reasonableness requirements for the deduction of business expenses. Describe the cash and accrual methods of accounting for business deductions. Apply a variety of Internal Revenue Code deduction disallowance provisions. Identify contributions that qualify for a charitable contribution deduction, and determine the limitations applicable to corporations. Determine the rules for cost recovery using MACRS, including Section 179 expensing and limitations on listed property and automobiles. Identify intangible assets that are eligible for amortization and calculate the amount of the deduction.
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C5 - 3 Ordinary and Necessary Expenses There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred … in carrying on any trade or business What is an ordinary expense? What is a necessary expense? What is a trade or business ?
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C5 - 4 Reasonable Expenses The Code mentions reasonableness only when referring to salaries and other compensation. However, the courts have applied the reasonableness requirement to all ordinary and necessary business expenses. Expenses in excess of reasonable amounts are not deductible. The taxpayer has the burden of proof for substantiating expenses and must retain adequate records; otherwise, the IRS can disallow any deduction.
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C5 - 5 Cash Method Requirements Cash basis taxpayers can deduct expenses only when they are actually paid with cash or property Payments made with borrowed funds can be deducted, but issuing a note does not meet the “actually paid” requirement For cash and accrual basis taxpayers, capital expenditures can be deducted only through amortization, depletion, or depreciation
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C5 - 6 Accrual Method Requirements Deductions are allowed when the all events test and the economic performance test are met. All events test is met when: All the events have occurred to create the taxpayer’s liability, and The amount of the liability can be determined with reasonable accuracy Economic performance test Met when service, property, or use of property giving rise to the liability is actually performed for, provided to, or used by the taxpayer
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C5 - 7 Accrual Method Requirements Certain recurring, immaterial items can be deducted in year incurred if economic performance occurs within 8 1/2 months after close of year. Reserves for estimated expenses (e.g. warranty expense, bad debt expense) common in financial accounting, are not allowed for tax purposes because the economic performance test is not satisfied.
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C5 - 8 Disallowance Possibilities Deductions are disallowed for specified expenses that are considered contrary to public policy, including: Bribes and illegal kickbacks Fines and penalties paid to a government for violation of law
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This note was uploaded on 08/25/2010 for the course TAX 4001 taught by Professor Hampton,m during the Fall '08 term at University of Central Florida.

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Ch5tax1 - Taxation of Business Entities Business Deductions Text Chapter 5 C5 1 Learning Objectives Understand the meaning and application of the

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