Federal Income Tax (Business) Deductions. © Copyright 2001-2011 by M. Ray Gregg. All rights reserved. 2 Perspective.

Federal Income Tax

(Business) Deductions

© Copyright 2001-2011 by M. Ray Gregg. All rights reserved.

2

Perspective

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Gross Income- FOR= AGI- FROM= Taxable Income

Business

Personal

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General Requirements• Problem 6 – 9

– Ordinary

– Necessary

– Reasonable

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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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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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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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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

tep

1:

Th

eory

Ste

p 2

?

Ste

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ractic

e

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GI- FOR= AGI- FROM= TI

“Tier 1”

“Tier 2”

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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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Refer to text page 7-35

Less 2%

“Tier 2”Expenses

Sub-total

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For vs. From• Problem 6 – 13

• Problem 6 – 33

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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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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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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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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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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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Airfare Deductible?

A B

CPrimary reason?

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Airfare Deductible?

A B

C

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•Purely business expenses on a personal trip ARE deductible

•Purely personal expenses on a business trip are NOT deductible

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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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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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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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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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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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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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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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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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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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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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Problem 9 - 49Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 500Prof Dues and Subs 500

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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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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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