Taxing Definitions

Definition — Fines and Penalties

You already know section 162(a) of the Internal Revenue Code lets you deduct the ordinary and necessary expenses you pay while carrying on your trade or business. An ordinary expense is one that is common and acceptable in your business. A necessary expense is appropriate and helpful in carrying on your business. You may also know that section 162(f) says…

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Taxing Definitions

The Value of Sand

Tax court cases frequently inform on interesting subjects. For example, did you know one cubic yard of sand generally weighs 1-1/2 tons? That’s according to footnote four in 140 T.C. No. 15 (Chapman Glen Limited). In this case, the value of the sand, and other assets, are in dispute—which leads to another interesting subject: valuing assets. Fair market value is…

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Taxing Definitions

Theft Losses and Legal Fiction

When you think of legal fiction, best-selling authors such as John Grisham and Scott Turow may come to mind—and if you’re a tax preparer, you might want to add Judge Francis M. Allegra of the US Court of Federal Claims to your list. In Goeller v. U.S., (Ct Fed Cl 3/20/2013), Judge Allegra writes of a long-entrenched legal fiction dealing…

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Taxing Definitions

Depends on Your Definition

Image source: wpclipart.com Some people define a boat as a watercraft, and others as a hole in the water into which you throw money. In T.C. Memo. 2012-289 (Blakeney), the $4 million yacht in question qualifies for the second definition, but another defining word determines whether the taxpayer will be liable for a $632,846 deficiency. The question is whether the…

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Taxing Definitions

Hot Interest

Image source: www.openclipart.org Generally, the IRS charges interest when you fail to pay the amount of tax you owe by the date it is due. The interest rate charged is the federal short term rate plus 3%, and is determined quarterly by the IRS. A special rate applies to C corporations that owe more than $100,000. For these “large corporate…

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Taxing Definitions

Substantial Compliance Doctrine

Image source: openclipart.org The tax code contains elections that notify the Internal Revenue Service of your intention to select a specific tax treatment when more than one is available or applicable. Generally, you must comply with the underlying regulations governing the completion of the election you’ve chosen in order to give the IRS enough information to determine whether the election…

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Taxing Definitions

The Idle Asset Rule

Image source: openclipart.org When you buy long-lived assets for your business and place them in service, you can take a tax deduction for depreciation to recover your investment in the asset. “Placed in service” is defined as when the asset is first ready and available for a specifically assigned function in your business (see Income Tax Regs. Section 1.167(a)-11(e)(1)(i)). You…

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Taxing Definitions

Foreign Earned Income Exclusion

As a US citizen, you’re taxed on your worldwide income. That includes income you earn working in a foreign country. To reduce the double taxation that can result when the foreign country where you work can also tax that income, and to create a more equitable economic playing field for companies that pay US workers overseas, section 911 of the…

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Taxing Definitions

All Events Test

Image source: openclipart.org When you use an accrual method of accounting, your financial statements reflect that you recognize income when you earn it and expenses when you incur them. The all events test is a standard for determining when an item of income or expense should be included on your income tax return. Income inclusion is covered in Regulation 1.451-1(a),…

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Taxing Definitions

Section 86(e) Election

Image source: Public domain via Wikimedia Commons  A section 86(e) election, also known as a “lump sum” election, is a way to reduce the amount of retroactive social security benefits included in your current year income. Under section 86 of the Internal Revenue code, part of your social security benefits can be taxable in the year you receive them. However,…

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