Tax I Study Objectives

TAX

CH. 6

OBJ #3

* Sec 263, expenditures that (1) provide a permanent improvement or “betterment” which increases the value if any property or (2) “restore” the property are considered capital expenditures which generally must be capitalized and depreciated over an appropriate number of years.

* Taxpayers often prefer a current deduction over capitalizing and depreciating an asset because of the time value of money

* Sec 266 is elective

* Taxpayers may not deduct any expense allocated or related to tax-exempt income

* The IRC specifically disallows interest expense on debt the taxpayer incurs in order to purchase or hold tax-exempt securities.

* Taxpayers may not deduct certain expenditures, if the payment itself is illegal or if the payment is a penalty or fine resulting from an illegal act.

* Payments of fines and penalties

* The IRC also disallows a deduction for the payment of any fine or penalty paid to a government because of the violation of the law.

* Other expenditures specifically disallowed

* Political contributions and lobbying expenses and in certain situations business start-up expenses.

* The IRC allows a current deduction in the year in which the business starts for business start-up expenditures.

* The current deduction amount is the lessor of the amount of the start-up expenditures or $5,000

* Taxpayers must capitalize and amortize the remain portion of the start-up expenditure

OBJ #4

* Generally the burden of proving the existence of a deduction or loss falls on the taxpayer.

* Sections 274 and 280F provide specific and more stringent recordkeeping requirements for travel, entertainment, business gifts, computers, and vehicles used for transportation. In these cases, the taxpayer may not take a deduction unless the taxpayer substantiates the expenditure by either an adequate record or sufficient evidence the corroborated the taxpayer statement.

* Amount of the...