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ON

LIBERTY

Second Loan

[blocks in formation]

BONDS

Third Loan

Fourth Loan

Second Liberty Loan Converted 474% Bonds of

1927-1942

Third Liberty
Loan 44% Bonds

of 1928

Fourth Liberty Loan 474% Bonds

of 1933-1938

Dated

5-9-1918 Due

II-15-1942 Redeemable

II-15-1927 Interest Payable

May and Novem

Dated

5-9-1918 Due

9-15-1928 Not redeemable

before maturity
Interest Payable

March and Sep-
tember 15

Dated

10-24-1918 Due

10-15-1938 Redeemable

10-15-1933
Interest Payable

April and
October 15

ber 15

Total Issue

$4,176,516,850

Total Issue

$6,992,927,100

Converted from Second Liberty Loan 4% Bonds as a consequence of issuing Third Liberty Loan 4443

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

Taxability

Interest received from this issue of the bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

Taxability

Interest received from this issue of bonds is exempt from all state and local taxes and from the Federal normal tax. However, such interest is subject to the surtax when holdings exceed the amount specified in Schedule A.

(Schedule B)

Deductions from Gross Income. In the preparation of an income tax return, the first step is to determine the taxable income and compute the amount of gross income. In the preceding discussion, we have attempted to outline the various sources of income and to distinguish between taxable income and income exempt from taxation. After the gross income has been determined, certain deductions are allowed in computing net income. The income tax is computed on the net income and not the gross income. The net income is determined by subtracting the allowable deductions from the gross income. Under the Law, the following items are considered allowable deductions from gross income:

I. Business Expenses
2. Interest
3. Taxes
4. Losses
5.

Bad Debts
6. Depreciation
7. Amortization
8. Depletion
9. Contributions or Gifts.

(a) In computing net income there shall be allowed as deductions:

(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity;

(2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title;

(3) Taxes paid or accrued within the taxable year except (A) income, war-profits, and excess-profits taxes imposed by the authority of the United States, (B) so much of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States, as is allowed as a credit under section 222, (C) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (D) taxes imposed upon the taxpayer upon his interest as shareholder of a corporation, which are paid by the corporation without reimbursement from the taxpayer. For the purpose of this paragraph, estate, inheritance, legacy, and succession taxes accrue on the due date thereof except as otherwise provided by the law of the jurisdiction imposing such taxes;

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;

(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a nonresident alien individual only if the profit, if such transaction had

resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed;

(6) Losses sustained during the taxable year of property not connected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. The basis for determining the amount of the deduction under this paragraph, or paragraph (4) or (5), shall be the same as is provided in section 204 for determining the gain or loss from the sale or other disposition of property;

(7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part;

(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence;

(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In the case of leases the deduction allowed by this paragraph shall be equitably apportioned between the lessor and lessee;

(10) Contributions or gifts made within the taxable year to or for the use of: (A) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively, public purposes; (B) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual; (C) the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act; (D) posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if such posts, organizations, units, or societies are organized in the United States or any of its possessions, and if no part of their net earnings inures to the benefit of any private shareholder or individual; or (E) a fraternal society, order, or association, operating under the lodge system, but only if such contributions or gifts are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals; to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this paragraph, except that if in the taxable year and in each of the ten preceding taxable years the amount in all the above cases combined ceeds 90 per centum of the taxpayer's net income for each such year, as computed without the benefit of this paragraph, then to the full amount of such contributions and gifts made within the taxable year. In case of a nonresident alien individual this deduction shall be allowed only as to contributions or gifts made to domestic corporations, or to community chests, funds, or foundations, created in the United States, or to such vocational rehabilitation fund. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.

(b). In the case of a nonresident alien individual, the deductions allowed in subdivision (a), except those allowed in paragraphs (5), (6), and (10), shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined as provided in section 217 under rules and regulations prescribed by the Commissioner with the approval of the Secretary. In the case of a citizen entitled to the benefits of section 262 the deductions shall be the same and shall be determined in the same manner as in the case of a nonresident alien individual.

