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THE UNITED STATES TAX SYSTEM: AN OVERVIEWlimited to those outlays that are: ordinary and necessary, current, and incurredfor business reasons. 8The federal tax law sets forth a number of allowable deductions, includingdepreciation 9 and loss 10 deductions. The business expense deduction is not,however, available for payments that are in fact contributions. 11(b) Personal Expense DeductionsAs noted, deductions from the federal income tax are generally available forexpenses associated with the cost of carrying on a trade or business. These costsrepresent the economic cost of generating revenue. The net result from thedeductions is economic gain or income. Because they represent personal consumptionand not the economic cost of doing business, personal expenses arenot generally allowed as deductions from income.Although the purpose of the income tax scheme is to tax economic profit orgain, the law permits a number of personal expense deductions that have nobearing on economic gain. There are a number of policy reasons underlyingthese personal deductions. Casualty 12 and medical 13 deductions are allowed forexpenses that may be unanticipated and/or unduly burdensome. Charitabledeductions 14 are allowed to encourage and promote philanthropic endeavors.Home mortgage interest 15 deductions are allowed as a form of tax subsidy forborrowers who use capital to purchase homes. These personal expense deductionsare allowed for social policy reasons, rather than for the costs associatedwith producing economic gain.Personal expense deductions (itemized deductions in lieu of the standarddeduction) are deducted from adjusted gross income to arrive at taxable incomeas the fourth step in computing and determining tax on income.(c) Itemized Deduction LimitationThe total amount of otherwise allowable itemized deductions for individuals(other than those for medical expenses; casualty, theft, or wagering losses; andinvestment interest, but including the charitable contribution deduction) isreduced by 3 percent of the amount of the taxpayer’s adjusted gross income inexcess of an annual base figure (indexed for inflation). 16 Otherwise allowableitemized deductions, however, may not be reduced by more than 80 percent. 178 IRC §§ 162(a), 212.9 IRC §§ 167, 168.10 IRC § 165.11 Reg. § 1.162-15(a)(1). To allow the use of a business expense deduction for charitable contributions would beto subvert the percentage limitations on the deductibility of charitable gifts (see Chapter 7). E.g., May v. Commissioner,71 T.C.M. (CCH) 2498 (1996).12 IRC § 165(c)(3).13 IRC § 213(a).14 IRC § 170(a).15 IRC § 163(a).16 E.g., the annual base amount for 2004 is $142,700 (or $71,350 for married couples filing separate returns)(Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, § 3.11).17 IRC § 68. 32