c4 - 1 chapter 4 business deductions chapter 4 business deductions

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Chapter 4

Business Deductions

Chapter 4

Business Deductions

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Learning Objective 1Learning Objective 1

Understand the meaning and application of the ordinary, necessary, and reasonableness

requirements for the deduction

of business expenses.

Understand the meaning and application of the ordinary, necessary, and reasonableness

requirements for the deduction

of business expenses.

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Ordinary ExpensesOrdinary Expenses

• An expense is ordinary if it is – Normal, usual, or customary in the type of

business conducted by the taxpayer, and – Not capital in nature

• Ordinary expenses need not be recurring in order to be deductible

• An expense is ordinary if it is – Normal, usual, or customary in the type of

business conducted by the taxpayer, and – Not capital in nature

• Ordinary expenses need not be recurring in order to be deductible

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Necessary ExpensesNecessary Expenses

• An expense is necessary if – A prudent businessperson would incur the same

expense, and – The expense is expected to be appropriate and

helpful in the taxpayer’s business

• Some expenses that are necessary are not ordinary, and therefore are not deductible

• An expense is necessary if – A prudent businessperson would incur the same

expense, and – The expense is expected to be appropriate and

helpful in the taxpayer’s business

• Some expenses that are necessary are not ordinary, and therefore are not deductible

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Reasonable ExpensesReasonable Expenses

• The Code applies the reasonableness requirement only to salaries and other compensation

• The courts have applied the reasonableness requirement to all ordinary and necessary business expenses

• Expenses in excess of reasonable amounts are not deductible

• The Code applies the reasonableness requirement only to salaries and other compensation

• The courts have applied the reasonableness requirement to all ordinary and necessary business expenses

• Expenses in excess of reasonable amounts are not deductible

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• Describe the cash and accrual methods of accounting for business deductions.

• Describe the cash and accrual methods of accounting for business deductions.

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Cash Method Requirements Cash Method Requirements

• Cash basis taxpayers can deduct expenses only when they are actually paid with cash or property– Payments made with borrowed funds can be deducted,

but issuing a note does not meet the “actually paid” requirement

• For cash and accrual basis taxpayers, Capital expenditures can be deducted only through amortization, depletion, or depreciation

• Cash basis taxpayers can deduct expenses only when they are actually paid with cash or property– Payments made with borrowed funds can be deducted,

but issuing a note does not meet the “actually paid” requirement

• For cash and accrual basis taxpayers, Capital expenditures can be deducted only through amortization, depletion, or depreciation

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Accrual Method Requirements (slide 1 of 2)


• Deductions are allowed when the all events test and the economic performance test are met

• All events test is met when:– All the events have occurred to create the

taxpayer’s liability, and – The amount of the liability can be determined

with reasonable accuracy

• Deductions are allowed when the all events test and the economic performance test are met

• All events test is met when:– All the events have occurred to create the

taxpayer’s liability, and – The amount of the liability can be determined

with reasonable accuracy

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• Economic performance test– Met when service, property, or use of property

giving rise to the liability is actually performed for, provided to, or used by the taxpayer

– Certain recurring, immaterial items can be deducted in year incurred if economic performance occurs within 8 1/2 months after close of year such expenses were incurred

• Economic performance test– Met when service, property, or use of property

giving rise to the liability is actually performed for, provided to, or used by the taxpayer

– Certain recurring, immaterial items can be deducted in year incurred if economic performance occurs within 8 1/2 months after close of year such expenses were incurred

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Apply a variety of Internal Revenue Code deduction disallowance provisions.

Apply a variety of Internal Revenue Code deduction disallowance provisions.

