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


3

Gross Income- FOR= AGI- FROM= Taxable Income

Business

Personal


4

General Requirements• Problem 6 – 9

– Ordinary

– Necessary

– Reasonable


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


7

The Four “Nots”


8

The Four “Nots”

• Contrary to public policy

• Capital

• Personal

• Related to tax-exempt income


9

The Four “Nots”• Problem 6 – 11

Why are expenses related to tax-exempt income disallowed?

• Income not included; expenses not deducted


10

Which is better?

For From


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


12

Business Expenses

• Generally…

–Self-employed = “for”

–Employee = “from”


13S

tep

1:

Th

eory

Ste

p 2

?

Ste

p 3

:P

ractic

e


14

GI- FOR= AGI- FROM= TI

“Tier 1”

“Tier 2”


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


17


“Tier 1”

“Tier 2”


18

Tier 2 ExpensesReduced by2% of AGI

to determine deductible amount


19

Most itemized deductionsare “Tier 1”

Refer to text page 7-35


20

Refer to text page 7-35

Less 2%

“Tier 2”Expenses

Sub-total


21


• Problem 6 – 33


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


23


“Tier 1”

“Tier 2”


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


25

Business Expenses

• Self-employed–“for”

• Employee–Reimbursed?

•Yes = “for”•No = “from”


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…


27


• 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)


30

Travel and Transportation

• Define travel

–“away from home overnight”

–Name some


31


• Define travel


–Name some


32


• Define travel


–Name some

• Define transportation

• Problem 9 -53


33

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


34

Airfare Deductible?

A B

C


35

Airfare Deductible?

A B

C


36

Airfare Deductible?

A B

C

1/32/3


37

Exemption


38

Prorate Exemption?

1/3? 2/3?


39

Airfare Deductible?

A B

CNever prorate airfare.


40

Airfare Deductible?

A B

CPrimary reason?


41

Airfare Deductible?

A B

C


42

•Purely business expenses on a personal trip ARE deductible

•Purely personal expenses on a business trip are NOT deductible


43

Problem 9 - 53

Airfare $ 450



Entertainment 500

Total $1,700



44

Problem 9 - 53

Airfare $ 450 $450



Entertainment 500

Total $1,700



45

Problem 9 - 53

Airfare $ 450 $450

Meals ($50 per day) x 3 250 $150


Entertainment 500

Total $1,700



46

Problem 9 - 53

Airfare $ 450 $450

Meals ($50 per day) x 3 250 $150


Entertainment 500

Total $1,700


50% limit


47

Problem 9 - 53

Airfare $ 450 $450

Meals ($50 per day) x 3 250 $ 75


Entertainment 500

Total $1,700



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



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


50% limit


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


Deductible FROM – Tier 2


51

Problem 9 - 53

Airfare $ 450



Entertainment 500

Total $1,700

assume he WAS reimbursed


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


a. none deductible by Mike


53

Problem 9 - 53

Airfare $ 450 0


Hotel ($100 per day) 500 0

Entertainment 500 0

Total $1,700


b. reimb not reported by Mike


54

Problem 9 - 53

Airfare $ 450 450


Hotel ($100 per day) 500 300

Entertainment 500 250

Total $1,700


c. all deductible by employer


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?


56

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


57

Problem 9 - 49Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500


58

Problem 9 - 49Automobile $2,500Moving Expenses FOR 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $10,750


59

Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000


60

Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $120,000 2,400


61

Problem 9 - 49Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $116,000 2,320


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


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


64

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

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