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Chapter 7 v2 - Income Taxation Chapter 7 Deductions...

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Income Taxation: Chapter 7
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Deductions Authorized by General Sections of the IRC Positive Criteria (allows deduction): Sec. 162: Expenses of carrying on a T/B, Sec. 212: Expenses for production of income, Sec. 165: Losses, and Sec. 172: NOL. Negative Criteria (disallows deduction): Sec. 262: Personal, living and family expenses, Sec. 263: Capital expenditures, and Sec. 265: Expenses & interest relating to tax exempt income.
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Trade or Business Expenses vs. Expenses for the Production of Income Sec. 162 Requirements: T/B Related: Intention to make a profit Entrepreneurial/personal effort required No hobbies Ordinary and Necessary ( Are the expenses “Customary & Appropriate” for the business ?) Reasonable in amount Paid/incurred during the year
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Reasonable Compensation Shareholder/Employees of C-Corporations prefer salary rather than dividends (pre-Tax Act of 2003) Payments of salary are not double taxed Salary payments are only for services rendered If salary is deemed in excess of services the excess is disallowed as deduction to corporation Deemed “Dividend” to S/H (JGTRRA currently taxes Dividends at 15%)
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Limitation on Deduction for Executive Compensation “Publicly Held Corporations” Maximum Deduction of $1,000,000 of “Compensation” to certain employees Covered Employees CEO plus Any of four most highly paid officers “Applicable Employee Remuneration” Includes: Cash and benefits / Excludes: Commissions; performance related pay if approved by shareholders; payment to a qualified retirement plan
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Current Requirements for Educational Deductions Educational expenses are deductible if undertaken to: maintain or improve skills Note: no deduction for meeting minimum job requirements general education (nonspecific to job) education that qualifies TP for new job or meet express requirement of employer or law in order to keep job or rate of pay
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Current Requirements for Educational Deductions Travel denied as a form of education Travel Deductible to educational event Qualified Higher Education Deduction for AGI ($3,000: 2002/03; $4,000: 2004- 09) From AGI if Employee--tuition, fees, typing, books, supplies, and qualifying
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Qualified Higher Education Expense -As of 2002, individuals are able to deduct certain expenses for qualified educational expenses for AGI: tuition and fees for postsecondary education (Room & Board does not qualify) Tuition & Fees for taxpayer, spouse, and dependents qualify Year Maximum Deduction 2002/03 $3,000 2004-09 $4,000* Deduction is FOR AGI (phased-out @ $130,000 for MFJ and $65,000 for others in 2002/03) Deduction is FOR AGI (phased-out @ $160,000 for MFJ and $80,000 for others in 2004-09) *Reduced Deduction of $2,000 for AGI levels between $130,000 and $160,000 (MFJ) and $65,000 to $80,000 (others) NOT APPLICABLE to MFS
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Tax Accounting Methods for Expenditures Cash Basis: Generally, recognize income when payments are received, recognize expenses when paid.
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