Deductions: General Concepts and Trade or Business Deductions

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Chapter 6 _____Deductions: General Concepts and Trade or Business Deductions

Tax deductions are allowed to taxpayers only if specifically authorized by the Internal Revenue Code. Deductions allowable to individual taxpayers fall into three categories: trade or business deductions, production of income deductions, and personal deductions. This chapter is also concerned with business deductions as they appear on a sole proprietor 's Schedule C, which is included as part of the taxpayer 's individual income tax return.

Categories of Allowable Deductions
¶6001 Classification of Tax Deductions
The three categories of tax deductions allowable to individual taxpayers are (1) trade or business expenses (including the
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¶6125 Substantiation of Tax Deductions
Taxpayers must be able to substantiate the deductions claimed on their tax returns if required by the IRS through the audit process. Taxpayers can normally substantiate tax deductions by providing documentary evidence such as receipts, invoices, and canceled checks. In some instances, oral testimony in support of the taxpayer may be of some value.

¶6145 Debts of Another Taxpayer
In general, if a taxpayer pays a tax deductible expense which is the obligation of another taxpayer, neither taxpayer is entitled to a tax deduction. The payer-taxpayer is not entitled to a deduction since the payer had no obligation to make the payment. The payee-taxpayer is not entitled to the deduction since the payee did not actually pay the obligation.

Common Business Deductions
¶6201 Advertising
Advertising expenditures are deductible for tax purposes if they are reasonably related to a taxpayer 's trade or business activities or if they are related to an income producing activity such as renting rental property. Goodwill advertising generally qualifies as a deduction.

¶6215 Bad Debts
Business or nonbusiness debts becoming worthless during the year are deductible. Business bad debts are debts arising in connection with a trade or business, while nonbusiness debts are debts of a personal nature. The amount of a bad debt deduction always is limited to the adjusted basis of the debt in the hands of the taxpayer. To be deductible,

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