1. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 1 Federal Income Tax (Business) Deductions

2. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 2 Perspective

3. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 3 Business Personal

4. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 4 General Requirements Problem 6 – 9 –Ordinary –Necessary –Reasonable

5. © 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

6. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 6 Prudent Man Rule The fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830: "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." Some states which don't have specific legal lists require fiduciaries to uphold the Prudent Investor Act. also called Prudent Investor Act (Rule). http://www.investorwords.com/3927/Prudent_Man_Rule.html

7. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 7 The Four “Nots”

8. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 8 The Four “Nots” Contrary to public policy Capital Personal Related to tax- exempt income

9. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 9 The Four “Nots” Problem 6 – 11 Why are expenses related to tax-exempt income disallowed? Income not included; expenses not deducted

10. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 10 Which is better? For From

11. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 11 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

12. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 12 Business Expenses Generally… –Self-employed = “for” –Employee=“from”

13. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 13 Step 1: Theory Step 2? Step 3: Practice

14. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 14 “Tier 1” “Tier 2”

15. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 15 For vs. From Problem 6 – 13

16. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 16 Problem 6 - 13 a.Deductible?  Yes  For or from?  FROM – employEE b.Two sources of income?  Split:  Self-employed = FOR  Employed = FROM

17. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 17 “Tier 1” “Tier 2”

18. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 18 Tier 2 Expenses Reduced by 2% of AGI to determine deductible amount

19. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 19 Most itemized deductions are “Tier 1” Refer to text page 7-36

20. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 20 Refer to text page 7-36 Less 2% “Tier 2” Expenses Sub-total

21. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 21 For vs. From Problem 6 – 13 Problem 6 – 33

22. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 22 Problem 6 - 33 YesFrom YesFrom YesFrom YesFrom a. Deductible? 2 2 2 2

23. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 23 “Tier 1” “Tier 2”

24. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 24 Problem 6 - 33 Yes For b. If reimbursed… No "Tiers" with FOR

25. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 25 Business Expenses Self-employed –“for” Employee –Reimbursed? Yes=“for” No=“from”

26. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 26 Problem 6 - 33 Yes For c. If self-employed…

27. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 27 For vs. From Problem 6 – 13 Problem 6 – 33

28. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 28 Chapter 9 Travel and Transportation Automobile Expenses Entertainment Moving Expenses Education Expenses Home Office Reimbursements Hobby losses (from Chap 6)

29. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 29 Chapter 9 Travel and Transportation Automobile Expenses Entertainment Moving Expenses Education Expenses Home Office Reimbursements Hobby losses (from Chap 6)

30. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 30 Travel and Transportation Define travel –“away from home overnight” –Name some

31. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 31 Travel and Transportation Define travel –“away from home overnight” –Name some

32. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 32 Travel and Transportation Define travel –“away from home overnight” –Name some Define transportation Problem 9 -56

33. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 33 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

34. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 34 Airfare Deductible? AB C

35. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 35 Airfare Deductible? AB C

36. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 36 Airfare Deductible? AB C 1/32/3

37. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 37 Exemption

38. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 38 Prorate Exemption? 1/3? 2/3?

39. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 39 Airfare Deductible? AB C Never prorate airfare.

40. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 40 Airfare Deductible? AB C Primary reason?

41. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 41 Airfare Deductible? AB C

42. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 42 Purely business expenses on a personal trip ARE deductible Purely personal expenses on a business trip are NOT deductible

43. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 43 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

44. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 44 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

45. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 45 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$150 Hotel ($100 per day)500 Entertainment 500 Total$1,700 assume he was NOT reimbursed

46. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 46 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$150 Hotel ($100 per day)500 Entertainment 500 Total$1,700 assume he was NOT reimbursed 50% limit

47. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 47 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$ 75 Hotel ($100 per day)500 Entertainment 500 Total$1,700 assume he was NOT reimbursed

48. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 48 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$ 75 Hotel ($100 per day) x 3 500$300 Entertainment 500 Total$1,700 assume he was NOT reimbursed

49. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 49 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$ 75 Hotel ($100 per day) x 3 500$300 Entertainment 500$250 Total$1,700 assume he was NOT reimbursed 50% limit

50. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 50 Problem 9 - 56 Airfare$ 450$450 Meals ($50 per day) x 3250$150 Hotel ($100 per day) x 3 500$300 Entertainment 500$250 Total$1,700 assume he was NOT reimbursed Deductible FROM – Tier 2

51. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 51 Problem 9 - 56 Airfare$ 450 Meals ($50 per day) 250 Hotel ($100 per day) 500 Entertainment 500 Total$1,700 assume he WAS reimbursed

52. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 52 Problem 9 - 56 Airfare$ 4500 Meals ($50 per day) 2500 Hotel ($100 per day) 5000 Entertainment 5000 Total$1,700 assume he WAS reimbursed a. none deductible by Mike

53. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 53 Problem 9 - 56 Airfare$ 4500 Meals ($50 per day) 2500 Hotel ($100 per day) 5000 Entertainment 5000 Total$1,700 assume he WAS reimbursed b. reimb not reported by Mike

54. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 54 Problem 9 - 56 Airfare$ 450450 Meals ($50 per day) 250 75 Hotel ($100 per day) 500300 Entertainment 500250 Total$1,700 assume he WAS reimbursed c. all deductible by employer

55. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 55 Problem 9 - 52 Automobile$2,500 Moving Expenses4,000 Entertainment 1,500 Travel2,000 Meals500 Prof Dues and Subs500 Have “issues” with any of these?Same facts as textbook?

56. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 56 Problem 9 - 52 Automobile$2,500 Moving Expenses4,000 Entertainment 750 Travel2,000 Meals500 Prof Dues and Subs500

57. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 57 Problem 9 - 52 Automobile$2,500 Moving Expenses4,000 Entertainment 750 Travel2,000 Meals250 Prof Dues and Subs500

58. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 58 Problem 9 - 52 Automobile$2,500 Moving Expenses FOR4,000 Entertainment 750 Travel2,000 Meals250 Prof Dues and Subs 500 Total$10,750

59. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 59 Problem 9 - 52 Automobile$2,500 Moving ExpensesFOR Entertainment 750 Travel2,000 Meals250 Prof Dues and Subs 500 Total$6,000 Less: 2% of $120,0002,400 Deduction$ 3,600 b. from; tier 2

60. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 60 Chapter 9 Travel and Transportation Automobile Expenses Entertainment Moving Expenses Education Expenses Home Office Reimbursements Hobby losses (from Chap 6) Step 1: Theory Step 2? Step 3: Practice

61. © Copyright 2001-2005 by M. Ray Gregg. All rights reserved. 61