Questions: Bruce is self-employed and has several expenses which could be classified as either a business expense or a personal expense. Which of the following statements regarding classification as business expenses versus personal expenses is correct? Business expenses are deducted above-the-line, while personal expenses may be classified as either above-the-line or below-the-line deductions. From a tax planning perspective, it makes no difference whether expenses are classified as business or personal expenses. Business expenses may be either above-the-line or below-the-line deductions, while personal expenses are deducted above-the-line. From a tax planning perspective, it is more advantageous to classify expenses as personal expenses versus business expenses.

The answer is the first one: Business expenses are deducted above-the-line, while personal expenses may be classified as either above-the-line or below-the-line deductions.

Explanation for each option:

1. Business expenses are deducted above-the-line, while personal expenses may be classified as either above-the-line or below-the-line deductions.

   • This statement is correct. Business expenses are typically deducted above-the-line, meaning they are subtracted from gross income to arrive at adjusted gross income (AGI). Personal expenses, on the other hand, can be either above-the-line (such as certain educator expenses or student loan interest) or below-the-line (itemized deductions like mortgage interest or charitable contributions).

2. From a tax planning perspective, it makes no difference whether expenses are classified as business or personal expenses.

   • This statement is incorrect. It does make a difference from a tax planning perspective because business expenses reduce AGI, which can affect eligibility for various tax credits and deductions. Personal expenses, especially those that are itemized, may not provide the same level of tax benefit.

3. Business expenses may be either above-the-line or below-the-line deductions, while personal expenses are deducted above-the-line.

   • This statement is incorrect. Business expenses are generally above-the-line deductions. Personal expenses are more commonly below-the-line deductions, although some can be above-the-line.

4. From a tax planning perspective, it is more advantageous to classify expenses as personal expenses versus business expenses.

   • This statement is incorrect. Generally, it is more advantageous to classify expenses as business expenses because they reduce AGI, which can have a broader impact on tax liability and eligibility for other tax benefits.