CHAPTER 13: PRINCIPLES OF DEDUCTIONS
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BUSINESS EXPENSE
Costs of doing trade, business, or practice of
profession.
Examples: Employee salaries, office utilities,
supplies and rent, taxes, losses, bad debts,
depreciation on business properties, research
and development and the like.
DEDUCTIBLE
BUSINESS EXPENSE
Benefits current accounting period.
Costs of generating income or gains for the
current period
DEDUCTIBLE
Examples: salaries and wages expense,
utilities expense, selling expenses, rent, local
taxes and permits.
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PERSONAL EXPENSE
Living and family expenses of individual
taxpayers.
Example: Family food, personal recreation
and transportation, medication, home rentals
and utilities, tuition fees of dependents, and
other similar expenses.
NOT DEDUCTIBLE
BUSINESS CAPITAL EXPENDITURE
Benefits future accounting period.
Initially recorded as assets upon acquisition
then later deducted against future gross
income when used in the trade, business, or
profession of taxpayer.
ADVANCED DEDUCTION IS NOT
WARRANTED AS IT CONTRADICTS THE
LIFEBLOOD DOCTRINE.
Examples: items of PPE, inventory,
investments, prepayments, acquisition of
intangible assets including costs of defending
the same in the court, expenses to promote
business goodwill, rentals on capital lease or
finance lease that transfers ownership.
RULES ON DEDUCTING CAPITAL EXPENDITURES
1. NON-DEPRECIABLE ASSET
Deducted against the selling price when sold.
2. DEPRECIABLE PROPERTIES
3. INTANGIBLE ASSETS
4. INVENTORY
5. PREPAID EXPENSES