SYNOPSIS OF IRC SECTION 162
Ron J. Lint, ASA, CEO
Business Valuation and ESOP Specialist
ATI Capital Group of Colorado, LLC
3578 Hartsel Dr., Unit E, PMB 321
Colorado Springs, CO 80920
IRC Section 162 relates primarily to trade and business expenses. The following is a brief presentation, in summary form, to provide a basic acquaintance with the various topics covered in this code section.
Section 162(a) states three primary guidelines for making deductions of expenses. The code specifically states: "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including (1) a reasonable allowance for salaries or other compensation for personal services actually rendered; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and (3) 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."
IRC Sec. 162(b) explains deduction restrictions upon charitable contributions and gifts expected. This section refers one to IRC Sec. 170 for specific percentage and dollar limitations.
IRC Sec. 162(c) reiterates what is stated in other parts of the law, but directly addresses, with respect to business practices, such as illegal payments including bribes, kickbacks, and rebates to both government and civilian parties.
IRC Sec.162(d) explains capital contributions to the Federal National Mortgage Association. Whenever the amount of capital contributions evidenced by a share of stock issued exceeds the fair market value of the stock, the initial holder of the stock shall treat the excess as ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. References in this section include IRC Sec 303(c) of the Federal National Mortgage Association Act (12 U.S.C., sec. 1718).
IRC Sec. 162(e) discusses denial of deduction for certain lobbying and political expenditures. Paragraph (1) explains in general which deductions may not be incurred. Paragraph (2) details exceptions for local legislation. Paragraph (3) explains application to dues of tax-exempt organizations. Paragraph (4) defines the term "influencing legislation," and gives specific reference to IRC Sec. 4911(e)(2). Paragraph (5) illustrates other special rules. Paragraph (6) defines the term "covered executive branch official." Paragraph (7) explains a special rule for Indian tribal governments. And, Paragraph (8) gives a cross-reference for reporting requirements and alternative taxes relating to this section, which is 6033(e).
IRC Sec. 162(f) explains specifically that "No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.
IRC Sec. 162(g) details allowances for the purpose of treble damage payments under the antitrust laws.
IRC Sec. 162(h) discusses state legislators' travel expenses away from home.
IRC Sec. 162(i) was repealed.
IRC Sec. 162(j) discusses certain foreign advertising expenses and includes a definition for the term "broadcast undertaking."
IRC Sec. 162(k) explains stock redemption expenses and provides exceptions for interest and dividends.
IRC Sec. 162(l) provides special rules for health insurance costs of self-employed individuals. Paragraph (1) includes specific deduction percentages and makes reference to section 401(c)(1). Paragraph (2) establishes limitations. Paragraph (3) discusses coordination with medical deduction, and gives reference to IRC Sec. 213(a). Paragraph (4) explains deductions not allowed for self-employment tax purposes, and gives reference to IRC Sec. 1402(a). And, Paragraph (5) discusses treatment of certain S corporation shareholders, and gives reference to IRC Sec. 3121, 401(c)(1).
IRC Sec. 162(m) discusses certain excessive employee remuneration. Paragraph (1) sets limits with respect to remuneration. Paragraph (2) defines the term "publicly held corporation." Paragraph (3) defines the term "covered employee." Paragraph (4) discusses in detail applicable employee remuneration.
IRC Sec. 162(n) explains a rule for certain group heath plans; however, "sub- sec. (n), following, is effective for services provided after 2/3/93, and on or before 12/31/95. Paragraph (1) discusses reimbursement. Paragraph (2) provides a state law exception. Paragraph (3) defines the term "group health plan."
IRC Sec. 162(o) provides cross-references for special rules relating to subdividing real property for sale, treatment of payments by a transferee of a franchise, trademark, or trade name. Also, provided are special rules relating to funded welfare plans and deferred compensation and other deferred benefits.