Essay about Tax Memorandum

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Tax file memorandum Subject: Profit or Loss from business I. Facts: In early 2010, Walter Hodges became interested in the real estate market so he initiated his investigation into the real estate market. Mr. Hodges intended to acquire real estate with the intentions for investment or rental. Mr. Hodge has no previous knowledge or exposure to any real estate rental or investment industry. As a result, Mr. Hodges began in Spring 2010 to advertise and expose his business through various promotional avenues such as business cards, flyers, and customer relations. As Mr. Hodges promoted his business, he also completed a business plan for buying, remodeling, and renting property. Furthermore, in October 2010, Mr. Hodges…show more content…
2. And why was it alleged that Walter Hodges was not in trade or business during 2010? III. Analysis: Issue 1. The issue for decision is whether Walter Hodges is entitled under section §162 to deduct claims on his 2010 Schedule C, Profit or Loss from Business. Upon examination of Mr. Hodges tax return, the IRS disallowed Mr. Hodges Schedule C expenses because he failed to substantiate his expenses or to prove that they were "ordinary and necessary" to his business. Section §162(a) states that all the ordinary and necessary expenses paid or incurred during the taxable year in any trade shall be allowed as deductions. Section §162(a) specifies that such expenses must be directly connected with or pertain to the taxpayer's trade or business that is functioning as a business at the time the expenses were incurred. Furthermore, Walter Hodges largest expenditure was training classes for $25,000 which was an educational expense incurred to prepare for a new career as a real estate investor and renter rather than to maintain or improve skills in an ongoing business or career so it was not a deductible under section §162 (sect. 1.162.-5, Income Tax Reg.). Issue 2: Furthermore, it was asserted that Ms. Hodges was not engaged in the business of investing, renting, or offering to rent property until March 2011. The taxpayer is not carrying on a trade or business under section §162(a) until the business is functioning as a

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