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Disallowance Possibilities (slide 1 of 9)


• Deductions are disallowed for specified expenses that are considered contrary to public policy, including:– Bribes and illegal kickbacks

– Fines and penalties paid to a government for violation of law

• Legal expenses incurred in defense of civil or criminal penalties are deductible only if directly related to a trade or business

• Deductions are disallowed for specified expenses that are considered contrary to public policy, including:– Bribes and illegal kickbacks

– Fines and penalties paid to a government for violation of law

• Legal expenses incurred in defense of civil or criminal penalties are deductible only if directly related to a trade or business

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• The ordinary and necessary expenses of operating an illegal business are deductible– Expenses incurred in illegal drug trafficking are

not deductible (except for cost of goods sold)

• Political contributions are not deductible

• The ordinary and necessary expenses of operating an illegal business are deductible– Expenses incurred in illegal drug trafficking are

not deductible (except for cost of goods sold)

• Political contributions are not deductible

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• Lobbying expenses may be deductible to a limited extent

• Deduction is not allowed for:– Influencing legislation

– Participating or intervening in any political campaign (for or against a candidate for public office)

– Attempting to influence voters

– Attempting to influence the actions of certain high-ranking public officials

• Lobbying expenses may be deductible to a limited extent

• Deduction is not allowed for:– Influencing legislation

– Participating or intervening in any political campaign (for or against a candidate for public office)

– Attempting to influence voters

– Attempting to influence the actions of certain high-ranking public officials

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• Exceptions to disallowance of lobbying expenditures (i.e., expenditures are deductible):– Influencing local legislation (city or county)– Activities devoted solely to monitoring

legislation– De minimis exception allows deduction of up to

$2,000 of in-house expenditures (unless prohibited by rules discussed previously)

• Exceptions to disallowance of lobbying expenditures (i.e., expenditures are deductible):– Influencing local legislation (city or county)– Activities devoted solely to monitoring

legislation– De minimis exception allows deduction of up to

$2,000 of in-house expenditures (unless prohibited by rules discussed previously)

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• Executive compensation of covered employees in excess of $1 million per executive per year generally is not deductible by publicly held corporations– Exception: certain types of compensation (e.g.,

commissions based on individual performance) are not treated as executive compensation for purposes of this limitation

– Covered employees include CEO and the four other most highly compensated officers

• Executive compensation of covered employees in excess of $1 million per executive per year generally is not deductible by publicly held corporations– Exception: certain types of compensation (e.g.,

commissions based on individual performance) are not treated as executive compensation for purposes of this limitation

– Covered employees include CEO and the four other most highly compensated officers

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• Expenses of investigating a business may or may not be deductible– If the taxpayer is in the same or a similar business,

expenses are deductible, whether or not the business is acquired

– If the taxpayer is not in the same or a similar business:• Expenses are deductible (amortized over 60 months or more)

only if the business is acquired

• Expenses are not deductible if the business is not acquired

• Expenses of investigating a business may or may not be deductible– If the taxpayer is in the same or a similar business,

expenses are deductible, whether or not the business is acquired

– If the taxpayer is not in the same or a similar business:• Expenses are deductible (amortized over 60 months or more)

only if the business is acquired

• Expenses are not deductible if the business is not acquired

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• A loss on a transaction between related parties is disallowed– This prevents close relatives from establishing

deductible losses while keeping the property within the family unit

– A gain realized on a subsequent sale by the related party purchaser is recognized only to the extent it exceeds the previously disallowed loss

• A loss on a transaction between related parties is disallowed– This prevents close relatives from establishing

deductible losses while keeping the property within the family unit

– A gain realized on a subsequent sale by the related party purchaser is recognized only to the extent it exceeds the previously disallowed loss

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• Accrued expenses and interest owed to a related party are deductible by the accrual basis taxpayer only when actually paid to the cash basis taxpayer

• The taxpayer has the burden of proof for substantiating expenses and must retain adequate records; otherwise, IRS can disallow the deductions

• Accrued expenses and interest owed to a related party are deductible by the accrual basis taxpayer only when actually paid to the cash basis taxpayer

• The taxpayer has the burden of proof for substantiating expenses and must retain adequate records; otherwise, IRS can disallow the deductions

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• Expenses and interest related to tax exempt income are disallowed

• Expenses and interest related to tax exempt income are disallowed

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Understand the limitations applicable to the charitable contribution deduction for

corporations.

Understand the limitations applicable to the charitable contribution deduction for

corporations.

