Deductions Allowed Under I.R.C. (( 161-166 and 212-219)

Section 161 of the Internal Revenue Code ("I.R.C." or "the Code") allows for the deduction of certain expenses when computing taxable income under section 63. The Code defines taxable income as "gross income minus the deductions allowed by this chapter" (I.R.C. ( 63). Generally, sections 161-166 itemize deductions for individual and corporate taxpayers. Also generally, sections 212-219 itemize additional deductions for individual taxpayers involved in activities that constitute the production of income rather than being a trade or business. Thus, sections 212-219 complement the deductions for individual taxpayers allowed under sections 161-166.

The Editorial Summary preceding the deductions allowable under section 161-166 states that the section is not intended to provide "all-inclusive justification for deducting the expenses of a trade or business" (I.R.C., p. 144). Rather, the sections provide the general authority and particular types of expenses that are deductible in accordance with the provisions contained in other code sections (I.R.C., p. 144). All deductions are statutory in nature, meaning that unless a particular item of expense is authorized it cannot be deducted from income.

Section 162(a) of the Code allows a deduction from gross income for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. This includes a reasonable allowance

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amounts are taxable income to the employee (162)(m)(4)(B)). Because of its focus on only allowing deductions for amounts expended in the ordinary conduct of business, section 162 does not allow a deduction for a stock redemption expenses (( 162(k)), charitable donations that would be allowed or barred under section 170 (( 162(b)), or illegal payments to a domestic or foreign government official (( 162 (c)). Generally, the payment is defined as illegal and therefore disallowed as a deduction if the payment is barred by any federal or state law or if such law subjects the payor to a criminal penalty or the loss of a license or privilege to engage in a trade or business (( 162(c)). The section further bars deductions for payments made to Medicare or Medicaid providers for preferential treatment (( 162(c)(3)) in an attempt to discourage such payments. Similarly, a person or business may not deduct amounts paid for any fine or penalty paid for violating the law or amounts exceeding one-third of a judgment in a suit based on the Clayton Act (antitrust law) after January 1, 1970 (( 162(g)). Generally, section 162(e)(1) also bars a deduction for payments in excess of $2,000 made to influence legislation or participate in or influenc
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