Held corporation since a portion of an unreasonable

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held corporation since a portion of an unreasonable salary payment may be treated as a disguised dividend. Hobby Activities The determination of whether an activity is a trade or business activity or personal (hobby) activity is 7. important in determining allowable deductions. Hobby expenditures are only deductible to the extent of gross income from the hobby. In addition, personal deductions that are available to all taxpayers (taxes, interest, casualty losses, etc.) fi rst have to be deducted from gross income related to the hobby activity before any other deductions are allowable. Business v. Personal Expenses Allocation A reasonable method of allocating an expenditure between business-related and personal portions must 8. be devised in order to determine the deductible portion. A reasonable allocation formula to determine deductible automobile expenses is to take total automobile expenses for the year times the ratio of total business miles for the year divided by total miles driven in the car during the year. Tax-Exempt Income Expenses The logic for this statutory provision is that since the tax-exempt income is not subject to taxation, any 9. deduction related to the tax-exempt income should also not be deductible. Independent Contractor v. Employee An independent contractor is an individual who sells services to the public and is, in effect, self-employed. 10. 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 while other employee expenses which are allowable are deductible from AGI as itemized deductions subject to a 2 percent of AGI limitation.
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91 Instructor’s Manual © 2009 CCH. All Rights Reserved. Chapter 6 Losses Deductions For individual taxpayers, losses are limited to the following three categories: (1) losses incurred in a trade 11. or business; (2) losses incurred in any transaction entered into for pro fi t, though not connected with a trade or business; and (3) losses of property not connected with a trade or business if such losses arise from fi re, storm, shipwreck, or other casualty, or from theft. Substantiation of Deductions Taxpayers can normally substantiate tax deductions by providing documentary evidence such as receipts, 12. invoices, and canceled checks. In some instances, oral testimony of the taxpayer or other persons in support of the taxpayer may be of some value. Business v. Nonbusiness Bad Debts Business bad debts are debts arising in connection with a trade or business while nonbusiness bad debts are 13. debts of a personal nature. Bad Debt Deduction Requirements To be deductible as a bad debt, the debt must be a valid and enforceable obligation arising in a proper debtor- 14.
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