Deductions: Busi. Cost, Loss & Bad Debt, Pers'al
Cost, & Int.
- Gen. Pers'al Expense § 262
- Cap. Expenditure § 263
- Specif. Policy Limits § 162
- Illegal bribe, kickback / others dir'ly / indir'ly
if result in crim. penalty by US / state law § 162)c)2
- Fine / similar penalties paid 2 govt 4 viol.
- Attempt 2 influence gen. pub. 4 election, leg.,
/ referendum § 162)e)1)C
- Ed. Cost Reg. 1.162-5
- Prob's of pers'al & cap.
- Expense 4 travel as form of ed. dir'ed toward
teachers § 274)m)2
- Expense 2 enter prof. Reg. 1.162-5)b)3
- Can deduct 2 improve & maintain skill / keep
Busi. Expense Deducted
- Gen. Types
- Ord. & Nec. Busi. Expense 4 Trade / Busi.
- Ord. if
- Used 4 things lasting less than 1 yr.
- For busi. rsn
- Nec. is what busi. person says
- Expense 4 Activities Rel'ed 2 Profit If Not in
Trade / Busi. § 212
- Ord. & nec. expenses 4 prod'ing / collecting
- Obj. rsbl stand. w/subj. factors by IRS 2 det.
- Manner in which T carries activity
- Experience / expertise
- X & effort
- Expectation that assets used in activity incr.
- Success in similar activities
- History of income / losses
- Amt of occasional profit
- Fin'al status of T
- Elements of pers'al pleasure / recreation
- Expense 4 Activities Not 4 Profit 2 Extent Have
Income § 183)b
- Allowable deductions like state taxes +
- Deduction = 2 amt. of deduction allowable if
activity was 4 profit but only 2 extent that GI derived exceeds
deductions allowable by 1st reqt
- Presumption of Profit by §
- GI from activity 4 3 out of 5 yrs & if horse
activities, 2 out of 7 yrs.
- Rebuttable presumption
- Busi. Uses
- If listed prop. of § 280F)b not predom'ly
used in qualified busi. use, depreciate through slow method of
- Predom'ly used 4 busi. use if more than 50%
- Listed prop. incl's auto / like, entertainment
prop., computer, phone
- Ee must use 4 er's conv. & req'ed by §
- Clothes deductible by § 162 if
- Req'ed as condition of empl.
- Not suitable 4 use outside of empl.
- Not worn outside of empl.
- Office decoration by § 162
- If req'ed 2 bring client in like law firm
- Office home by § 280A)c only if excl'ly
used reg'ly 4
- Princ. place of busi. 4 any trade / busi.
- Can B where subst'l adm. perf'ed
- If do most work, imp. place of work, & others
see as such
- Place of busi. used by pat's, clients / customers
in mtgs w/T
- Where sep. structure not attached, it's in cnxn
w/T's trade / busi.
- Settlement agmts
- Origin of claim doc. 2 see if arose from prof'l
activity 2 deduct
- Travel, Transportation, & Commute §
- Commuting btwn 2 & from work not deductible
- Travel expenses deductible by § 162)a
- Incl's meal & lodging
- Must B away from home 4 trade / busi. / stay
- Home where U live / works
- T not temp'ly away from home if per. exceeds
- Deductible if go 2 other place than place of
- Entertainment & Meals § 274
- No deduction 4 activity / facility 4 entertainment,
amusement / rec. unless dir'ly rel'ed / assoc'ed w/T's trade /
- Req's bona fide busi. disc. during, before, /
after 2 rel. 2 T's busi.
- Good substantiation / suff. evid. 2 corrob. T's
stmt § 274)d
- For entertainment, amusement, / rec. activity
- Traveling expense
- Listed prop. of § 280F)d)4
- No deduction 4 food / beverage unless §
- Not lavish / extravagant under circ. +
- T present 2 furnishing of food / beverage
- Only 50% of meals & entertainment deductible
by § 274)n unless
- If it's 4 ee's in compensation / reimbursement
§ 274)e /
- If 4 pub., customers / who isn't ee by §
- Sky boxes, then only deduct cost of reg. tix
- No deduction 4 spouse on busi. travel unless
- T's ee
- Travel 4 bona fide busi. purpose +
- Expense otherwise deductible by spouse
- Can't deduct dues 2 clubs § 274)a)3
- Can deduct other costs if club used 2 prim'ly
further T's busi. / trade & dir'ly rel'ed 2 busi./ trade /
more than 50% 4 busi.
- Compensation § 162)a
- Deduct only 4 rsbl allowance of salary / other
- Contingent compensation K, then look @ whether
rsbl & arms length barg. when entered K
- Concern w/small closely held corp.
