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Text Notes Ch 7 - Overview of Deductions and Losses

Text Notes Ch 7 - Overview of Deductions and Losses - Text...

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Reasonable allowance for salaries or other compensation 1) Travel exp (including meals & lodging) while away from home in pursuit of trade or bus 2) Rental or other payments required to be made a as cond of cont use or possession 3) 162 - there shall be allowed as a deduction all ordinary & necessary expenses pd or incurred in carrying on trade/bus including i. For production or collection of income 1) Management, conservation or maint of prop held for production of income 2) 212 - in the case of an individual there shall be allowed as a deduction all the ordinary and necessary exp pd & incurred during taxable year ii. The activity - both 162 & 212 deny deduct for exp incurred in activity that is primarily personal in nature - to constitute trade or bus or income producing activity must be entered into for profit to be qualified as trade or bus not just income producing activity must have both motive and a sufficient degree of taxpayer involvement in the activity a) Distinguishing between 162 & 212 - production of income expenses are misc itemized and deduction that can be deducted only to the extent that they exceed 2% of adj gross income, bus exp are deduction for adjust gross income and deductible in full. b) The relationship - deduction must have relationship to trade or bus or income to be deductable- bus exp must be directly connected with or pertain to the trade or bus, income exp must bear a reasonable & proximate relationship to income producing activity c) Mist be related to carrying on a trade or bus or an income producing activity 1) Ordinary - if it is normally incurred in the type of bus in which the taxpayer is involved, not necessarily habitual and recurring a) Necessary - must not just be ordinary but also necessary, if it is appropriate , helpful, or capable of making a contributution to the taxpayers profit seeking activites. b) Must be ordinary and necessary 2) Duties performed i) Volume and complexity of bus handled ii) # available persons capable of performing the duties of position iii) Corporations dividend policy and history iv) mostly salary related - factors used by IRS to consider reasonableness of compensation: a)
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