Ch6 outline

Ch6 outline - CH 6 SELF-EMPLOYED BUSINESS INCOME The income...

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CH 6 – SELF-EMPLOYED BUSINESS INCOME The income from a sole proprietorship is netted with related ordinary and necessary business expenses to determine the increase (or decrease if a net loss results) in AGI A “trade or business” is an activity engaged in for profit ORDINARY AND NECESSARY TRADE OR BUSINESS EXPENSES o Ordinary - customary or usual in the taxpayer’s particular business o Necessary - appropriate or helpful rather than one that is essential to the business o Reasonableness - reasonable in amount and reasonable in relation to its purpose o Forbidden Expenses: Illegal bribes, etc Lobbying and political expenses Fines and penalties DEPRECIATION o Expense allowed for the wear or loss of usefulness of a business asset o Material noncash expense on the tax return that provides a large cash flow savings in terms of a tax reduction o Allowed for every tangible asset except land…used in a trade or bus for income o NOT including inventory or investment property o MACRS Basis (cost of the asset) Depreciation periods (asset class lives) Depreciation convention (half yr, mid qtr, mid mth) Deprecation method (200% or 150% declining balance or straight-line) o Depreciable Basis Purchase cost of asset Inherited FMV @ date of death Converted from pers. use to bus. use lower of the FMV or cost @ date of conversion Nontaxable exchange asset’s cost less deferred gain on old asset Adjusted basis = cost basis – accumulated depreciation
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Ch6 outline - CH 6 SELF-EMPLOYED BUSINESS INCOME The income...

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