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This assignment is basically meant to determine our understanding of the ability to differentiate between a business expense and an itemized deduction. Moving forward, we would commence the assignment with clear and simple definitions of both business expenses and itemized deductions.
The assignment will then list items that are considered to be treated as business expense and those that are to be treated as itemized deductions which in other cases are referred as standardized deductions.
The final part of the assignment would involve determining where the accounting services provided to Frank business falls. The reasons for choosing the treatment will also be given taking into account the references for authorities involved in determining the subject.
Treatment of Accounting Services Provided to Frank’s Small Business
A business expense refers to an ordinary and necessary expense incurred by a business in the course of carrying out trade or profession in that matter. In general, it means that a business expense always involves a legitimate business purpose. Business expense might either be personal or business related (Perez, 2011).
According to Internal Revenue Service publication 535, personal expenses are those that are not connected to any activity of the business operations and never deducted from the taxable income while business expense is always business related. Examples of personal (non deductibles) expenses are bribes, lobbying expenses and penalties and fines. Business (deductible) expenses on the other hand include: consultation services, accounting fees, rent, trade, and may even include partially deductible expenses like gifts (deductible up to $25 per person) ,home office and meals and entertainment ( 50% deductible).
Itemized deductions, on the other hand, refer to the qualified expense that tax payers in the United States accounts on their federal income tax returns in order to be granted a decrease in their taxable income. From this description, we can therefore argue that itemized deductions are those business expenses that the federal Government has allowed to be considered for deductions as part of deductible business expenses.
Taxpayers are usually allowed to make a choice between itemized deductions or standardized deductions. The process of determining itemized deduction involves adjusting gross income and then itemizing the deductions from a list provided by the IRS commonly known as allowable items (Perez, 2011).
In Frank’s case, the tabulation of business information, determining of Frank’s income from his investments and the differentiation of personal itemized deductions by the accountant, all fall under accounting services. The fee paid by Frank to the accountant, that is $3700, is referred as accounting fees,
Choosing to treat the accounting fees as a business expense would deny him a chance of maximizing profits and therefore, the best advice for Frank is to specify the expense to as an itemized deduction. Itemized deductions are the allowable items that could be deducted in the adjusted gross income (AGI) which in turn results in reduction of the taxable income.
A lower taxable income generally means that Frank will present a smaller portion of his income to the IRS for tax deductions. Lower taxes means that a large proportion of Frank’s income is not affected and will result to a higher amount of profit as compared to the treatment of the service as a mere business expense.
According to publication made by the IRS, that is, IRS Publication 535, a list of itemized deductions is provided and it includes all business expenses that are eligible for consideration as allowable items. Accounting services provided to businesses is considered “necessary and ordinary” while carrying out any trade or profession and is basically an allowable item.
In conclusion, it would be wise to comprehend that not all business expenses are considered when determining taxable income. An individual conducting business should be guided by list of items provided by IRS.