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Charitable Contributions (slide 1 of 6)Charitable Contributions (slide 1 of 6)

• Contributions are not deductible unless made to qualified domestic charitable organizations– See list on p. 4-14 of text

• Contributions are not deductible unless made to qualified domestic charitable organizations– See list on p. 4-14 of text

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• Contributions are generally deductible when the payment is made, both for cash and accrual basis taxpayers– Exception: Accrual basis corporations may

deduct contribution in year of accrual if:• Authorized by the board of directors, and

• Actually paid within 2 1/2 months of end of year

• Contributions are generally deductible when the payment is made, both for cash and accrual basis taxpayers– Exception: Accrual basis corporations may

deduct contribution in year of accrual if:• Authorized by the board of directors, and

• Actually paid within 2 1/2 months of end of year

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• The deduction for a charitable contribution of property depends on the type of property contributed– Ordinary income property

• Deduction generally is adjusted basis

– Long-term capital gain property• Deduction generally is fair market value (FMV)

• The deduction for a charitable contribution of property depends on the type of property contributed– Ordinary income property

• Deduction generally is adjusted basis

– Long-term capital gain property• Deduction generally is fair market value (FMV)

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• Exceptions for certain contributions of long-term capital gain property:– Basis (rather than FMV) is used if the property

is tangible personal property and is put to an unrelated use by the donee

– Basis (rather than FMV) is used for contributions to certain private nonoperating foundations

• Exceptions for certain contributions of long-term capital gain property:– Basis (rather than FMV) is used if the property

is tangible personal property and is put to an unrelated use by the donee

– Basis (rather than FMV) is used for contributions to certain private nonoperating foundations

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• Deduction is equal to basis plus half of appreciation for contributions of certain types of property:– Inventory used solely for care of the ill, the

needy, or infants– Scientific property donated to colleges and

certain scientific research organizations for use in research

• Deduction is equal to basis plus half of appreciation for contributions of certain types of property:– Inventory used solely for care of the ill, the

needy, or infants– Scientific property donated to colleges and

certain scientific research organizations for use in research

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• Corporate contribution deductions are limited to 10% of taxable income computed without regard to: – The charitable contribution deduction– Any NOL or capital loss carryback– The dividends received deduction

• Individuals may be subject to limits of 20%, 30%, or 50% (see Chapter 15)

• Corporate contribution deductions are limited to 10% of taxable income computed without regard to: – The charitable contribution deduction– Any NOL or capital loss carryback– The dividends received deduction

• Individuals may be subject to limits of 20%, 30%, or 50% (see Chapter 15)

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Recognize and apply the alternative tax treatments for research and experimental

expenditures.

Recognize and apply the alternative tax treatments for research and experimental

expenditures.

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Research & Experimental Expenditures (slide 1 of 2)


• R & E expenditures are defined in the Regulations (see p. 4-17 in text)– Includes costs of developing a model, a plant

process, a product, a formula, or an invention– Includes costs of improving an existing

property of type mentioned above– Excludes costs for ordinary testing, quality

control, efficiency surveys, etc

• R & E expenditures are defined in the Regulations (see p. 4-17 in text)– Includes costs of developing a model, a plant

process, a product, a formula, or an invention– Includes costs of improving an existing

property of type mentioned above– Excludes costs for ordinary testing, quality

control, efficiency surveys, etc

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• Alternative treatments for R & E expenditures:– Expense in the year paid or incurred– Defer and amortize over a period of not less

than 60 months– Capitalize

• Alternative treatments for R & E expenditures:– Expense in the year paid or incurred– Defer and amortize over a period of not less

than 60 months– Capitalize

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Other Expense Rules - InterestOther Expense Rules - Interest

• Corporations may generally deduct all business interest incurred (unless associated with a passive activity)

• Individuals may deduct some type of interest but not others– Deductible: business interest, home mortgage interest

(to a limited extent), and investment interest (to a limited extent)

– Not deductible: personal interest (unless the loan is secured by the taxpayer’s home)

• Corporations may generally deduct all business interest incurred (unless associated with a passive activity)

