The Washington herald., 1921-01-17
Income Tax
Facts 7 ou
Should Know
CHAPTER vi

:, In computing net income. a de-
duction for business expense or d
disbursement or charge must have
certain qualities in order to be al
flowed. 1t must relate to a trade.
business, profession, or vocation
Ifcarried on" by the taxpayer in
(which he has invested time and
money for the purpose of a liveli-
hood or profit. A single transac-
tion or a series of isolated transaC-
1ions do not ordinarily constitute
trade or business. A business is
being carried on by its owner, even
though all its activities may be con-
=ducted by employees.
taxpayer may carry on more
than one business or trade if he
dPvOtes sufficient time and atten
- lion to each enterprise, and may
claim as deductions the business
expenses of each. Mere investment
of capital, however, is not sufficient
10 allow such claim. For example
manufacturer buying stock in a
mine or oil we'll who desires to visit
the scene of operation may not claim
as a deduction the cost of his jour
ney.
The deduct. On must be a "busi
ness expense and not an invest
ment of capital" Amounts expend-
ed for the erection of new buildings,
Installation of machinery, and the
purchase of tools or implements OF
permanent value do not constitute
business expenses. being merely
Ihange in the form of capital and
not a reduction of wealth. Expendi-
ture for property which is used up
in the course of the year may be de-
Quoted as a business expense.
Salary Deductions.
The law provides for the deduc-
tiOn as a business expense of "a
reasonable allowance for salaries or
=ether compensation for personal
services actually rendered" Such
claims are subject to careful scru-
tiny by the Bureau of Internal Rev
enUe. and to be allowed must con-
form strictly to the wording OF the
statute. The test of deductibility is
whether the amounts paid are rea-
sOnakle. and whether they are, in
fact, purely for personal services.
Reasonable compensation is held by
the bureau to mean only such
amounts as would ordinarily be paid
for like services by like enterprises
in like circumstances.
Claims or deductions for salary
payments are allowed only when
The compensation is for services
actually rendered" and for no other
consideration. For example. should
stockholders of a corporation draw
salaries in amounts which bear a
81 Ia fH- - -
holdings, and If such payments are
found to be in excess Of a reason
able allowance for services render
ed. the excess would be regarded as
distribution OF profits under the
guise Of salaries.
z Complete Return Required.
- Each years returns. both as to
s~s income and deductions there
zen, should be complete in itself,
krd taxpayers are expected and re-
oaired 70 make every reasonable ef-
bort to ascertain the facts necessary
- make a correct return. Expenses,
Asb1ities, and deficits paid or in
9zarred in 1919 or prior years for
= dich no deductions were claimed in
the return for those years cannot
te included in the 1890 return.
losses by theft or embezzIement
sustSined in one year and discovered
u a1other are deductible only for
ne year Of their occurrence. II
sstxDayer discovers a loss sustained
y prior year, he may render an
amended return for that year and
&c claim for refund of the ex-
tess tax paid by reason of his fail
are to dedsct such loss in his original
ketuTn
Claim for deductions for per
sorzl family, or living expenses
~hich are, expressly disallowed by
IRE revenue act, are not infre-
Sueetly found in thesreturns. Such
<xpenses include rent paid for a.
sorse 9wages OF servants. cost Of
fHcd and clothing for the family.
seation Of children, cost of up
= ep OF automobile used for pleas
s=re or convenience, and all items
= INJECTED with the maintenance,
ll-eeing. and pleasure of the tax
sr and his family.