Daily Kennebec journal. [microfilm reel] (Augusta, Me.) 1870-1975, 1921-01-15
THE INCOME TAX
Facts You ShoalA Know for
Atakinr 1871 ReDot.f


Making 1891 Rspotf
In computing net income, q deduction
for business expense or disburse-
lnent or charge must have certain
qualities in order to be allowed. II
must relate to q trade. business. pro-
fession. or vocation carried on by
this taxpayer In which he has invested
time and money for the purpose OF .
livelihood or profit. A single trans
action or a series of Isolated trans
actions do not ordinarily constitute
trade or business. A business is being
carried ION by its owner, even though
all It's activities may be conducted by
employees.
A taxpayer may carry on more than
one business or trade IL he devotes
sufficient time and attention to each
enterprise, and may claim as deduc-
tons the businesses expenses of each.
Mere Investment of capital. however.
Is not sufifcient to allow such claim.
For example. a manufacturer buying
stock in a mine or oil well who de-
sires to visit the scene of operation
MAY not claim as deduction the cost
Of his journey.
The deduction must be a business
expense and not an Investment of
capital" Amounts expended for the
erection Of new buildings, installations
of machinery, and the purchase OF
tools or implements of permanent value
do not constitute business expenses.
being merely change in the form of
capital and not reduction of wealth.
Expenditure for property which is
used up in the course Of the year may
be deducted as q business expense.
Salary Deductions
The law provides for the deduction
as business expense Of "a reasonable
allowance for salaries or other com.
pensation for personal services actually
rendered" Such claims are subject
to careful scrutiny by the Bureau of
Internal Revenue, and to be allowed
must conform strictly to the wording
of the statute. The test of deducti-
bility is whether the amounts paid are
reasonable. 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 for deductions for salary
payments are allowed only when the
compensation is 'for services actually
rendered" and for no other considera-
ton. For example. should stockhold-
ers of a corporation draw salaries In
amounts which bear a close relation
ship to their stock holdings, and if
such payments are found to be in ex-
cess of a reasonable allowance for
services rendered, the excess would be
regarded as distribution of profits
under the guise of salaries.
Complete Return Required
Each years returns, both as to gross
income and deductions therefrom.
should be complete in itself, and tax
payers are expected and required to
make every reasonable effort to ascer-
tain the facts necessary to make a
correct return. Expenses, liabilities,
and deficits paid or incurred in 1919 or
prior years for which no deductions
were claimed in the return for those
years can not be included in the 1920
return. Losses by theft or embezzle-
ment sustained In one year and dis
covered in another are deductible only
for the year of their occurrence. If a
taxpayer discovers a loss sustained in
a prior year, he may render an
amended return for that year and file
claim for refund Of the excess tax
paid by reason of his failure to deduct
such loss in his original return.
Claim for deductions for personal.
family, or living expenses" which are
expressly disallowed by the revenue
act, are not infrequently found in the
returns Such expenses include rent
paid for home, wages of servants,
cost of food and clothing for the fam
lily, education of children, cost of up
keep of automobile used for pleasure
or convenience. and all items connected
with the maintenance. well-being. and
pleasure of the taxpayer and his
family.