CHAPTER 5 NOTES TAX 4001

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CHAPTER 5 NOTESTAX 4001

• Spring 2009

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MAJOR CONCEPTS

• ORDINARY NECESSARY BUSINESS EXPENSES
• DIALLOWANCE POSSIBLIITES
• RELATED PARTY TRANSACTIONS
• BUSINESS INVESTIGATION COSTS
• DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
• CHARITABLE CONTRIBUTIONS
• DEPRECIATION/AMORTIZATION

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ORDINARY AND NECESSARY BUSINESS EXPENSES

• MUST BE BUSINESS OR PROFIT RELATED
• NO Deduction for personal expenses or personal
  losses, i.e., 50 of meals entertainment
• Must be reasonable
• When deductible
• Cash Method when paid (even with borrowed
  funds)
• Accrual economic performance (liability
  incurred and determined)

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DISALLOWANCE POSSIBLITIES

• Public Policy Limitations
• Bribes, fines, penalties, kickbacks
• Two-thirds of treble damage payments in antitrust
  suits
• Relationship of legal fess to trade or business
• Expenses related to illegal businesses
• Political Contributions
• Lobbying (OK for local, monitoring, 2,000 of
  in house costs)

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RELATED PARTY TRANSACTIONS

• Losses disallowed, but may offset gain realized
  on subsequent sale to third parties
• Expenses between accrual and cash basis taxpayers
  (placed on the cash basis)
• Constructive Ownership Rules apply
• Relationships by blood (brother, sister, spouse,
  ancestors lineal descendants)
• Relationship through entity ownership

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BUSINESS INVESTIGATION COSTS

• Deductible if related to taxpayers current trade
  or business
• If not related
• Non deductible if new business is not started
• Partially Deductible if new business is started
• 5,000 maximum deduction
• Reduced by each dollar above 50,000 with
  nondeductible amounts amortized over 180 months
  (15 years).

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DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

• Generally, 6 of the lesser of
• Qualified Production Activities Income (QPAI)
• Generally, Domestic Production Gross Receipts
  less related 1) cost of sales, 2) direct
  expenses, and 3) allocated indirect expenses
• Or, Taxable Income
• Limited to 50 of W-2 wages paid to employees
  engaged in qualified production activities

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CHARITABLE CONTRIBUTIONS

• Only donations to domestic donees qualify
• Deductible in the year made
• Exceptions for corporate donations authorized by
  the board of directors and paid by 15th day of
  third month of following year (due date for
  return)
• Property Contributions
• Long Term Gain Property
• FMV unless tangible property put to unrelated use
  or donations to private nonoperating foundations
  (basis)

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CHARITABLE CONTRIBUTIONS (CONTD)

• Ordinary Income property
• Basis unless for Ill, needy, infants, qualified
  research, etc.
• Additional 50 of appreciation limited to twice
  basis
• Limitations
• Corporations ,10 of taxable income before
  Contributions, NOL, and Dividends Received
  Deductions
• Individuals Chapter 16

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DEPRECIATION (COST RECOVERY)

• Deduction for otherwise non deductible capital
  expenditures
• Must be placed in service and used in a trade or
  business
• Personal assets converted to business use are
  limited to the lesser of FMV or cost on date of
  conversion
• Different Rules for Personal Property and Real
  Property

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DEPRECIATION (CONTD)

• Personal Property
• Expense Election (Sec. 179)
• For 2008, 250,000 expense option
• Limited to cost of new property purchased
• Limited to Taxable Income (cant create a NOL)
• Excess carries forward
• Maximum purchases 800,000 with for reduction
  of deduction for purchases above this amount
• Excess may be depreciated.

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DEPRECIATION (CONTD)

• Cost Recovery for Personal Property
• 3, 5, 7, 10, 15, or 20 year period
• Specified by the IRS, not necessarily useful life
• MACRS
• Double declining Balance switching to Straight
  Line when Straight Line is greater.
• ½ year convention unless more than 40 of the
  value of all property is placed in service during
  the last quarter then mid-quarter
• For 2008, 50 additional first year depreciation
  (after Sec. 179)

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DEPRECITION (CONTD)

• Limitations on automobiles and trucks 2008
• Cars 2,960, 4,800, 2,850, 1,775 vs. MACRS
  (similar rules for leased autos)
• Light Trucks 3,160, 5,100, 3,050, 1,875
• Limitations on personal use
• MACRS if used more that 50 for Business
• SL if less than 50
• Cost Recovery for Real Property
• Straight Line 27.5 years for residential, 39 for
  other (31.5 if pre 93), mid-month convention