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1、C6-1,Chapter 6,Deductions and Losses: In General,Copyright 2010 Cengage Learning,Comprehensive Volume,C6-2,Deductions,Exclusive definition of deductions Deductions are allowed based on legislative grace and defined narrowly Substantiation requirements Taxpayer has burden of proof for substantiating
2、all expenses deducted on return Thus, adequate records of expenses must be maintained,C6-3,Deductions for and from AGI (slide 1 of 3),Deductions for AGI Can be claimed even if taxpayer does not itemize Important in determining the amount of certain itemized deductions Certain itemized deductions are
3、 limited to amounts in excess of specified percentages of AGI e.g., Medial expenses (7.5% of AGI), misc. itemized deductions ( 2% of AGI),C6-4,Deductions for and from AGI (slide 2 of 3),Deductions from AGI: In total, must exceed the standard deduction to provide any tax benefit Called “below the lin
4、e” or itemized deductions,C6-5,Deductions for and from AGI (slide 3 of 3),Comparison of deductions for and from AGI (2009 tax year) Single taxpayer has gross income of $45,000 and a $6,000 deductionFor AGI From AGI Gross income $45,000 $45,000 Less: for AGI ded. 6,000 0 AGI $39,000 $45,000 Less: fro
5、m AGI ded. 5,700 6,000 Less: personal exempt. 3,650 3,650 Taxable income $29,650 $35,350,C6-6,Deductions for AGI (slide 1 of 3),Partial list includes: Trade or business expenses Reimbursed employee business expenses Deductions from losses on sale or exchange of property Deductions from rental and ro
6、yalty property Alimony One-half of self-employment tax paid,C6-7,Deductions for AGI (slide 2 of 3),Partial list includes: 100% of health insurance premiums paid by a self-employed individual Contributions to pension, profit sharing, annuity plans, IRAs, etc. Penalty on premature withdrawals from tim
7、e savings accounts or deposits Moving expenses,C6-8,Deductions for AGI (slide 3 of 3),Partial list includes: Interest on student loans Qualified tuition and related expenses under 222 Up to $250 for teacher supplies for elementary and secondary school teachers,C6-9,Deductions from AGI,Itemized deduc
8、tions include: Medical expenses (in excess of 7.5% of AGI) Certain state and local taxes Contributions to qualified charitable organizations Personal casualty losses (in excess of 10 % of AGI and a $100 floor per casualty) Certain personal interest expense (e.g., mortgage interest on a personal resi
9、dence) Miscellaneous itemized deductions (in excess of 2% of AGI),C6-10,Trade or Business Deductions (slide 1 of 2),Section 162(a) permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business including: Reasonable salaries paid for services Expenses
10、 for the use of business property One-half of self-employment taxes paid Such expenses are deducted for AGI,C6-11,Trade or Business Deductions (slide 2 of 2),In order for expenses to be deductible, they must be: Ordinary: normal, usual, or customary for others in similar business, and not capital in
11、 nature Necessary: prudent businessperson would incur same expense Reasonable: question of fact Incurred in conduct of business,C6-12,Section 212 Expenses (slide 1 of 2),Section 212 allows deductions for ordinary and necessary expenses paid or incurred for the following: The production or collection
12、 of income The management, conservation, or maintenance of property held for the production of income Expenses paid in connection with the determination, collection, or refund of any tax,C6-13,Section 212 Expenses (slide 2 of 2), 212 expenses that are deductions for AGI include: Expenses related to
13、rent and royalty income Expenses paid in connection with the determination, collection, or refund of taxes related to the income of sole proprietorships, rents and royalties, or farming operations All other 212 expenses are itemized deductions (deductions from AGI) For example, investment-related ex
14、penses (e.g., safe deposit box rentals) are deductible as itemized deductions attributable to the production of investment income,C6-14,Business And Nonbusiness Losses,Deductible losses of individual taxpayers are limited to those: Incurred in a trade or business, Incurred in a transaction entered i
15、nto for profit Individuals may also deduct casualty losses from fire, storm, shipwreck, and theft,C6-15,Methods of Accounting,The method of accounting affects when deductions are taken Cash: expenses are deductible only when paid Accrual: expenses are deductible when incurred Apply the all events te
16、st and the economic performance test Exception to the economic performance test for recurring items,C6-16,Disallowance Possibilities,The tax law disallows the deduction of certain types of expenses for a variety of reasons e.g., May restrict taxpayer attempts to deduct certain items that, in reality, are personal expenditures Certain disallowance provisions are a codification or extension of prior court decisions e.g., After courts denied deductions for payments in violation of public policy, tax law was changed to provide specific authority for the disallowance,
