International Taxation

Chapter 4Allocation and Apportionment of Deductions

Learning objectives

• Identify how to determine gross income classes.
• Recognize post-Tax Cuts and Jobs Act (TCJA) provisions that affect various deductions and expenses and resulting federal income tax rates.
• Recognize when a deduction is considered definitely related and therefore allocable to a class of gross income.
• Identify what deductions are not definitely related to any class of gross income.
• Determine how to apportion deductions allocated to a gross income class between statutory and residual groupings within that gross income class.
• Determine how to allocate and apportion interest, research and experimentation expenditures, stewardship expenses, legal and accounting fees and expenses, income taxes, personal property, net operating losses (NOLs), special deductions, and charitable contributions.

Allocation and apportionment of expenses, losses, and other deductions to U.S. and foreign-source income

Once a taxpayer has determined gross income from sources within and outside the United States, the next task is to deduct the allowable expenses, losses, and other deductions allocated to such income to calculate taxable income from sources within and outside the United States.

The general objective of Treasury Regulation (Treas. Reg.) 1.861-8 is to allocate deductions based on the factual relation of an expenditure to, or its identification with, gross income rather than the specific purpose of the expenditure. Treas. Reg. ...