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AC 750 Chapter 8

AC 750 Chapter 8 - Chapter 8 Business Deductions Business...

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Business Deductions Chapter 8
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AC 750 - Chapter 8 Business Deduction Requirements The deduction must be: 1. be related to a trade or business (business, not primarily personal) 2. ordinary and necessary 3. reasonable 4. paid or incurred during the taxable year *** Still may be limited by the IRC *** Deductible? When? 2
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AC 750 - Chapter 8 1.  Trade or Business Must be entered into for a profit (profit-motive), even if a profit is not made Trade or business requires a sufficient degree of taxpayer involvement hobby vs. business facts and circumstances Personal (hobby) or profit (business) motive? business manner, experts, time, history of income and losses, other sources of income 3
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AC 750 - Chapter 8 2. Ordinary and  Necessary, and   3. Reasonable Ordinary – normally incurred in the type of business ( industry ) the taxpayer is involved in Necessary – makes a contribution to the activity Reasonable – no excessive payments; usually involves salaries 4
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AC 750 - Chapter 8 4. Paid or Incurred Paid – cash basis taxpayers Incurred – accrual basis taxpayers 5
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AC 750 - Chapter 8 “Paid” - Cash Basis Taxpayers Generally, expenses are deductible when paid No deduction is allowed until debts are paid, unless cash is borrowed (ie. Bank loan) to pay the expense (credit card=cash) Prepaid expenses only deductible if the useful life does not extend substantially beyond the taxable year (1yr.) Prepaid rent and insurance deductible only if prepayment required . 6
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AC 750 - Chapter 8 “Incurred” - Accrual Basis Taxpayers Must meet all general requirements plus be “incurred”.
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