Chapter 6 Deductions and losses
Chapter 6 Deductions and Losses
Learning Objectives Distinguish between deductions for and from AGl Discuss the criteria for deducting business and investment List the substantiation requirements for deducting travel and entertainment expenses Explain the timing of deductions under both the cash and accrual methods
Learning Objectives • Distinguish between deductions for and from AGI • Discuss the criteria for deducting business and investment • List the substantiation requirements for deducting travel and entertainment expenses • Explain the timing of deductions under both the cash and accrual methods
Learning Objectives Explain the Tax consequences of wash sales Tax consequences of transaction between related parties Discuss the criteria for determining whether an activity is a hobby or trade or business Determine the tax consequences of vacation homes
Learning Objectives • Explain the Tax consequences of wash sales • Tax consequences of transaction between related parties • Discuss the criteria for determining whether an activity is a hobby or trade or business • Determine the tax consequences of vacation homes
For versus from agi classification For AGi Reduces aGi which affects the allowable deduction for itemized deductions Most common deductions for AGi Trade or business expenses RAS Alimony Losses on investment Interest paid by certain individuals on qualified educational loans 1/2 of self-employment tax and 60 of health insurance costs paid by self-employed individuals
For Versus From AGI Classification • For AGI – Reduces AGI which affects the allowable deduction for itemized deductions – Most common deductions for AGI • Trade or business expenses • IRAs • Alimony • Losses on investment • Interest paid by certain individuals on qualified educational loans • 1/2 of self-employment tax and 60 % of health insurance costs paid by self-employed individuals
For versus from agi classification From AGl Itemized deduction only will have tax benefit if the total deductions exceed the applicable standard deduction
For Versus From AGI Classification • From AGI – Itemized deduction only will have tax benefit if the total deductions exceed the applicable standard deduction
Criteria For Deducting Business And Investment Expenses Related to a profit- motivated activity Ordinary expenses Necessary expenses Reasonable expenses Properly documented An expense of the taxpayers(not someone elses expense)
Criteria For Deducting Business And Investment Expenses • Related to a profitmotivated activity • Ordinary expenses • Necessary expenses • Reasonable expenses • Properly documented • An expense of the taxpayers(not someone else’s expense)
General Restrictions on the Deductibility of Expenses Capitalization versus expense deduction Expenses related to exempt income Expenditures that are contrary to public policy · Other expenditures that are specifically disallowed
General Restrictions on the Deductibility of Expenses • Capitalization versus expense deduction • Expenses related to exempt income • Expenditures that are contrary to public policy • Other expenditures that are specifically disallowed
Proper Substantiation Requirement The taxpayer has the burden of proof The Cohan rule More restrictive substantiation equirements for travel, entertainment business gifts
Proper Substantiation Requirement • The taxpayer has the burden of proof • The Cohan rule • More restrictive substantiation requirements for travel, entertainment, business gifts
When An Expense Is Deductible Cash method Deduct expenses when paid Prepaid expenses which extend beyond the end of tax year must be amortized Points paid in principal residence Clearly disclosed Secured by residence
When An Expense Is Deductible • Cash method – Deduct expenses when paid – Prepaid expenses which extend beyond the end of tax year must be amortized – Points paid in principal residence • Clearly disclosed • Secured by residence
When An Expense Is Deductible Accrual method Allowed to deduct expenses in the period in which the expenses accrue under the all-events test and economic performance test All-events test is met When amount of liability is established Amount of liability is determined with reasonable accuracy Economic performance test is met When economic performance is deemed to occur (see Table 16-1)
When An Expense Is Deductible • Accrual method – Allowed to deduct expenses in the period in which the expenses accrue under the all-events test and economic performance test – All-events test is met • When amount of liability is established • Amount of liability is determined with reasonable accuracy – Economic performance test is met • When economic performance is deemed to occur (see Table I6-1)
