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Unformatted text preview: ___________________________________________________________________ CHAPTER 5 INTRODUCTION TO BUSINESS EXPENSES ___________________________________________________________________ DISCUSSION QUESTIONS 1. All allowable deductions of individual taxpayers are classified as either for adjusted gross income or from adjusted gross income. Why are deductions for adjusted gross income usually more advantageous than deductions from adjusted gross income? Although both types of deductions reduce taxable income, deductions for adjusted gross income are always deductible. Taxpayers who incur allowable deductions from adjusted gross income may not receive the full advantage of the deduction. First, even though an allowable expense may be incurred, if the taxpayer's total itemized deductions do not exceed the standard deduction amount, then the taxpayer will deduct the standard deduction and receive no benefit from the allowable expenses. Second, many of the deductions are subject to limitations based on the taxpayer's adjusted gross income. For example, the deduction for medical expenses is reduced by 7 1/2% of the taxpayer's adjusted gross income. Thus, many of the allowable deductions from adjusted gross income are not deductible in full. In addition, total itemized deductions are subject to a reduction rule when the taxpayer's adjusted gross income exceeds a specified amount, further lowering the value of such deductions. Lastly, given the reductions based on adjusted gross income, any deductions for adjusted gross income have the effect of making the allowable deductions from adjusted gross income larger. 4. What are the two primary categories of business expense? Why is it necessary to classify business expenses in these two categories? The two categories of business expense are: Trade or business expenses, and Expenses for the production of income (investment expenses). All expenses must be classified into one of the categories to determine the proper reporting and limitations on the deduction of the expenses. A trade or business expense is fully deductible in calculating adjusted gross income of an individual. An expense for the production of income is usually subtracted from adjusted gross income as an itemized deduction. As an itemized deduction, the expense may be limited based on the taxpayer's adjusted gross income. Also, the taxpayer will only receive a benefit from a production of income expense if the taxpayer itemizes his/her deductions. 21. What is/are the criterion (criteria) for the deduction of an expense by a cash basis taxpayer? Cash basis taxpayers are allowed to take a deduction in the year in which the expense is paid. However, even cash basis taxpayers cannot take current deductions for the full amount of current period capital expenditures....
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