Chapter 9: Business Income and Deductions

What all counts as business income?

• “All income from whatever source derived”

• Gross profit from inventory sales (less COGS)

• Income from services provided

• Income from renting property to customers

What are the four requirements in order to deduct a business expense?

• For-profit motive

  • Otherwise, it is a hobby

• Ordinary

  • Normal and appropriate for business under the cirvumstances

  • Not necessarily typical or repetitive in nature

• Necessary

  • Helpful or conducive to business activity

  • Not necessarily essential or indispensable (like interior design)

• Reasonable in amount

  • Not extravagant or exorbitant; not for purely personal reasons

  • IRS evaluates (1) price paid as compared to arm’s-length transactions, and (2) the extent to which the taxpayer gets personal enjoyment from the expense (Sedan vs sports car)

Are speeding ticket fines deductible for businesses?

No, expenditures against public policy are excluded

Are fee associated with a municipal bond deducitble?

No because it will generate tax exempt income. Life insurance premiums are another example of this

Would a welder’s uniform be a business deduction?

Yes, because it would not be appropriate to wear it for personal use

Would an accountant’s suit be a business deduction?

No because a suit is appropriate to wear for personal reasons

Would the purchase of a short-term asset (6 months) be a business deduction?

Yes because it will not be depreciated

What does it mean for an expense to be mixed-motive?

The activity is motivated by both business and personal interests

Is a business related meal deductible for a business?

50% of costs are deductible, and the taxpayer must be present. Entertainment costs must be seperated

When are entertainment costs a business deduction?

Only if provided to all employees as a benefit or as compensation

When are the costs of transportation to work a business deduction

The cost of commuting from home to the office is not deducible. It is only deductible when going to a special site like to a client factory to do inventory as an auditor. When when traveling ot a work site, only the distance in excess of the ordinary travel between home and office is deducintle.

When using a car for business, how is the deduction calculatged?

Actual Cost or operating the car

Standard mileage (70 cents a mile)

• only excess travel over the distance between the employee’s home and office

For a mixed purpose business trip, when are transportation expenses a business deducition?

Must be overnight

• Solely Business → Completely deductible

• Mainly busine → All deducitble (for internaltion travel → International travel costs/(Total Costs × Business %)

• Mainly Personal → None is deductible unless it specifically took place during the business portion of the trip

How is the deducible business expenses for a international business trip calculated?

Ask her!

When are traveling costs other than trans[portation costs deductible?

• Soley Business → All Deductible

• Mainly business → % of business days

• Mainly personal → % of business days

When is property use a business deduction?

Only deductible to the extent it is used for business → allocate based on % business use

When is a home office a business deduction?

If used only for work, the percent of the house’s square footage can be calculated. That portion of the expenses for the house are deductible.

When can phones be considered a business deduiction?

The number of hours used for business purposes can be used to calculate the business portion

What business have a limit to how much business interest deduction they can take?

Taxpayers/businesses with an average annual gross receipts over the past 3 years of over $31M

For large businesses, how is their adjusted taxable income calculated?

Taxable income

-Business interest income

+Business interest expense

+Net Operating Loss Carry Forward

+Depreciation, amortization, and depletion

=Adjusted Taxable income

For large businesses, how is deductible interest expense calculated?

The lesser of the two:

• Business interest income + (30% × adjusted gross income)

• Interest Expense

Come back here an write some to cover losses on disposition of business property and down