Once he classification of the expenditure is determined, what are the rules for each class of expenditure to determine the amount of the deduction?
1. All ordinary, necessary, and reasonable expenses related to a trade or business are deductible. The only limit laced on he amount of the deduction or a trade or business related expense is that the expense be reasonable in amount.
2. All ordinary, necessary, and reasonable expenses related to an investment activity are allowed as deductions. However, the amount of the deduction may be limited due to the nature of the activity (passive losses) or the amount may be limited by a percentage of the taxpayer's income (investment expenses of individuals have a 2% of adjusted gross income limitation).
3. Only specifically allowed personal expenditures are deductible. The general classes allowed are Medical, Interest, Taxes, Charitable Contributions, Personal Casualty Losses, and various Miscellaneous Itemized Deductions. These expenditures have various limits on the amount that may be deducted. The limit is tied to the taxpayers income.
a. Taxpayers who incur minimum amounts of these allowable personal expenditures are entitled to deduct a Standard Deduction in lieu of actual expenditures.