• Individuals may deduct some type of interest but not others– Deductible: business interest, home mortgage interest

(to a limited extent), and investment interest (to a limited extent)

– Not deductible: personal interest (unless the loan is secured by the taxpayer’s home)

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Other Expense Rules - Taxes (slide 1 of 2)


• Taxes of all types incurred by business entities are generally deductible (unless incurred in a passive activity)– Most Federal taxes are not deductible

• Taxes of all types incurred by business entities are generally deductible (unless incurred in a passive activity)– Most Federal taxes are not deductible

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• Taxes incurred by individuals are generally deductible if related to business or investments– Taxes on realty and personalty generally are deductible,

even if the property is for personal use

• When real property is sold during the year, real estate taxes must be apportioned between the buyer and seller on the basis of days owned during the tax year

• Taxes incurred by individuals are generally deductible if related to business or investments– Taxes on realty and personalty generally are deductible,

even if the property is for personal use

• When real property is sold during the year, real estate taxes must be apportioned between the buyer and seller on the basis of days owned during the tax year

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Determine the amount of cost recovery under MACRS, and apply the § 179 expensing election and the deduction limitations on

listed property and automobiles when making the MACRS calculation.

Determine the amount of cost recovery under MACRS, and apply the § 179 expensing election and the deduction limitations on

listed property and automobiles when making the MACRS calculation.

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Depreciation vs. Cost Recovery Allowances

Depreciation vs. Cost Recovery Allowances

• Depreciation rules applied to assets before 1980 and continue to apply to pre-1981 assets and certain assets placed in service after 1980

• The accelerated cost recovery system (ACRS) generally applied to assets acquired after 1980 and before 1987– ACRS cost recovery lives were shorter than

depreciation lives and used more accelerated methods

• Depreciation rules applied to assets before 1980 and continue to apply to pre-1981 assets and certain assets placed in service after 1980

• The accelerated cost recovery system (ACRS) generally applied to assets acquired after 1980 and before 1987– ACRS cost recovery lives were shorter than

depreciation lives and used more accelerated methods

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MACRS (slide 1 of 2)MACRS (slide 1 of 2)

• MACRS applies to post-1986 property– Depreciation and ACRS rules, which are applicable to

pre-1987 property, are not covered in the text

• Different cost recovery tables apply to personalty and realty– Realty includes land, buildings, etc. (real estate)

– Personalty includes assets that are not realty (machines, equipment, furniture, etc.)

• MACRS applies to post-1986 property– Depreciation and ACRS rules, which are applicable to

pre-1987 property, are not covered in the text

• Different cost recovery tables apply to personalty and realty– Realty includes land, buildings, etc. (real estate)

– Personalty includes assets that are not realty (machines, equipment, furniture, etc.)

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MACRS (slide 2 of 2)MACRS (slide 2 of 2)

• Trade or business or production of income assets are eligible for cost recovery– Assets that do not decline in value or have a determinable useful

life are not eligible (e.g., land, antiques, stock)

• Basis of property must be reduced by cost recovery allowed and by not less than the allowable amount

• Basis for cost recovery of personal-use assets converted to business or income-producing use is the lower of adjusted basis or FMV at time property is converted

• Trade or business or production of income assets are eligible for cost recovery– Assets that do not decline in value or have a determinable useful

life are not eligible (e.g., land, antiques, stock)

• Basis of property must be reduced by cost recovery allowed and by not less than the allowable amount

• Basis for cost recovery of personal-use assets converted to business or income-producing use is the lower of adjusted basis or FMV at time property is converted

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MACRS - Personalty (slide 1 of 3)MACRS - Personalty (slide 1 of 3)

• Determine cost recovery period of asset (Exhibit 4-2, p. 4-24 in text)

• Look up rate in appropriate table– Table 4-1 (Half-year convention)– Table 4-2 (Mid-quarter convention)– Table 4-4 (Straight-line election, half-year convention)

• Multiply rate times basis• Generally, allowed 1/2 year of cost recovery in

year of acquisition and disposition

• Determine cost recovery period of asset (Exhibit 4-2, p. 4-24 in text)

