Chapter 6: Deductions and Losses: In General

Flashcards covering key concepts and terms from Chapter 6: Deductions and Losses in General, focusing on various types of deductions, accounting methods, and disallowances.

Deduction for AGI

Deductions that can be claimed even if the taxpayer does not itemize, important for determining certain itemized deductions.

Itemized Deductions

Deductions from AGI that must exceed the standard deduction to provide any tax benefit.

Common Deductions

Include expenses for property held for production of rents, business expenses, student loan interest, and medical insurance premiums.

Ordinary and Necessary Expenses

Expenses that are common, accepted, and appropriate for the business operation, as defined under Sections 162 and 212.

Personal Expenses

Expenditures in one's personal life that are usually not deductible unless specifically authorized by tax code.

Section 165

Code providing for deductions for losses not compensated for by insurance, limited to losses incurred in a trade or business.

Qualified Business Income (QBI)

Up to 20% deduction for income from sole proprietorships, partnerships, or S corporations.

Cash Method of Accounting

Expenses are deductible only when cash is paid; not applicable for all taxpayers.

Accrual Method of Accounting

Expenses are deductible when incurred, regardless of when they are paid.

Prepaid Expenses - 12-Month Rule

Taxpayer can deduct amounts paid for benefits that do not extend past 12 months after payment or end of the year following the payment.

Disallowance of Personal Expenses

No deduction allowed for personal, living, or family expenses unless specified in tax code.

Related Party Transactions

Losses from sales or exchanges between related parties are disallowed under tax code.

Public Policy Limitations

Certain expenditures not deductible if contrary to public policy, including fines and bribes.

Investigation Expenses

Costs associated with exploring a new or expanded business; treated based on various conditions.

Hobby Loss Rules

If an activity is not for profit, hobby loss rules limit deductions to income generated by the hobby.

Excessive Executive Compensation

Subject to limitations; publicly held corporations can only deduct up to $1 million for covered executives.

Capital Expenditures

Deductions not allowed for amounts paid for new buildings or permanent improvements that increase property value.

Substantiation Requirements

Taxpayer must provide adequate records for deducting expenses; undocumented deductions may be disallowed.