Acct411s08ch6hw - Intro Taxation Spring 2008 Chapter 6...

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Intro Taxation, Spring 2008, Chapter 6 homework solutions 1. Three basic categories of deductions: a) trade/business b) production of income c) personal 3. Deductions for AGI reduce adjusted gross income. Deductions from AGI (a/k/a itemized deductions) are used only if they exceed the standard deduction. Furthermore, many deductions from AGI are limited. Typical deductions for AGI are business, rental, farming expenses and certain personal expenses like alimony paid, student loan interest, and moving expenses that Congress has decided to increase the availability of the deduction by not requiring the deduction to be itemized. 6. The IRS would be interested in the reasonableness of a salary payment to an employee/owner of a closely held corporation since a portion of the salary payment may include a disguised dividend. The IRS is interested in the answer to the question of whether the payment is for services (deductible) or a return on capital (non-deductible). 9. Some reasonable allocation based on use. Business vs. personal miles driven might be a reasonable allocation for a vehicle. Hours used for business vs. personal use might be reasonable for something like technology. 10. The logic for this statutory provision is that since the tax-exempt income is not subject to taxation, any deduction related to the tax-exempt income should also not be deductible. The tax law allows reasonable expenses necessary to produce income to reduce the amount subject to taxation. Since there is no income to recognize, there is no necessity to allow expenditures to reduce the income. 11. An independent contractor is an individual who sells services to the public and is, in effect, self-employed. An employee is an individual who works for a company or organization in an employment capacity. If an individual is self-employed, all trade or business expenses are deductible for AGI, whereas, if the individual is an employee, only reimbursed employee expenses are deductible for AGI (actually, the employer takes the deduction and the employee reports neither the expense nor the reimbursement) while unreimbursed employee expenses are deductible as itemized deductions in the miscellaneous itemized deduction category. The total of deductions in this category must exceed 2% of AGI in order to provide any tax benefit.
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