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Earlier this month, Elon Musk announced it would terminate its contract with Twitter. As a result, Musk has a $ 1 billion down payment – some call it a split fee – as well as additional costs.
Presumably, comments about the split and the fee began to circulate on social media shortly after the announcement. Among other things, some say that this is a major tax deduction for business expenses.
From some liability companies to one-member companies to international enterprises, taxpayers often believe that paying business expenses is deductible for federal income tax purposes. But while there are many videos on the topic of Tick Talk, that’s not the case. See some of the costs that can be considered business expenses but not tax deductible
Personal expenses
Even if the company agrees to pay them, you will not be able to reduce personal expenses on your tax return. Giving a place or car in the name of an organization is not enough to cover the costs for business – and you will be taxed according to the type of expenses.
The deduction of business expenses is based on two questions.
- Is this for business?
- Is it ordinary (normal and acceptable in your industry) and important (useful and suitable for your business or business)?
The answer to both questions to answer the question must be yes. Business tax deduction Section 162 of the Tax Code – Assuming that no special circumstances apply. You can find a discussion of common business expenses in IRS publication 535.
This is true even if the costs are paid by an LLC or a corporation because the creation of a legal entity does not change or reduce the nature of the costs.
If expenses are mixed, that is, if you use them for personal and business expenses, you can only reduce the portion for business. Always keep good records.
Penalties to be paid to the government
It is not always enough to meet standard and necessary requirements to reduce costs. Section 162 is very long and involves many special circumstances. One of these exceptions — Section 162 (f) makes it clear that taxpayers cannot reduce the penalty they pay to the government or a government agency for violating any law. That is true even if the penalty is reduced to ordinary business expenses.
That’s what Mask knew in 2018. According to the SEC, Mook tweeted that he could take Tesla personally when he learned that the transaction was uncertain. The tweet has caused “significant market disruption.” The SEC filed a complaint and eventually reached an agreement with Musk and Tesla to pay a $ 20 million fine to each of the potential investors.
There is no exception If the penalty is used to compensate for the damage or damage caused by the act, including the modification of the property, the deduction prohibition does not apply to this section.
In the case of Musk, the SEC anticipated that exception, and the terms of the treaty “constitute a penalty for all purposes, including tax purposes.” In other words, no reduction will be allowed for Musk and Tesla if the money is finally used to repay.
Illegal bribery and loans
What about bribery and retaliation? Those are generally paid to help pave the way for palm oil or to facilitate trade. Depending on your industry, you may argue that those may be ordinary and important. However, like penalties, those are specifically prohibited under Section 162 (c).
Certain legal damages
My husband’s corporate lawyer jokes that the American view of his work can be solved financially. That’s why if there is a breach of contract – like masks and Twitter – or after the fact, they can agree.
In most cases, the damage needs to be accounted for in reasonable numbers — generally enough to restore the injured or injured person before the violation occurs or to make up for lost profits or other expenses. These injuries are commonly called fluid damage – although the term is very broad.
These amounts are usually deducted for federal tax purposes if the basic actions that led to the termination or prosecution are ordinary and necessary.
By Rev. Rule. 80-211 — Not to be used directly or as a precondition – The IRS makes it clear that the damages are based on facts and circumstances to determine whether the damages meet the requirements of Section 162. This means that taxpayers must keep good records. Lawyers should make sure that any settlements or related agreements clearly identify the nature of the harm.
For example, the amount paid under the agreement will not be deducted if it is taken as a covert penalty or fine. Similarly, certain types of damages may be prohibited by law — Section 162 (g), for example, restricts deductions related to anti-integrity charges.
Large or complex settlements can solve many basic issues — challenge mitigation. Normally, the more accurate the language, the better for the taxpayer.
Political contributions
In the current climate, there is a lot of pressure on political issues and financial support for candidates. This is also true for businesses — especially if those contributions could further support your geographic location or industry. If there are issues. Citizens United Legalizing corporations to write certain types of checks, Section 162 (m) generally rejects deductions for political contributions. This is an important way of doing business, but it is not a deduction.
Precious gifts
He often made expensive bottles of champagne for my clients.
But you need to think before you send an expensive gift, and not only how it will be seen by customers, but also how it will be viewed by Iris. Gifts may be legal business expenses associated with the company, but you are limited to a discount of up to $ 25 per person per year.
An interesting note is that the law firm will pass the gift overnight. Accidental costs such as packing or transportation are not included in the $ 25 limit unless they add significant value.
Unpaid business expenses
A.D. Until 2025, there is no timeline for unpaid business expenses for employees. If you are self-employed — such as a freelancer or gigabyte — you can continue to reduce business-related expenses.
Conclusion
The rules for tax cuts are generally the same for all businesses – the single entrepreneur and the richest person in the world. And as a business owner, employee or legal advisor, understanding a few key concepts such as “ordinary” and “important” and understanding when you need help will help you make healthy business and tax decisions.
This is a regular column from Taxgirl Kelly Phillips Erb. Erb provides up-to-date comments on tax news, tax law and tax policy. Find a weekly column from Bloomberg Tax and follow it on Twitter. @Tax Girl.
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