chapter 6 handout

chapter 6 handout - Individual Tax Accounting & Planning...

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Chapter 6 Deductions in general A taxpayer may deduct an expenditure or loss if: 1. There is specific provision in the tax code permitting it; 2. The taxpayer is obligated to pay it; 3. The taxpayer himself/herself did pay it; and 4. The amount paid is not against the law Exception to the “obligated to pay and did pay himself/herself” related to medical expenses incurred on behalf of a dependent or someone who would be the taxpayer’s dependent were it not for the gross income and joint return tests. e.g. Let’s suppose Taxpayer paid the property taxes ($10,000) and medical insurance premiums ($8,000) for his daughter, who is not his dependent only because of the gross income test. Who can take the deductions? Property taxes – no one Medical insurance premiums – father, but not daughter Four questions need to be answered with regard to deductions: 1. How much is the deduction? 2. When can it be deducted (in what tax year)? 3. What is the character of the deduction (capital v. ordinary)? 4. Where is the deduction reflected on the tax return (either “for AGI” or “from AGI”)? How much is the deduction? Generally, the amount of the deduction is the amount paid by the taxpayer in the applicable tax year. Deductions for losses, generally, represent the unrecovered basis. That is, if the adjusted basis of property is $10,000 and proceeds from its sale are only $8,000, the loss is $2,000. The amount of a loss cannot be estimated; it must reflect the actual loss. (e.g. Bad Debt Expense as it relates to Accounts and Notes Receivable) Let’s suppose that a business reflects the following transactions in its Accounts Receivable and Allowance for Bad Debt accounts for 2010: Accounts Receivable Allowance for Bad Debts Beg 100 10 Beg Sales 240 203 collected 22 Bad debt expense 17 written-off Written-off 17 1
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Chapter 6 End 120 15 End How much is deductible for tax purposes? The amounts actually identified and written-off as uncollectible are deductible in 2010 (specific charge off method), in this case $17. The estimate for Bad Debt Expense is not the deductible amount. When can the deduction be recognized on the tax return?
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This note was uploaded on 12/22/2010 for the course BUSACC 1242 taught by Professor Staff during the Spring '10 term at Pittsburgh.

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chapter 6 handout - Individual Tax Accounting & Planning...

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