Discuss how an individual would deduct each of the following expenditures. If more than one treatment is possible, discuss the circumstances under which each type of deduction would be obtained:
- Amos purchased 500 shares of Lietzke stock for $50 per share. He also paid $1,200 in commissions on the purchase.
- Dandy owns an optical store. She paid $2,000 in medical insurance premiums on her employees and $1,400 on a medical policy covering herself and her family.
- Oscar is a finance professor at State University. He purchased professional journals costing $400 which he uses to keep current on the latest developments in finance.
- Gerry is a nurse. He paid $350 for nursing uniforms
- Edgar owns a rental property. His rental income for the year was $13,000, and his allowable expenses were $9,000
- Amos purchased 500 shares of Lietzke stock for $50 per share. He also paid $1,200 in commissions on the purchase.
Commissions paid are part of the cost of acquiring the stock and must be added to the basis of the stock. Because stock does not have a definite life, capital recovery does not occur until Amos disposes of the stock.
- Dandy owns an optical store. She paid $2,000 in medical insurance premiums on her employees and $1,400 on a medical policy covering herself and her family.
The $2,000 of premiums paid on employees’ insurance is deductible as an ordinary and necessary business expense (for adjusted gross income). If Dandy owns the store as a sole proprietor, she is not an employee of the store and cannot deduct the $1,400 as a business expense (just as an employee could not deduct the cost of personal medical insurance as a business expense). As a self-employed individual, Dandy can deduct all of the cost of her policy for adjusted gross income (see Chapter 6).
- Oscar is a finance professor at State University. He purchased professional journals costing $400 which he uses to keep current on the latest developments in finance.
Oscar is considered to be in a trade or business and the journals are related to his trade or business. However, employees are only allowed to deduct expenses related to their employment as miscellaneous itemized deductions, which are subject to a 2% of adjusted gross income limitation (see Chapter 8).
- Gerry is a nurse. He paid $350 for nursing uniforms.
Gerry is considered to be in a trade or business and special clothing required in a trade or business is deductible. If he is an employee of a hospital or doctor, he will only be allowed to deduct the cost of the uniforms as a miscellaneous itemized deduction (which is subject to a 2% of adjusted gross income limitation). However, if he is self-employed, the cost of the nursing uniforms would be deducted for adjusted gross income.
- Edgar owns a rental property. His rental income for the year was $13,000, and his allowable expenses were $9,000.
Rental expenses are always deductible for adjusted gross income without regard to whether the rental activity is a trade or business or a production of income activity. As a practical matter, the expenses are netted against the income from the rental and the net amount is reported on the tax return. In this case, $4,000 ($13,000 – $9,000) would be included in gross income.
