Federal Taxation Ch 6 Solution Manual

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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 four categories: trade or business expenses, expenses incurred for the production of income, losses, and personal expenses. In addition to discussing the general requirements for deductibility for each of the above types of expenses, this chapter also discusses the tax treatment of many commonly encountered expenses incurred by taxpayers, from trade or business expenses such as rent, insurance, interest, taxes, bad debts, etc. to employee business expenses (travel, transportation, etc.) to
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Personal expenses deducted as itemized deductions are discussed in Chapter 8.

Trade or Business Deductions
¶6201 Overview—Code Sec. 162 Under Code Sec. 162, all ordinary, necessary and reasonable expenses incurred in carrying on a trade or business activity are deductible. This is true whether the taxpayer’s business activities are structured as a sole proprietor, a partnership, or a corporation. Allowable trade or business expenses incurred by individuals are deductible “for” AGI, usually on Schedule C, attached to Form 1040. ¶6205 General Criteria There are four requirements for an expense to be deductible as a trade or business expense: (1) It must be related to carrying on a trade or business activity (as opposed, for example, to a hobby activity); (2) It must be ordinary and necessary; (3) It must be reasonable; and (4) It must be paid or incurred during the taxable year. ¶6215 Expense Must Be Incurred in a Trade or Business Activity A deduction is authorized by Code Sec. 162 only if the expenditure is paid or incurred in an activity that constitutes a trade or business. The purpose of this requirement is to deny deductions for expenses incurred in activities that are primarily personal in nature. Business status requires both a profit motive and a sufficient degree of taxpayer involvement in the activity to distinguish the activity from a passive
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