© copyright 2001-2005 by m. ray gregg. all rights reserved. 1 federal income tax (business)...

© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 1

Federal Income Tax

(Business) Deductions


Perspective


Gross Income- FOR= AGI- FROM= Taxable Income

Business

Personal


General Requirements• Problem 6 – 9

– Ordinary

– Necessary

– Reasonable


General Requirements• Problem 6 – 9

– Ordinary

– Necessary

– Reasonable

• Related to income production• Customary; usual

• Appropriate; helpful• “Prudent person”• Would others have incurred it?

• In amount• Not excessive when compared to industry


The Four “Nots”


The Four “Nots”

• Contrary to public policy• Capital• Personal

• Related to tax-exempt income


The Four “Nots”• Problem 6 – 11

Why are expenses related to tax-exempt income disallowed?

• Income not included; expenses not deducted


Which is better?

For From


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


Business Expenses• Generally…

–Self-employed = “for”–Employee = “from”

© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 13Step 1:Theory

Ste p 2 ?

Step 3:Practice


GI- FOR= AGI- FROM= TI

“Tier 1”

“Tier 2”


For vs. From• Problem 6 – 13


Problem 6 - 13a. Deductible?

Yes For or from?

FROM – employEEb. Two sources of income?

Split: Self-employed = FOR Employed = FROM



“Tier 1”

“Tier 2”


Tier 2 ExpensesReduced by2% of AGI

to determine deductible amount


Most itemized deductionsare “Tier 1”

Refer to text page 7-36


Refer to text page 7-36

Less 2%

“Tier 2”Expenses

Sub-total


For vs. From• Problem 6 – 13• Problem 6 – 33


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



“Tier 1”

“Tier 2”


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


Business Expenses• Self-employed

–“for”• Employee

–Reimbursed?•Yes = “for”•No = “from”


Problem 6 - 33For or

Ded? From?

Travel to clients $750Subs to prof journals 215Lunches w/clients 400Photocopying 60

YesYesYesYes

ForForForFor

c. If self-employed…


For vs. From• Problem 6 – 13• Problem 6 – 33


Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)


Travel and Transportation• Define travel

–“away from home overnight”–Name some




• Define transportation• Problem 9 -56


Problem 9 - 56

Airfare $ 450

Meals ($50 per day) 250

Hotel ($100 per day) 500

Entertainment 500

Total $1,700

assume he was NOT reimbursed


Airfare Deductible?A B

C



C



C

1/32/3


Exemption


Prorate Exemption?

1/3? 2/3?



CNever prorate airfare.



CPrimary reason?



C


•Purely business expenses on a personal trip ARE deductible

•Purely personal expenses on a business trip are NOT deductible


Problem 9 - 56

Airfare $ 450



Entertainment 500

Total $1,700



Problem 9 - 56

Airfare $ 450 $450



Entertainment 500

Total $1,700



Problem 9 - 56

Airfare $ 450 $450

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


Entertainment 500

Total $1,700



Problem 9 - 56

Airfare $ 450 $450

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


Entertainment 500

Total $1,700


50% limit


Problem 9 - 56

Airfare $ 450 $450

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


Entertainment 500

Total $1,700



Problem 9 - 56

Airfare $ 450 $450

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

Hotel ($100 per day) x 3 500 $300

Entertainment 500

Total $1,700



Problem 9 - 56

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


Problem 9 - 56

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


Problem 9 - 56

Airfare $ 450



Entertainment 500

Total $1,700

assume he WAS reimbursed


Problem 9 - 56

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


Problem 9 - 56

Airfare $ 450 0


Hotel ($100 per day) 500 0

Entertainment 500 0

Total $1,700


b. reimb not reported by Mike


Problem 9 - 56

Airfare $ 450 450


Hotel ($100 per day) 500 300

Entertainment 500 250

Total $1,700


c. all deductible by employer


Problem 9 - 52Automobile $2,500Moving Expenses 4,000Entertainment 1,500Travel 2,000Meals 500Prof Dues and Subs 500

Have “issues” with any of these?Same facts as textbook?


Problem 9 - 52Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 500Prof Dues and Subs 500


Problem 9 - 52Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500


Problem 9 - 52Automobile $2,500Moving Expenses FOR 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $10,750


Problem 9 - 52Automobile $2,500Moving Expenses FOREntertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $6,000Less: 2% of $120,000 2,400Deduction $ 3,600

b. from; tier 2

© copyright 2001-2005 by m. ray gregg. all rights reserved. 1 federal income tax (business)...

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