Substantiation requirements for taxpayer to get deductions - taxpayer has burden of
proof for proving all expenses
adequate records of expenses must be maintained
Can deductions FOR AGI be claimed if taxpayer does not itemize? - Yes - itemized
deductions are a type of deduction FROM AGI
AGI as a function - Income - Exclusions - Deductions for AGI
Deductions from AGI (specifically _________ deductions) must _________ the
Standard Deduction to provide any tax benefit - itemized
exceed
Deductions FOR AGI can include: (1st 5) - Business or Trade Expenses
When you reimburse your employees (i think?)
Deductions from Losses on Sale/exchange of Property
Deductions from Expenses paid for Rental and Royalty Property (Section 212)
Alimony
Deductions FOR AGI can include: (4) - 1/2 of Self-Employment Tax Paid
100% of Health Insurance Premiums paid by a Self-Employed Individual
Contributions to a Pension, Profit Sharing, Annuity Plan, IRA, etc.
Penalty on Premature Withdrawals from Time Savings Accounts or Deposits
Deductions for AGI can include: (5) - Moving Expenses
Interest on Student Loans
Qualified Tuition and Related Expenses under Tax Code 222
Up to $250 for Teacher Supplies for elementary and secondary school teachers
Employee contributions to Health Savings Accounts
Expenditures for deductions can be any of 3 mutually exclusive categories: -
Investment/Production of Income (Section 212)
Trade or Business (Section 162)
Personal Activity
Trade or Business Deductions (162)
(line item 1 under Deductions FOR AGI) - All ordinary and necessary expenditures paid
or incurred in carrying on a trade or business
Trade or Business Deductions include: - Reasonable Salaries Paid for Services
Expenses for the Use of Business Property
1/2 of Self-Employment Taxes Paid
,Trade or Business (162) Deductions are Deductible _______ AGI - FOR
A key distinction between trade/business expense and not a trade/business expense is
whether or not the activity is a: - Hobby
If the taxpayer's ventures are not extensive enough to indicate that a trade or business
exists, the activity is a _______, and expenses related to the activity are __________ -
Hobby
Limited to the activity's income (cannot report a loss from the activity on taxes)
For Business/Trade Expenses (162) and for Investment/Production of Income (212)
expenses to be deductible, they must be: - Ordinary: Normal, usual, or customary for
others in similar businesses, and NOT capital (big exp) in nature
Necessary: a Prudent Businessperson would incur the same Expense
Reasonable: salaries, compensation for services
Common Personal Expenses classified as ITEMIZED Deductions (FROM AGI) include:
- Medical Expenses in excess of 10% of AGI
Certain State and Local Taxes
Contributions to Qualified Charitable Organization
Personal Casualty Losses in Excess of 10% (AGI) + 100*(#casualties)
Certain Personal Interest Expense (Mortgage Expense on a PERSONAL Residence)
Miscellaneous Itemized Deductions in Excess of 2% of AGI
(hobby expenses)
Section 212 Expenses FOR AGI - Expenses related to Rent and Royalty Property
Income
Expenses related to the determination, collection, or REFUND of TAXES related to the
INCOME of Sole Proprietorships, Rents and Royalties, or Farming Operations
Section 212 Expenses FROM AGI: - All other Section 212 Expenses besides those that
are FOR AGI, such as Other
Investment-related expenses
Deductible losses of individual taxpayers are limited to Those:
(These include Business and Nonbusiness Losses) - Incurred in a Trade or Business
Incurred in a Transaction entered into for Profit
Casualty Losses from Fire, Storm, Shipwreck, and Theft
Paid vs Incurred (what accounting basis used) - Paid refers to Cash Basis - get
deduction only in year of Payment for Expense
Incurred refers to Accrual Basis - get deduction only in year the Liability for the Expense
is Certain
A cash basis taxpayer must have _____ or ______ paid the Expense - Actually
, Constructively
A Current Deduction is Not Allowed for Capital Expenditures except through -
Amortization, Depletion, or Depreciation
An Expenditure that creates an Asset having a Useful Life that Extends Substantially
beyond the End of the Current Tax Year must be - Capitalized (use Depreciation to
record its expenses for Tax Purposes)
The Cost of an Asset that will Expire or be Consumed by the End of the Tax Year
Following the Year of Payment - Must be Prorated across the years used
If inventories are an income-producing factor in a Business, the individual business
owner must - use accrual method for sales and cost of goods sold
To determine the period in which an Accrual Basis taxpayer can deduct an Expense,
use the - All Events Test
Economic Performance Test
All Events Test - All of the event have occurred to create taxpayer's liability
Amount of the liability can be determined with reasonable accuracy
Economic Performance Test - The service, property, or use of property giving rise to the
Liability is actually Performed, Provided for, or Used by the taxpayer
Exception to the Economic Performance Test:
so strict economic performance does not have to occur for an expense to be accrued if
the test is met - certain Recurring Items can be Deducted immediately if all of the
following:
Item is Recurring
Accrued Item is not Material or Accruing it in the Current Period results in Better
Matching of Income and Expenses
All Events have occurred that determine existence of liability, amount of liability can be
determined
Economic Performance Occurs No Later than 8 1/2 months after close of taxable year
Disallowance Possibilities: - Tax Law disallows the Deduction of Certain Items under
some circumstances, relating to:
Expenditures Contrary to Public Policy
Legal Expense Incurred in Defense of Civil or Criminal Penalties
Expenses Relating to an Illegal Business
Expenditures Contrary to Public Policy - Deductions are Disallowed for Penalties
incurred, Fines incurred, Illegal bribes or kickbacks paid
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