• Look up rate in appropriate table– Table 4-1 (Half-year convention)– Table 4-2 (Mid-quarter convention)– Table 4-4 (Straight-line election, half-year convention)

• Multiply rate times basis• Generally, allowed 1/2 year of cost recovery in

year of acquisition and disposition

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MACRS Personalty (slide 2 of 3)MACRS Personalty (slide 2 of 3)

• Example 1 - Acquisition– Acme acquires a computer on 1/1/01 for

$10,000• 5-year property (see Exhibit 4-2)

• Rate from Table 4-1 = 20%

– Cost recovery allowance for 2001:

$10,000 x 20% = $2,000– Cost recovery allowance for 2002:

$10,000 x 32% = $3,200

• Example 1 - Acquisition– Acme acquires a computer on 1/1/01 for

$10,000• 5-year property (see Exhibit 4-2)

• Rate from Table 4-1 = 20%

– Cost recovery allowance for 2001:

$10,000 x 20% = $2,000– Cost recovery allowance for 2002:

$10,000 x 32% = $3,200

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MACRS Personalty (slide 3 of 3)MACRS Personalty (slide 3 of 3)

• Example 2 - Disposition– Acme sells the computer on 1/1/03 for $6,000

• Half-year convention applies (half-year of cost recovery is allowed in year of disposition)

– Cost Recovery Allowance for 2003:• $10,000 x 19.20% from Table 4-1 x 1/2 = $960

– Accumulated Cost Recovery Allowance:• [20% + 32% + (1/2 x 19.20%)] = ($2,000 + $3,200 + $960) =

$6,160

– Basis is $10,000 - $6,160 = $3,840

• Example 2 - Disposition– Acme sells the computer on 1/1/03 for $6,000

• Half-year convention applies (half-year of cost recovery is allowed in year of disposition)

– Cost Recovery Allowance for 2003:• $10,000 x 19.20% from Table 4-1 x 1/2 = $960

– Accumulated Cost Recovery Allowance:• [20% + 32% + (1/2 x 19.20%)] = ($2,000 + $3,200 + $960) =

$6,160

– Basis is $10,000 - $6,160 = $3,840

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MACRS - Realty (slide 1 of 3)MACRS - Realty (slide 1 of 3)

• MACRS for Post-1987 Realty– Based on SL method, mid-month convention– 27.5 year life for residential property– 39 year life for nonresidential property (31.5

year life from 1/1/87 through 5/12/93)

• Multiply base x rate from Table 4-3

• MACRS for Post-1987 Realty– Based on SL method, mid-month convention– 27.5 year life for residential property– 39 year life for nonresidential property (31.5

year life from 1/1/87 through 5/12/93)

• Multiply base x rate from Table 4-3

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• Example – Acquisition– Taxpayer acquires a warehouse for $100,000 on

April 1, 2001– 2001 Cost Recovery Allowance (CRA)

• $100,000 X 1.819% from Table 4-3 = $1,819

• Example – Acquisition– Taxpayer acquires a warehouse for $100,000 on

April 1, 2001– 2001 Cost Recovery Allowance (CRA)

• $100,000 X 1.819% from Table 4-3 = $1,819

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• CRA in year of disposition is based on the mid-month convention

• Example – Disposition– Taxpayer disposes of above warehouse on

October 1, 2002– 2002 Cost Recovery Allowance

• ($100,000 x 2.564%) [from Table 4-3] x (9.5/12) = $2,030

• CRA in year of disposition is based on the mid-month convention

• Example – Disposition– Taxpayer disposes of above warehouse on

October 1, 2002– 2002 Cost Recovery Allowance

• ($100,000 x 2.564%) [from Table 4-3] x (9.5/12) = $2,030

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Mid-Quarter ConventionMid-Quarter Convention

• Applies if > 40% of personalty is placed in service during last quarter of the year– Must group property by quarter acquired– Property acquired in1st quarter is allowed 10.5

months of cost recovery; 2nd quarter, 7.5 months; 3rd quarter 4.5 months; 4th quarter, 1.5 months

