Chapter 7, Problem 1DQ

To determine

State the differences and similarities between deductions and losses.

Explanation of Solution

Difference:

The important difference is that most of the deductions are for the purpose of current expenditures and amortization of capital expenditures whereas the losses results from either an excess of deduction over income which refers to annual loss or an excess of basis over the amount realized on the disposition of an asset which refers to transaction loss.

Similarities:

The concept of deductions and losses refers to the amounts invested to produce income and are reductions in the taxable income under the concept of ability to pay. Further, the general approach to the deductibility of losses is similar to that of the approach towards deductions. That is, tax relief is the result of legislative grace and any deduction which is allowed must be specified in the tax law. The categorization of losses by those incurred in trade or business, personal losses is same to the approach for deduction. The limitation on any losses is similar to the limitation which is placed on deductions within each category.