Chapter #6 Deductions and Losses: In General Chapter Introduction
Learning Objectives
After completing Chapter 6, you should be able to:
LO.1Differentiate between deductions for and from adjusted gross income and describe the relevance of the differentiation.
LO.2Describe the cash and accrual methods of accounting with emphasis on the deduction aspects.
LO.3Apply some of the most common Internal Revenue Code deduction disallowance provisions.
LO.4Identify tax planning opportunities for maximizing deductions and minimizing the disallowance of deductions.
The Big Picture
Calculation of Deductible Expenses
Dr. Cliff Payne determines that the deductible expenses associated with his dental practice (a sole proprietorship) are as follows:
Salaries including FICA ($5,000 are unpaid at year-end) $120,000
Building rent 24,000
Depreciation of dental equipment and office furnishings and equipment 52,000
Insurance (malpractice, dental equipment, and office furnishings and equipment) 22,000
Dental supplies 16,000
Office supplies 3,000
Investigation expenses 6,000
Contribution to the State Senate campaign fund of Tom Smith 1,000
Contribution to the State Senate campaign fund of Virginia White 1,000
Legal expenses associated with patient lawsuit 4,000
Fine imposed by city for improper disposal of medical waste 3,000
Dues paid to The Dental Society 10,000
Draw by Dr. Payne for living expenses ($5,000 monthly) 60,000
Has Dr. Payne correctly calculated the deductible business expenses for his dental practice?
Read the chapter and formulate your response.
Framework 1040
Tax Formula for Individuals
This chapter covers the boldfaced portions of the Tax Formula for Individuals that was introduced in Concept Summary 3.1. Below those portions are the sections of Form 1040 where the results are reported.
The tax law has an all-inclusive definition of income; that is, income from whatever source derived is includible in gross income. Income cannot be excluded unless there is a specific statement to that effect in the tax law.
The opposite approach is used for deductions. A deduction is allowed only if there is a specific provision in the tax law that permits it. The inclusive definition of income and the exclusive definition of deductions may not seem fair to taxpayers, but it is the structure of the tax law. The courts agree with this structure, holding that any exclusions from income and all deductions are gifts from Congress.
Classification of Deductible Expenses
LO.1
Differentiate between deductions for and from adjusted gross income and describe the relevance of the differentiation.
