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Santa Maria California Form 1040A or 1040 Schedule R: What You Should Know

March 2003). p. 23. CODES: U.S. Code, Part I, The Internal Revenue Code [Title 26, Section 1120(a)], codifies and states the rules under which taxpayers may subtract business income from other income. For example, if a taxpayer deducts only the amount described in §1120(a)(1)(B), he or she can't deduct the entire amount of business expenses. Therefore, the taxpayer must be able to deduct only the portion of the business expense in business expenses which are allocable to a qualified housing costs or qualified tuition and fees, or both. This is not intended to be a comprehensive discussion of all aspects of the reducibility of business expenses. A more extensive discussion and an analysis is available in Internal Revenue Code section 1120(i)-(ii), which explains the reducibility of housing expenses under section 280F of the Internal Revenue Code. Qualified Health Insurance If income is derived only from the ownership of, or participation in, a qualified health insurance policy, § 1120(i) establishes the reducibility of certain capitalized expenses, e.g., insurance premiums, under IRC section 140 and the deduction of costs described in IRC section 280B(a) for amounts paid or incurred to obtain or maintain such insurance. To claim an exclusion from gross income for insurance premiums paid or incurred before becoming self-employed, the taxpayer must include in income as ordinary income the greatest of: (1) The premiums actually paid or incurred before becoming self-employed; or (2) The amount that would be ordinary income if the premiums had been taxable income. Qualified health insurance and the business tax treatment of the deductible costs described in the section 140(c) rules of IRC section 140. If, following a change in residence, a taxpayer was a qualified health insurance issuer before becoming a taxpayer and subsequently changed to a self-employed taxpayer, § 1120(i) provides a deduction for any amounts paid or incurred by the taxpayer to obtain or maintain the policy and for the costs of insuring the consumer. (The section 140 rules of IRC section 140, however, do not apply to self-employed taxpayers who are liable for the self-employment tax imposed by IRC section 1402(a), because these rules did not apply to the taxpayer at any time during the five-year period beginning on the taxpayer's effective date of becoming self-employed.

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