Substantially beyond the close of the taxable year

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substantially beyond the close of the taxable year may not be deductible when made, or may be deductible only in part.” In this regard, the courts agree that “substantially beyond” means a useful life of more than one year. M.J. Zaninovich , 69 TC 605, Dec. 34,935 (1978), rev’d, CA-9, 80-1 USTC ¶ 9342, 616 F2d 429. Prepaid Rent A cash method taxpayer’s prepayments for rents or services may be deducted in the year paid when two conditions are present: (1) the period for which the payment is made does not exceed one year following the end of the current tax year, and (2) the taxpayer is contractually obligated to prepay an amount for a period extending beyond the close of the year. M.J. Zaninovich , supra . Prepaid Insurance Prepayments of insurance premiums must be capitalized and prorated over the period actually covered by the insurance policy. Prepaid Interest Prepaid interest and other costs or fees incurred in obtaining a loan must be capitalized and deducted ratably over the period of the loan. The sole exception is for “points” paid for a debt incurred by the taxpayer to purchase his or her principal residence. Points paid on borrowing money to re fi nance an existing mortgage must be capitalized and amortized over the life of the new debt. Other Prepayments Prepayments of other expenses normally should be deductible if the asset will be consumed by the close of the following year, there is a business purpose for prepaying the expenditure, and there is no material distortion of income. Taxes Federal income taxes are not deductible on the federal income tax return since the return is being prepared to compute the amount of federal income taxes due. Payroll taxes paid by an employer are fully deductible, but taxes withheld from employee wages such as federal, state, and local income taxes payable and F.I.C.A. taxes are not. The latter type of tax expense (withholdings from employees’ wages) is not incurred by the employer, but by the employee. Accordingly, the employer is not allowed a deduction for these expenditures. Similarly, while property taxes are generally deductible by the taxpayer who pays them, if business property is sold during the year,
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80 CCH Federal Taxation—Comprehensive Topics Chapter 6 © 2009 CCH. All Rights Reserved. the property taxes related to the property must be allocated between the buyer and the seller based on the number of days during the tax year that each party held the property. Code Sec. 164(d). This allocation is required regardless of which party actually pays the property tax and regardless of the method of accounting used by the two parties. Bad Debts Where a taxpayer can establish that an actual debt existed, and the debtor refuses to repay the debt, a deduction may be claimed for bad debt expense. The amount of the deduction is limited to the adjusted basis of the debt in the hands of the taxpayer. The taxpayer must be able to establish that the debt is not collectible. A business
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