In computing an individual's taxable income, the individual is permitted to claim certain deductions, Some of these deductions may be subtracted from gross income, while other types of deductions must be claimed as itemized deductions and subtracted from the individual's adjusted gross income. A Deduction from adjusted gross income is generally referred to as a “itemized deduction”. To be deductible as a trade or business expense, an expense must be:

The business expenses of a sole proprietorship or a “statutory employee” are claimed on Schedule C of Form 1040.

A “trade or business,” although not defined in the tax law, has been characterized as an activity carried on for a livelihood or for profit.

A profit motive must be present and some type of economic activity must be conducted. With respect to the profit motive, an activity is considered a business if it is entered into and carried on in good faith for the purpose of making profit. Moreover, a trade or business is characterized by regularity of activities and transactions and the production of income.

A self-employed taxpayer can deduct as a business expense on U.S. Form 1040, Schedule C, a percentage of the premiums paid during the tax year for “qualified” long-term care insurance. The definition of “qualified” long-term care insurance is set forth in IRC Sec. 7702B(b)(1). The applicable percentage begins with 40% for the 1997 tax year and increases up to a maximum of 80% in 2006. The percentages are as follows:

Under certain circumstances, expenses incurred by a taxpayer for eligible long-term care insurance premiums may be taken as an itemized deduction. This deduction for unreimbursed medical expenses can be taken only to the extent such expenses exceed 7.5% of the taxpayer's AGI. IRC Sec. 213(d)(1)(D).

“Eligible” long-term care insurance premiums may be deductible as medical expenses when such premiums are paid towards “qualified” long-term care insurance. The definition of “qualified” long-term care insurance is set forth in IRC Sec. 7702B(b)(1).

For tax years beginning before 01/01/95, IRC Sec. 274 as in effect 01/01/89 shall apply. For tax years 1995 and 1996, IRC Sec. 274 as in effect on 01/01/95 shall apply. Beginning with the 1997 tax year, IRC Sec. 274 as in effect on 01/01/97 shall apply. 80% of qualified expenses will be allowed for tax years beginning before 01/01/95, and 50% of qualified expenses will be allowed for tax years beginning on or after 01/01/95.

A self-employed taxpayer can deduct as a business expense on U.S. Form 1040, Schedule C, a percentage of the premiums paid during the tax year for insurance which constitutes medical care for the taxpayer, his spouse and dependents. The applicable percentage begins with 40% in 1997 and increases up to a maximum of 80% in 2006. IRC Sec. 162(1). The percentages are as follows: