Chapter 6 NoteSheet

Chapter 6 NoteSheet - CHAPTER 6 Individual Deductions 3...

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CHAPTER 6- Individual Deductions 3 categories of deductions for AGI: directly related to business activities, indirectly related to business activities, and deductions subsidizing specific activities. Deductions Directly Related to Business Activities: Taxpayers are allowed to deduct expenses incurred to generate business income. For tax purposes activities are either profit-motivated or motivated by personal objectives. Profit-motivated activities are classified as business activities or investment activities. Business activities require a high involvement or effort from taxpayer while investment activities don’t. Trade or Business Expenses must be: directly connected to the business activity, ordinary and necessary for the activity, reasonable in amount. Expenses are claimed on Schedule C and revenues from the same activity are also reported on the same Sched. C. The net income or loss from Schedule C is transferred to Form 1040 Rental and Royalty Expenses: could either be an investment activity or a trade activity depending on facts. Flow through Entities: expenses and losses incurred by a flow- through entity pass through to the entity owners Losses: Taxpayers disposing of trade or business assets at a loss are allowed to deduct the loss for AGI, losses from investment assets (capital assets) are offset against capital gains. If capital losses exceed capital gains, this is called a net capital loss. A net capital loss is deducted fro AGI but limited to 3000. Any excess of this are carried forward to subsequent years Deductions indirectly related to business activities includes moving expenses, health insurance deduction by self-employed taxpayers, self-employment tax deduction, and penalty for early withdrawal of savings Moving expenses: deductible for AGI is the move meets two tests. (1) Distance test:
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This note was uploaded on 02/22/2011 for the course BMGT 323 taught by Professor Pfeiffer during the Spring '08 term at Maryland.

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Chapter 6 NoteSheet - CHAPTER 6 Individual Deductions 3...

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