(Section 214–1924 Act) General Business Expenses. For the purpose of the income tax, it is very necessary to make a clear distinction between business expenses and personal expenses.

Business expenses are expenses incurred in connection with carrying on a business and are deductible in determining the income subject to the tax. Personal expenses are the personal expenses of the individual or his family and are not deductible in determining net income.

In reporting his business expenses, the individual may report them on either the cash or accrual basis. However, his expenses must be reported on the same basis as his income. If he elects to report his income on the cash basis he must report his expenses accordingly, and vice versa.

Expenses incurred in earning exempt income are not deductible. For instance, expenses incurred in connection with the purchase of municipal bonds or the collection of interest on municipal bonds would not be deductible since the interest from the bonds is exempt from taxation.

The cost of repairs incurred in the maintenance of property or equipment used in carrying on the business is deductible, but the cost of repairs in connection with the home in which the individual lives or the equipment in the home or of property such as automobiles used for private purposes, is not deductible.

An individual engaged in the rendering of professional services, such as a physician or lawyer, may deduct the cost of all supplies necessary for the carrying on of his professional work and of all expenses incurred in the operations thereof.

Compensation for personal services may be deducted if paid to others than the taxpayer himself or to a minor child of the taxpayer. This is based on the theory that he is entitled to the services of such child without compensation and any compensation paid is merely a gift or gratuity to the child. In case of a corporation, compensation paid to the taxpayer himself may, of course, be deducted. In the case of a business organized other than as a corporation, the claiming as a deduction of compensation paid to the taxpayer would serve no purpose, since if he claimed it as an expense of the business, he would have to report it as an income to himself and the net result would be the same.

Bonuses paid to employees as compensation for services may be treated as a deduction. If, however, the bonus is made merely as a gift to the employee, it is not regarded as an expense and may not be treated as a deduction. No doubt, bonuses are always given in return for services rendered; therefore, they should always be deducted.

Compensations paid to individuals for injuries received in the business or to dependents of such individuals are deductible. Contributions to pension funds which are held by the business for the benefit of employees are not deductible.

Payments for rent may be deducted regardless of the form in which paid. Where a leasehold is purchased, the cost of the leasehold should be apportioned over its life and not claimed entirely as a deduction for the year in which it is purchased. Taxes paid by the tenant for the landlord are regarded as additional rent. The cost of erecting buildings on leased property which are to go to the landlord at the termination of the lease should be written off over the life of the lease.

A farmer may deduct all expenses incurred in connection with the production and disposition of all products produced on the farm. This includes the cost of labor used in connection with the production of crops or live stock, the cost of seed, fertilizer, and the original cost plus the cost of feed of stock purchased for resale. Repairs to farm buildings, fences, and farm machinery may be treated as an expense, but repairs on the family dwelling may not be so treated. Reasonable depreciation on all property and equipment other than the family dwelling may be treated as a deduction.

Miscellaneous Business Expenses. It is impossible to name all the individual items of business expense which may be deducted. For purposes of illustration, however, a number of miscellaneous items will be mentioned here.

The expenses of advertising may be deducted by a merchant. Wages, heat, light, water, telephone, and entertainment of outof-town guests may also be deducted by a merchant. As a general rule, the cost of clothing cannot be deducted, but actors may deduct the cost of clothing used for stage purposes only. The wages personal servants cannot be deducted, since these are regarded as personal expenses. The cost of maintaining an automobile for personal use cannot be deducted, but if the automobile is used for business purposes, such expenses can be deducted. Car fare incurred in traveling to and from one's place of business is regarded as a personal expense and cannot be deducted. Dues paid to social clubs cannot be deducted, but dues of commercial or professional clubs may be deducted as an expense. The cost of technical magazines relating to the taxpayer's profession may be deducted, but the cost of literary magazines cannot be deducted.

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