Question

Your client, Sam, is a small business taxpayer. He is under the impression that every dollar he spends currently related to his business will reduce his taxable income.

Required:

1 - Why are some expenses not deductible? Provide an example of an expense to support your response.

2 - Explain what actions Sam could take to turn a disallowed expense into a deductible expense.

3 - Provide an alternative example of where Sam might have an expense disallowance.

Answer 1

1. Deductibility of Expenses to Sam: According to IRC Section 162, trade or business expenses shall be allowed as a deduction on all ordinary and necessary expenses paid and incurred during the taxable year. In general, a reasonable amount of salaries and compensation that paid for personal services that actually rendered, travelling expenses that on pursuing of trade or business which are not lavish or extravagant under the circumstances, and rentals and other payments that actually paid in order to continued use of profession for purposes of the trade or business. 2&3. Non Deductibility of some expenses: Here is the general framework for certain deductions in the Tax Code: (a) Ordinary and necessary trade or business expenses are deductible under Section 162; (b) Investment expenses or expenses incurred in the production of income are deductible under Section 212; and (c) Personal expenses are NOT deductible as per Section 262 (unless there is an exception in the Code for particular personal expenses. For Example, Mortgage interest in Sec.163).