The statute specifies the particular deductions and credits which may be subtracted from gross income to determine taxable net income or from the tax as ascertained under certain sections to determine the net tax to be paid. These deductions and credits are listed separately in the law and differ somewhat according to the character of the taxpayer—whether a corporation or an individual, or whether a resident or a non-resident. In this book all the peculiarities relating to non-resident aliens, including deductions, are relegated to a special chapter, 41. The deductions allowed to others than nonresident aliens, whether individuals or corporations, are consolidated and are treated topically in the series of chapters which follows. Deductions limited to those specified in the statute.-While the tax is levied on "net income received," that term is not precisely the "net income" of the accountant's vocabulary. It is a resultant obtained by subtracting from gross income, as determined in the particular manner described in the preceding chapters, certain specified deductions which are discussed in the chapters which follow. In the language of the regulations: REGULATION. Net income is that portion of the gross income which remains after all proper deductions have been taken into account. . . . (Art. 531.) The law expressly excludes certain items usually regarded as legitimate deductions from income, and the Treasury has held that some other items of ordinary expenses are not allowable. Some of these restrictions apply both to individuals and to corporations. Others apply merely to one or the other. REGULATION. In general the deductions from gross income allowed corporations are the same as allowed individuals, except that corporations may deduct dividends as provided in paragraph (6) of section 234 (a) and may not deduct contributions or gifts. (Art. 561.) Neither individuals nor corporations may deduct some items as, for example, special assessments of certain types or interest on money borrowed to purchase certain tax-exempt securities. the other hand, an individual may deduct charitable contributions to a limited extent, while a corporation may not. Again, an individual may not deduct personal expenses, which makes it necessary to define personal expenses very carefully, while a corporation, of course, is presumed to have no "personal" expenses. But taxes imposed on an individual's residence and interest on money borrowed for personal use are not considered personal expenses. Moreover, an individual can deduct the loss sustained through "casualty" which happens to his automobile or other property (such as his residence), a loss which is nothing more than a personal or living expense. Furthermore, individuals may deduct the interest paid on loans which are used to defray personal expenses. Inconsistencies such as these give rise to most of the complications encountered in drawing up returns. Those charged with the preparation of returns should carefully study the provisions of the law bearing on deductions and be prepared to pass on the propriety of including or excluding the various items of expenditures which have been made.1 Accounting procedure.-The discussion of accounting procedure on page 239 et seq. is applicable in large part to deductions as well as to items of income. The form of reconcilement statement which will be found in Excess Profits Tax Procedure, 1921, pages 365, 366, affords a means of preventing the omission of any allowable deduction in the books, and as to classification it calls attention to any omission of allowable items not in the books. Adjustments will of course have to be made to give effect to the special provisions of the 1926 law. |