– Use Table 4-2 (Mid-quarter convention)

• Applies if > 40% of personalty is placed in service during last quarter of the year– Must group property by quarter acquired– Property acquired in1st quarter is allowed 10.5

months of cost recovery; 2nd quarter, 7.5 months; 3rd quarter 4.5 months; 4th quarter, 1.5 months

– Use Table 4-2 (Mid-quarter convention)

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The MACRS Straight-Line Election (Personalty)

The MACRS Straight-Line Election (Personalty)

• MACRS allows accelerated depreciation for personalty placed in service after 1986 (Table 4-1)

• The taxpayer may elect straight-line depreciation for personalty placed in service after 1986 (Table 4-4)– Taxpayer may wish to take slower write-offs

for various reasons (e.g., tax bracket is expected to be higher in later years)

• MACRS allows accelerated depreciation for personalty placed in service after 1986 (Table 4-1)

• The taxpayer may elect straight-line depreciation for personalty placed in service after 1986 (Table 4-4)– Taxpayer may wish to take slower write-offs

for various reasons (e.g., tax bracket is expected to be higher in later years)

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Election to Expense Assets Under § 179 (slide 1 of 3)


Maximum amount allowed:2000 $20,000

2001 or 2002 $24,000

2003 and thereafter $25,000

Maximum amount allowed:2000 $20,000

2001 or 2002 $24,000

2003 and thereafter $25,000

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Example: Corporation buys a $100,000 truck (5-year property) on February 15, 2001 and elects immediate expensing of the maximum amount

Cost of machine $100,000

§ 179 deduction 24,000

Amount subject to ACRS $ 76,000

MACRS rate .20

Cost recovery allowance $ 15,200• Total cost recovery allowed in 2001 is $39,200 ($24,000 + $15,200)

Example: Corporation buys a $100,000 truck (5-year property) on February 15, 2001 and elects immediate expensing of the maximum amount

Cost of machine $100,000

§ 179 deduction 24,000

Amount subject to ACRS $ 76,000

MACRS rate .20

Cost recovery allowance $ 15,200• Total cost recovery allowed in 2001 is $39,200 ($24,000 + $15,200)

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• Annual limitations on § 179 expense– The § 179 deduction is reduced dollar-for-

dollar to the extent eligible property placed in service during the year exceeds $200,000

– The amount expensed under § 179 cannot exceed the aggregate amount of taxable income derived from the conduct of any trade or business by the taxpayer

• Annual limitations on § 179 expense– The § 179 deduction is reduced dollar-for-

dollar to the extent eligible property placed in service during the year exceeds $200,000

– The amount expensed under § 179 cannot exceed the aggregate amount of taxable income derived from the conduct of any trade or business by the taxpayer

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Limits on Autos and Other Listed Property (slide 1 of 6)


• Limits on MACRS deductions apply to– Automobiles– Listed property (see next slide) used for both

business and personal purposes

• Types of limits– Restrictions on allowable cost recovery method

(depends on predominant use); applies to autos and listed property

– Dollar limits apply to autos

• Limits on MACRS deductions apply to– Automobiles– Listed property (see next slide) used for both

business and personal purposes

• Types of limits– Restrictions on allowable cost recovery method

(depends on predominant use); applies to autos and listed property

– Dollar limits apply to autos

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• Listed property includes: – Passenger automobiles– Certain other property used for transportation– Property used for entertainment, recreation, or

amusement– Certain computer equipment and peripherals– Cellular phones and similar

telecommunications equipment– Other property specified in the regulations

• Listed property includes: – Passenger automobiles– Certain other property used for transportation– Property used for entertainment, recreation, or

amusement– Certain computer equipment and peripherals– Cellular phones and similar

telecommunications equipment– Other property specified in the regulations

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• Methods for determining cost recovery allowance– Statutory percentage method–may be used if

property is predominantly (>50%) used for business; results in faster write-off than straight-line method

– Straight-line method–required if property is not used predominantly for business

