© copyright 2001-2005 by m. ray gregg. all rights reserved. 1 federal income tax (business)...
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© Copyright by M. Ray Gregg. All rights reserved. 3 Business PersonalTRANSCRIPT
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 1
Federal Income Tax
(Business) Deductions
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 2
Perspective
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 3
Gross Income- FOR= AGI- FROM= Taxable Income
Business
Personal
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 4
General Requirements• Problem 6 – 9
– Ordinary
– Necessary
– Reasonable
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 5
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
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 7
The Four “Nots”
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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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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 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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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 12
Business Expenses• Generally…
–Self-employed = “for”–Employee = “from”
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 13Step 1:Theory
Ste p 2 ?
Step 3:Practice
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 14
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 - 13a. Deductible?
Yes For or from?
FROM – employEEb. 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 7-36
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Refer to text page 7-36
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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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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Business Expenses• Self-employed
–“for”• Employee
–Reimbursed?•Yes = “for”•No = “from”
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© Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 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 -56
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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
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Airfare Deductible?A B
C
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Airfare Deductible?A B
C
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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 - 56
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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Problem 9 - 56
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 - 56
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 - 56
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 - 56
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 - 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
assume he was NOT reimbursed
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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
assume he was NOT reimbursed
50% limit
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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
assume he was NOT reimbursed
Deductible FROM – Tier 2
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Problem 9 - 56
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 - 56
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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Problem 9 - 56
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 - 56
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 - 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?
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Problem 9 - 52Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 500Prof Dues and Subs 500
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Problem 9 - 52Automobile $2,500Moving Expenses 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500
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Problem 9 - 52Automobile $2,500Moving Expenses FOR 4,000Entertainment 750Travel 2,000Meals 250Prof Dues and Subs 500Total $10,750
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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
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