Loss & Bad Debts Deducted
- Loss § 165
- If in trade / busi., deduct losses not compensated
- Limited 4 indiv. 2 § 165)c
- Trade / busi.
- Trxn entered 4 profit &
- Casualty loss
- Deduction only 4 basis § 165)b
- Cap. Loss § 1211
- Deduct cap. loss only 2 extent have cap. gains
- Lwr of $3k / excess of loss over gain
- If not have cap. gain, carry over loss
- Can't deduct
- If transf. 2 rel'ed parties § 267
- Got subst'ly same stock w/in 30 days after loss
§ 1091 where basis is same as orig. stocks, incr'ed / decr'ed
by dif. in price stock req'ed from X stock was sold
- Bad Debt § 166
- Busi. debt
- Rel'ed 2 trade / busi. /
- In busi. of making loans
- Nonbusi. debt 4 loss of sale / exch. 4 cap. asset
held less than 1 yr.
- Show entered 4 profit otherwise pers'al loss
- Tax Shelters
- Arose from partn. form & Crane rule that
basis incl. nonrecourse liab.
- Ended tax shelters by
- At risk rule 2 deduct losses 2 extentreally had
$ in risk § 465
- Real estate exempt
- Passive activity rule 2 deduct losses 4 passive
activity against passive activity income § 469
- Corp. exempt
- Casualty Loss § 165)c)3
- Losses 4 fire, storm, shipwreck, theft, &
other sudden & imm. sit's
- Deduction is
- Lesser of fair mkt value before casualty - fair
mkt value after / basis
- Only 2 extent exceed $100 § 165)h
- Only 2 extent exceed 10% of AGI § 165)h)2
- Charitable Contrib. § 170
- Subsidy v. income consumption rationales
- Gen'ly = fair mkt value of charity contrib.
- Deduct 4 basis of appreciated prop. gifts if
- Prop. not prod. long term gain / prop. not held
4 1 yr.
- Unrel'ed tangible pers'al prop. 4 pub. charity
except 4 land & stock
- Anything 2 priv. foundation
- Can't deduct
- Quid pro quo / receive something tangible in
- If also get athletic tix, 80% deductible §
- Relig. serv. w/comm'l value but if value is only
relig., no comm'l value
- Deduction limited
- Corp. only 2 10% of income
- Indiv. 2 50% of AGI
- Only contrib. 2 § 501)c)3 tax exempt charity
which IRS det's
- Req. proof of receipt 4 more than $150 contrib.
- State & Local Taxes § 164
- Med. Expense Deduction § 213
- Subsidy & consumption rationale
- Deduct 4 med. care § 213)d
- Cost 4 diagnosis, cure, mitigation, treatment
/ prevention of disease / affecting any structure / fn. of body
- Not incl. cosmetic surgery unless nec. 2 improve
congenital / pers'al inj. deformity from accident / disease §
- Travel expenses & lodging 4 getting med.
- Drugs not deductible unless prescription drug
- Floor of 7.5% AGI
- Payor gets above line deduction, not itemized
- Payee has income
- Can't get bad debt deduction if not get alimony
- Alimony det'ed by factor
- If payment ends when spouse dies
- If ins. premium is owned by spouse
- If T in same household, not alimony §
- Front loaded alimony discouraged
- If sig. reduction 3rd yr., payor recap. income
& payee deduct § 71)f
- Not recapture if not w/in payor's control
- Ch support not deductible
- Any amt in instr. reduced on conting. rel. 2
ch., amt of reduction treated as ch. support § 71)c)2
- First payments of late payment goes 2 ch. support
- Dep. & Med. Deduction 4 Divorced
- Custodial parent gets deduction 4 dep. unless
agree otherwise § 152)e
- Each parent paying 4 med. can get deduction §
152)e)6 & § 213)d)5
- Busi. Int.
- Can deduct if can trace loan § 163)a
- Can deduct investment int. only 2 extent have
investment income § 163)d
- If commingle borrowed $
- Then 1st $ out 2 use is consid'ed loan $ used
- Anything bought w/in 15 days of commingling is
from loan $
- Residential (Res.) Int.
- Acq. indebtedness § 163)h)3
- For acq., construct / subst'ly improve qualified
- Limited 2 aggreg. of $1 mill.
- Qualified res. is princ. res. + 1 other res.
selected by T
- Home is if have bathroom & kitchen
- Home equity indebtedness § 163)h)3
- For anything where debt secured by qualified
- Can't exceed aggreg. fair mkt value of qualified
res. - amt of acq. indebtedness
- Limited 2 $100k in aggreg.
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Law School Notes
December 8, 1997
Ms. Haeji Hong