Federal Income Tax
(Business) Deductions
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2
Perspective
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3
Gross Income- FOR= AGI- FROM= Taxable Income
Business
Personal
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4
General Requirements• Problem 6 – 9
– Ordinary
– Necessary
– Reasonable
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5
General Requirements• Problem 6 – 9
– Ordinary
– Necessary
– Reasonable
• Related to income production• Customary; usual; regular; common; typical
• Appropriate; helpful• “Prudent person”• Would others have incurred it?
• In amount• Not excessive when compared to industry
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7
The Four “Nots”
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8
The Four “Nots”
• Contrary to public policy
• Capital
• Personal
• Related to tax-exempt income
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9
The Four “Nots”• Problem 6 – 11
Why are expenses related to tax-exempt income disallowed?
• Income not included; expenses not deducted
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10
Which is better?
For From
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11
Why is For better?• Reduces TI for full amount even if standard
deduction is used• From not beneficial unless > standard
deduction• Many items from are limited by AGI
percentage reducing the benefit• Taxability of SS benefits based on AGI• Lower AGI increases possibilities for financial
aid for education
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12
Business Expenses
• Generally…
–Self-employed = “for”
–Employee = “from”
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13S
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GI- FOR= AGI- FROM= TI
“Tier 1”
“Tier 2”
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15
For vs. From• Problem 6 – 13
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Problem 6 - 13
a. Deductible? Yes For or from?
FROM – employEE
b. Two sources of income? Split:
Self-employed = FOR Employed = FROM
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GI- FOR= AGI- FROM= TI
“Tier 1”
“Tier 2”
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Tier 2 ExpensesReduced by2% of AGI
to determine deductible amount
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Most itemized deductionsare “Tier 1”
Refer to text page 7-35
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20
Refer to text page 7-35
Less 2%
“Tier 2”Expenses
Sub-total
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21
For vs. From• Problem 6 – 13
• Problem 6 – 33
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22
For or Tier 1Ded? From? or Tier 2?
Travel to clients $750Subs to prof journals 215Lunches w/ clients 400Photocopying 60
Problem 6 - 33
Yes FromYes FromYes FromYes From
a. Deductible?
2222
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23
GI- FOR= AGI- FROM= TI
“Tier 1”
“Tier 2”
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24
For orDed? From?
Travel to clients $750Subs to prof journals 215Lunches w/clients 400Photocopying 60
Problem 6 - 33
YesYesYesYes
ForForForFor
b. If reimbursed…
No "Tiers" with FOR
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25
Business Expenses
• Self-employed–“for”
• Employee–Reimbursed?
•Yes = “for”•No = “from”
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26
Problem 6 - 33For or
Ded? From?
Travel to clients $750Subs to prof journals 215Lunches w/clients 400Photocopying 60
YesYesYesYes
ForForForFor
c. If self-employed…
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27
For vs. From• Problem 6 – 13
• Problem 6 – 33
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Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
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Travel and Transportation
• Define travel
–“away from home overnight”
–Name some
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Travel and Transportation
• Define travel
–“away from home overnight”
–Name some
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Travel and Transportation
• Define travel
–“away from home overnight”
–Name some
• Define transportation
• Problem 9 -53
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Problem 9 - 53
Airfare $ 450
Meals ($50 per day) 250
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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34
Airfare Deductible?
A B
C
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35
Airfare Deductible?
A B
C
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36
Airfare Deductible?
A B
C
1/32/3
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37
Exemption
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Prorate Exemption?
1/3? 2/3?
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Airfare Deductible?
A B
CNever prorate airfare.
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40
Airfare Deductible?
A B
CPrimary reason?
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41
Airfare Deductible?
A B
C
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42
•Purely business expenses on a personal trip ARE deductible
•Purely personal expenses on a business trip are NOT deductible
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43
Problem 9 - 53
Airfare $ 450
Meals ($50 per day) 250
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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44
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) 250
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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45
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $150
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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46
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $150
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
50% limit
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47
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $ 75
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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48
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $ 75
Hotel ($100 per day) x 3 500 $300
Entertainment 500
Total $1,700
assume he was NOT reimbursed
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49
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $ 75
Hotel ($100 per day) x 3 500 $300
Entertainment 500 $250
Total $1,700
assume he was NOT reimbursed
50% limit
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50
Problem 9 - 53
Airfare $ 450 $450
Meals ($50 per day) x 3 250 $150
Hotel ($100 per day) x 3 500 $300
Entertainment 500 $250
Total $1,700
assume he was NOT reimbursed
Deductible FROM – Tier 2
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51
Problem 9 - 53
Airfare $ 450
Meals ($50 per day) 250
Hotel ($100 per day) 500
Entertainment 500
Total $1,700
assume he WAS reimbursed
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52
Problem 9 - 53
Airfare $ 450 0
Meals ($50 per day) 250 0
Hotel ($100 per day) 500 0
Entertainment 500 0
Total $1,700
assume he WAS reimbursed
a. none deductible by Mike
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53
Problem 9 - 53
Airfare $ 450 0
Meals ($50 per day) 250 0
Hotel ($100 per day) 500 0
Entertainment 500 0
Total $1,700
assume he WAS reimbursed
b. reimb not reported by Mike
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54
Problem 9 - 53
Airfare $ 450 450
Meals ($50 per day) 250 75
Hotel ($100 per day) 500 300
Entertainment 500 250
Total $1,700
assume he WAS reimbursed
c. all deductible by employer
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55
Problem 9 - 49Automobile $2,500Moving Expenses 4,000Entertainment 1,500Travel 2,000Meals 500Prof Dues and Subs 500
Have “issues” with any of these?Same facts as textbook?
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56
Problem 9 - 49Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 500Prof Dues and Subs 500
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57
Problem 9 - 49Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500
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58
Problem 9 - 49Automobile $2,500Moving Expenses FOR 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $10,750
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Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000
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Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $120,000 2,400
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61
Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $116,000 2,320
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62
Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $116,000 2,320Deduction $ 3,680
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63
Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $116,000 2,320Deduction $ 3,680
b. from; tier 2
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