Professional Documents
Culture Documents
Dr. Cliff Payne determines that his deductible expenses associated with his
dental practice are as follows:
Salaries including FICA (unpaid at year-end of $5,000)
$120,000
Building rent
24,000
Depreciation of dental equipment and office
furnishings and equipment
52,000
Insurance (malpractice and of dental equipment
and office furnishings and equipment)
22,000
Dental supplies
16,000
Office supplies
3,000
Investigation expenses 6,000
Contribution to U.S. Senate campaign fund of Tom Smith
1,000
Contribution to U.S. Senate campaign fund of Virginia White 1,000
Legal expenses associated with patient lawsuit (jury decision for
defendant)
4,000
Fine imposed by city for improper disposal of medical waste
3,000
Draw by Dr. Payne for living expenses ($5,000 monthly)
60,000
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Deductions
Exclusive definition of deductions
Deductions are allowed based on legislative grace
and defined narrowly
Substantiation requirements
Taxpayer has burden of proof for substantiating all
expenses deducted on return
Thus, adequate records of expenses must be maintained
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6,500
3,900
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Business And
Nonbusiness Losses
Deductible losses of individual taxpayers are
limited to those:
Incurred in a trade or business,
Incurred in a transaction entered into for profit
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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 test and the economic performance
test
Exception to the economic performance test for recurring
items
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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
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Expenditures Contrary
To Public Policy
Deductions are disallowed for certain specific
types of expenditures that are considered
contrary to public policy
Examples: penalties, fines, illegal bribes or
kickbacks, two-thirds of treble damage payments
for violation of anti-trust law
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Nondeductible Fines
Return to the facts of The Big Picture on p. 6-1.
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Expenses Relating To
An Illegal Business
Usual expenses of operating an illegal business
are deductible
However, deduction for fines, bribes to public
officials, illegal kickbacks, and other illegal
payments are disallowed
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Political Contributions
Return to the facts of The Big Picture on p. 6-1.
Dr. Payne made political contributions to the State Senate
campaigns of Tom Smith and Virginia White.
Dr. Payne made these contributions to encourage these
senators to support a new bill that is beneficial to the states
dental profession.
Therefore, he assumed that these would be deductible
business expenses.
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Investigation Of A Business
(slide 1 of 3)
Investigation Of A Business
(slide 2 of 3)
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Investigation Of A Business
(slide 3 of 3)
If acquired
Investigation expenses must be capitalized
May elect to deduct the first $5,000 of expenses currently
Any excess expenses can be amortized over a period of not less than
180 months (15 years)
In arriving at the $5,000 immediate deduction allowed, a dollar-fordollar reduction must be made for those expenses in excess of
$50,000
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Income (loss)
2008
2009
2010
2011
2012
2013
2014
$500
(1,500)
700
(1,000)
900
(500)
1,200
Hobby?
Yes
Yes
Yes
Yes
No, profit 3 of 5 years
Yes, profit only 2 of 5 years
No, profit 3 of 5 years
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Order
Amount
Income
$15,500
Interest
6,000
$ 6,000
Taxes
3,000
3,000
Vet Bills
2,000
2,000
Feed
4,000
4,000
Depreciation
1,000
Ltd. to 500
Total
15,500
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Rental days
Less than 15 days: No gross income recognized
from rentals and no deductible rental expenses
Mortgage interest and property taxes treated as if on
personal residence (generally deductible in full)
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Personal/rental use
If rented for 15 days or more and personal use
days exceed the greater of 14 days or 10% of fair
rental days
Treated similar to hobby
Rental expenses deducted in three step process
No rental loss allowed
Carryforward of disallowed rental expenses
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Not Significant
X
X
Significant
X
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Not Significant
X
X
Significant
X
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Personal Expenditures
Unless otherwise provided in the Code,
personal expenses are not deductible
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Capital Expenditures
Amounts are capitalized
Asset may be subject to depreciation (or cost
recovery), amortization, or depletion
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The fine paid for violating waste control rules comes under
the public policy limitations (see Example 13) and is
specifically made nondeductible by Code 162(f).
Along the same line are the political contributions
(Example 17) made nondeductible by 162(e).
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