Chapter 6 _____Deductions: General Concepts and Trade or Business Deductions
SUMMARY OF CHAPTER
Tax deductions are allowed to taxpayers only if specifically authorized by the Internal Revenue Code. Deductions allowable to individual taxpayers fall into three categories: trade or business deductions, production of income deductions, and personal deductions. This chapter is also concerned with business deductions as they appear on a sole proprietor 's Schedule C, which is included as part of the taxpayer 's individual income tax return.
Categories of Allowable Deductions
¶6001 Classification of Tax Deductions
The three categories of tax deductions allowable to individual taxpayers are (1) trade or business expenses (including the
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¶6125 Substantiation of Tax Deductions
Taxpayers must be able to substantiate the deductions claimed on their tax returns if required by the IRS through the audit process. Taxpayers can normally substantiate tax deductions by providing documentary evidence such as receipts, invoices, and canceled checks. In some instances, oral testimony in support of the taxpayer may be of some value.
¶6145 Debts of Another Taxpayer
In general, if a taxpayer pays a tax deductible expense which is the obligation of another taxpayer, neither taxpayer is entitled to a tax deduction. The payer-taxpayer is not entitled to a deduction since the payer had no obligation to make the payment. The payee-taxpayer is not entitled to the deduction since the payee did not actually pay the obligation.
Common Business Deductions
¶6201 Advertising
Advertising expenditures are deductible for tax purposes if they are reasonably related to a taxpayer 's trade or business activities or if they are related to an income producing activity such as renting rental property. Goodwill advertising generally qualifies as a deduction.
¶6215 Bad Debts
Business or nonbusiness debts becoming worthless during the year are deductible. Business bad debts are debts arising in connection with a trade or business, while nonbusiness debts are debts of a personal nature. The amount of a bad debt deduction always is limited to the adjusted basis of the debt in the hands of the taxpayer. To be deductible,
Section 61 of the Internal Revenue Code defines income as “income from whatever source derived unless otherwise excluded” (2014, IRC Code). In determining income, several key concepts have evolved from this definition. Explain the following concepts, and provide at least one example of each. Explain which concept you think is most beneficial from a taxpayer’s point of view and which concept is most beneficial from IRS’s point of view.
Only those personal expenditures that are allowed by the tax law are deductible as itemized deductions.
Answer each of these questions, explaining the applicable rules and possibilities of each. (Points : 50)
$0 deduction because unless there is a significant discussion of business of that particular day then the payment can’t be deductible!
There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152 , determined without regard to subsections (b)(1) , (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.
Which of the following is not a required test for the deduction of a business expense?
INCOME TAXES – As a sole proprietor all business income or losses must be reported as personal income tax. The business itself is not taxed separately.
John has income derived from a business and as such the gross income will be taxable. (Code §1.61-3(a)) This total amount of taxable income will pass through to his personal taxes since he has an LLC, meaning he will be subject to self
John has income derived from a business and as such the gross income will be taxable (Code §1.61-3(a)) (Tax Almanac, 2005). This $300,000 taxable income will pass through to his personal taxes and is subject to self employment tax since he has an LLC. He
Business taxes can have a huge impact on the profitability of businesses and the amount of business investment. Taxation is a very important factor in the financial investment decision-making process because a lower tax burden allows the company to lower prices or generate higher revenue, which can then be paid out in wages, salaries and/or dividends. Business taxes include, Federal Income Tax; a tax levied by a national government on annual income, Payroll Tax; a tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee, Unemployment Tax; a federal tax that is allocated to unemployment agencies to fund unemployment assistance for laid-off workers, and Sales Tax; a tax imposed by the government at the point of sale on retail goods and services. Sales tax is based on a percentage of the selling prices of the goods and services. Consumers pay sales taxes, but effectively, business pay them since the tax increases consumer’s costs and causes them to buy less.
There are two requirements for taxpayers to qualifies their expense as travel expenses deduction: First, the purpose of the trip must be connected with a trade or be employment related; Second, the taxpayer must be away from his tax home overnight or for a sufficient duration to require sleep or rest before returning home.
You can qualify for substantial tax deductions if you establish this kind of plan for your business, which include a 50% tax credit on startup costs.
Which of the following business expense deductions is most likely to be unreasonable in amount?
IRC Sec. 213(a) states that “there shall be allowed as a deduction the expenses paid
When I went back to my notes that I took during the Taxation class and think about filing a tax return with IRS I see that there are a lot of similarities between individual tax and business tax. However, weighing individual and business tax on the same gauge will evince how much they are different from each other (Pack, n.d.). Individual taxation is a type of tax return filed by an individual for both single and married taxpayers whether they have dependents or not, they will file the tax returns on Form 1040. The Form 1040 indoctrinate tax filers for information on their filing status and number of dependents, the income section includes wages, salary, taxable interest, capital gains and other types of income. filers can claim deductions for expenses, education, moving expenses and many other categories.