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Unformatted text preview: 69 Chapter 6 Deductions: General Concepts and Trade or Business Deductions SUMMARY OF CHAPTER Tax deductions are allowed to taxpayers only if specifically authorized by the Internal Revenue Code. Deductions allowable to individual taxpayers fall into four categories: trade or business expenses, expenses incurred for the production of income, losses, and personal expenses. In addition to discussing the general requirements for deductibility for each of the above types of expenses, this chapter also discusses the tax treatment of many commonly encountered expenses incurred by taxpayers, from trade or business expenses such as rent, insurance, interest, taxes, bad debts, etc. to employee business expenses (travel, transportation, etc.) to expenses that can best be categorized as adjustments to gross income (moving expenses, student loan interest, etc.). The chapter also discusses how capital expenditures are allocated across multiple taxable years in the form of depreciation, amortization, depletion, etc. Categories of Allowable Deductions ¶6001 Classification of Tax Deductions Four categories of tax deductions are allowable to individual taxpayers: (1) trade or business expenses (including the business-related expenses of employees); (2) expenses incurred for the production of income (including expenses incurred for the management, conservation or maintenance of income-producing property, and tax planning and compliance expenses); (3) losses incurred on the sale or disposition of business or investment property, or on the loss due to casualty or theft of any property (including personal use property); and (4) personal expenses, most of which are not deductible, but some of which are allowed under specific provisions of the Internal Revenue Code (alimony, health insurance for self-employed taxpayers, certain contributions to MSAs or HSAs, interest on education loans, qualified tuition and fees, miscellaneous itemized deductions, etc.). ¶6101 Deductions “For” vs. “From” AGI Business and investment expenses are deductible “forÄ adjusted gross income. That is, they are deducted in computing a taxpayer’s AGI. In contrast, most personal expenses and losses, if deductible at all, are deductible “fromÄ AGI as itemized deductions. This is an important distinction for several reasons. First, a taxpayer may claim either itemized deductions or the standard deduction, but not both; in contrast, deductions “forÄ AGI may be claimed in addition to the standard deduction. Moreover, because some itemized deductions are subject to a “floorÄ on deductibility computed as a percentage of AGI (e.g., medical expenses, miscellaneous itemized deductions), deductions “forÄ AGI often have the added advantage of increasing the amount of deductions allowed “fromÄ AGI....
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This note was uploaded on 11/17/2010 for the course FI 515 FI 515 taught by Professor Senn during the Spring '10 term at Keller Graduate School of Management.
- Spring '10