• Methods for determining cost recovery allowance– Statutory percentage method–may be used if

property is predominantly (>50%) used for business; results in faster write-off than straight-line method

– Straight-line method–required if property is not used predominantly for business

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• Dollar limits applicable to automobiles (for 2001)

Recovery Year Recovery Limitation

1 $3,060

2 5,000

3 2,950

Remaining years* 1,775* $1,775 is recovered each year until cost is recovered

completely

• Dollar limits applicable to automobiles (for 2001)

Recovery Year Recovery Limitation

1 $3,060

2 5,000

3 2,950

Remaining years* 1,775* $1,775 is recovered each year until cost is recovered

completely

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Example: Taxpayer acquired an auto in 2001 for $20,000 and used it 80% for business.

2001 cost recovery allowance: ($20,000 x 20%) $4,000

Deduction is limited to $3,060 $3,060x Business use .80Cost recovery allowance $2,448

Example: Taxpayer acquired an auto in 2001 for $20,000 and used it 80% for business.

2001 cost recovery allowance: ($20,000 x 20%) $4,000

Deduction is limited to $3,060 $3,060x Business use .80Cost recovery allowance $2,448

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• Autos and listed property not used predominantly in business– Straight-line cost recovery tables apply

• Change from predominantly business use– Cost recovery allowances computed under

statutory percentage method are subject to recapture

• Autos and listed property not used predominantly in business– Straight-line cost recovery tables apply

• Change from predominantly business use– Cost recovery allowances computed under

statutory percentage method are subject to recapture

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Leased AutomobilesLeased Automobiles

• A taxpayer who leases an automobile must report an inclusion amount in gross income– Prevents taxpayers from circumventing dollar

limitations by leasing instead of purchasing– Inclusion amount is computed from a table

provided by the IRS

• A taxpayer who leases an automobile must report an inclusion amount in gross income– Prevents taxpayers from circumventing dollar

limitations by leasing instead of purchasing– Inclusion amount is computed from a table

provided by the IRS

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Alternative Depreciation System (ADS)

Alternative Depreciation System (ADS)

• ADS must be used in certain cases:– To calculate the AMT adjustment(Chapter 13)

– To compute depreciation on property• Used predominantly outside the U.S.

• Leased or otherwise used by a tax-exempt entity

• Financed with the proceeds of tax-exempt bonds

• Imported from foreign countries that maintain discriminatory trade practices or otherwise engage in discriminatory acts

– To compute depreciation for earnings and profits purposes ( Chapter 10)

• ADS must be used in certain cases:– To calculate the AMT adjustment(Chapter 13)

– To compute depreciation on property• Used predominantly outside the U.S.

• Leased or otherwise used by a tax-exempt entity

• Financed with the proceeds of tax-exempt bonds

• Imported from foreign countries that maintain discriminatory trade practices or otherwise engage in discriminatory acts

– To compute depreciation for earnings and profits purposes ( Chapter 10)

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Identify intangible assets that are eligible for amortization and calculate the amount of the

deduction.

Identify intangible assets that are eligible for amortization and calculate the amount of the

deduction.

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Amortization (slide 1 of 2)Amortization (slide 1 of 2)

• Amortization refers to the systematic write-off of intangible assets

• Amortizable § 197 intangibles may be written off over a 15-year period

• Amortization refers to the systematic write-off of intangible assets

• Amortizable § 197 intangibles may be written off over a 15-year period

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Amortization (slide 2 of 2)Amortization (slide 2 of 2)

• § 197 intangibles include:– Goodwill and going concern value– Franchises (except sports franchises)– Trademarks and trade names– Certain other intangibles obtained in acquisition of

a business (e.g., covenant not to compete, patents)

• § 197 intangibles include:– Goodwill and going concern value– Franchises (except sports franchises)– Trademarks and trade names– Certain other intangibles obtained in acquisition of

a business (e.g., covenant not to compete, patents)

c4 - 1 chapter 4 business deductions chapter 4 business deductions

Documents

necessary expenses

deductible expenses

business slide

reasonable expenses

deduction of business

deductible slide

specified expenses

nature ordinary expenses