Business and Profit Seeking Expenses

These are the general requirements to qualify for a deduction for business and profit-seeking expenses:
1. the cost has to be an "expense"
2. the expense has to be "ordinary"
3. it has to be "necessary"
4. it has to be "paid or incurred during the taxable year" &
5. it has to be paid or incurred in "carrying on " a "trade or business."

What does "ordinary" mean? It means "customary or expected in the life of a business."

To determine if an expense is deductible, we need to perform the following analysis:
1. ascertain the purpose or motive of the taxpayer in making the payments and
2. determine whether there is a sufficient connection between the expenditures and the taxpayer's trade or business.

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I am a law student, not a lawyer. This website is composed as a personal study aid for myself as I study law, it does not contain legal advice and I am not your lawyer. Please seek legal advice from a lawyer, not a blog.

Taxes on work abroad (Foreign Earned Income)

 I've often asked myself a question. If you are an American that works abroad, are your wages there taxable under US law? Apparently up to $80000 are not taxable as compensation. If you exceed that amount, the amount in excess is taxable.

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I am a law student, not a lawyer. This website is composed as a personal study aid for myself as I study law, it does not contain legal advice and I am not your lawyer. Please seek legal advice from a lawyer, not a blog.

Adopt a child to save $10000 on taxes

If you adopt a child you are generally allowed a maximum credit of $10000 for qualified adoption expenses, e.g. reasonable and necessary adoption fees, courts costs, attorney fees, etc. Obviously it can't be your spouse's child. The child has to be under 18 and has to be "physically or mentally incapable of caring for himself."

If you're making over $150K in gross income, bad news, the exception is gradually phased out from that amount.

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I am a law student, not a lawyer. This website is composed as a personal study aid for myself as I study law, it does not contain legal advice and I am not your lawyer. Please seek legal advice from a lawyer, not a blog.

Use of fringe benefits by family members

If your company pays for a fringe benefit for you, e.g. for plane tickets to fly to various conventions/events and your friends and family members can tag along with you, have you or your family members realized any taxable income?

Generally we would start our analysis of this problem by looking at section 61 of the Internal Revenue Code. Section 61 defines what Gross Income is.

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived...

Generally payments from an employer to an employee are taxable as compensation. It is true that an employee saves money he would have otherwise spent on this travel but perhaps he would not have chosen to travel. So it would be unfair to require him to pay income on something he might not have purchased of his own free will had it not been for the employer. Therefore an employee is generally taxed if the benefit he received was necessary for the performance of his duties. For instance, if he was required to travel by his employer, his tickets would be exempt from taxation.

What about his family and friends that came with him? If their presence was necessary for the performance of his duties, then their tickets would not be taxable. If they came for pleasure, their tickets would be taxed.

Obviously I am not going in-depth in my analysis.

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I am a law student, not a lawyer. This website is composed as a personal study aid for myself as I study law, it does not contain legal advice and I am not your lawyer. Please seek legal advice from a lawyer, not a blog.

Tax treatment of fringe benefits

What is more beneficial to you?

If you are working for a company that offers you a fringe benefit worth $200 or if you are working for another company that doesn't offer any fringe benefits but perhaps pays you a bit more, say $400 and  you are in a 50% tax bracket.

Here is a calculation:

If you are for instance in a 50% tax bracket, to purchase the same item you would need to earn $400 first. Once you have earned $400, you would pay $200 in taxes on it (50%), and you would have $200 left that you could spend on this product.

Comparing the two options now: assuming you are in the 50% tax bracket, the company that offers you a $200 fringe benefit would clearly be preferable economically compared to the company offering ANYTHING BELOW $400 in wages.

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I am a law student, not a lawyer. This website is composed as a personal study aid for myself as I study law, it does not contain legal advice and I am not your lawyer. Please seek legal advice from a lawyer, not a blog.