Chapter 6 - Business Expense

Chapter 6 - Business Expense - Chapter 6 Business Expense...

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Chapter 6 – Business Expense I. Business Expense a. Entertainment, Auto, Travel, Gift, and Education Expenses: i. Meals and Entertainment: 1. Taxpayer may deduct 50% of the costs of meals and entertainment incurred for a business purpose a. Must be an ordinary and necessary expense and not be lavish or extravagant 2. Must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose a. Directly Related To: i. There is more than a general expectation of deriving income or a business benefit from the meal or entertainment ii. A bona fide business activity takes place during the meal or entertainment iii. The principal reason for providing the meal or entertainment is to conduct business iv. The expenses are related to the taxpayer and people involved in the business activity b. Associated With: i. There is a clear business purpose for the meal or entertainment ii. The meal or entertainment directly precedes or follows a substantial and bona fide business discussion 3. Cost of a meal includes the amount spent for food, beverage, tax, and tips 4. Entertainment expenses include amounts spent at nightclubs, theater, and sporting events a. Deduction for tickets is limited to the face value of the ticket
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5. Common situations in which a business expense for meals and entertainment is fully deductible: a. Expenses treated as compensation to an employee and subject to income tax withholding i. Arises when the employer has a nonaccountable plan for reimburising employee’s expenses b. Expenses incurred while performing service for another person who reimburses the expenses when the taxpayer specifically accounts for them i. Person who reimburses is subject to 50% limitation c. Recreational, social, or similar expenses primarily for the benefit of the employees d. Expenses for goods, services, and facilities that are taxable income to a recipient who is not an employee because the meal or entertainment expense represents a payment of compensation for services or a prize or an award e. Expenses for goods, services, and facilities made available to the general public f. Meals that are received tax-free by employees because they are for the convenience of the employer ii. Auto Expenses: 1. Considered business related if the travel is: a. Out of town b. From the taxpayer’s home to his or her temporary workplace c. From the taxpayer’s regular workplace to a temporary workplace d. From the taxpayer’s regular workplace (or temporary) to a second job i. Mileage between the taxpayer’s second job an home is considered personal 2. Standard Mileage Rate Method:
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a. Taxpayer deducts 50 cents for each business mile the car was driven b. In addition to this rate, the taxpayer can deduct direct out-of-pocket expenses that are unrelated to the operating costs of the car i. Business portion of parking, tolls, interest, and property taxes 1. Property taxes must be based on the cars value 2. Interest is deductible only if the taxpayer is self-employed
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Chapter 6 - Business Expense - Chapter 6 Business Expense...

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