Federal Taxation Tested Exam Questions And
Answers Graded A+ 2025/2026
May use Accrual Method (basis) if: - sells products, inventory based, required to use if
average gross receipts > $30M (2023)
If you switch between methods, you have to wait ____ to request to change again. - 5
years
Accrual method- all events test: - Everything necessary to establish legal liability has
occurred. Amount can be determined.
Accrual Method- Economic Performance Test - Party legally required to perform/
provide has done so.
aka: When the revenues are earned and expenses are incurred.
Expenses are: - Not deductible unless the tax law says they are
Something has to be _____, _______, and ______ to be deductible - Ordinary,
necessary, and reasonable
Requirements for deductible business expenses:
Ordinary - Normal, usual or customary for the business type
Ordinary is different depending on: - The type of business.
Ex. an office has computers, desks, etc
A salon has shampoo, scissors, blowdryers, etc.
What is "normal"/ordinary varies by business
Requirements for deductible business expenses:
Necessary - Appropriate and helpful in taxpayer's business
ex. A computer is helpful but not NEEDED or else business will fail
Requirements for deductible business expense:
Reasonable in amount - Fair, equitable, justifiable based upon facts and circumstances
(small banks vs national bank)
Common business deductions: - Advertising
Bad Debt
Commissions & Fees
Depreciation & Amortization
Insurance
Interest
Professional Fees
Taxes & Licenses
Supplies
,Salaries & Wages
Office Expense & Postage
Payroll Taxes
Employee Benefit Programs
Pension & Profit-Sharing Plans
Rents
Repairs & Maintenance
Travel
Utilities
Non deductible expenses: - Federal Income Tax
Personal Expenses
Social Club Dues (lake club, etc)
Entertainment Expenses
Political & Lobbying Expenses (if you're paying to lobby, non-deductible)
Bribes & Kickbacks
Fines & Penalties due to Law Violations (trucking companies probably have many
speeding tickets but they are not deductible)
Clothing that can be worn "every day" (things that are not a uniform)
Expenses related to Tax Exempt Income (if income isn't taxable--->related expenses
aren't)
Combination expenses can be: - Business, personal or both
Combination expenses are known as: - IRS Audit Targets
Examples of combination expenses: - Company car, travel, meals, other business
expenses
If 100% is business related that is: - Deductible
If you go on a business trip and also go visit a friend it is: - Combination expense
Are transportation expenses deductible? - They may be
Commuting is not deductible unless: - Working outside the home AND work locations
where the taxpayer lives and normally works.
Working at a temporary work location IF taxpayer has a regular place of business.
Travel from taxpayer's home and other locations if the home is the principal place of
business.
Special types of deductions-Transportation. The two types are: - Standard mileage rate
-or- actual expenses
Special types of deductions-Transportation
Actual expenses - Gas & oil
, Insurance
Repairs & maintenance
Depreciation
Are these deductible?
Gas & oil
Insurance
Repairs & maintenance
Depreciation - If they're 100% business related
ex. landscaping truck only used for business and the expenses that go with it
Parking, tolls, interest on car loans and property taxes (are/are not) part of standard
mileage rate? - Are NOT
If you use the actual expense method the first year... - You must continue to use it
May switch from standard mileage method to actual cost method, but then you must
use: - straight-line depreciation (accelerated tax methods NOT permitted).
Actual cost method requires: - very detailed record keeping
Special types of travel deductions: - Airfare, Bus Fare, Train Fare
Meals are only 50% deductible (was 100% in 2022 if "restaurant meal")
Lodging
Taxis/Rental Car
Tips
Laundry
For all special types of travel deductions you need: - Documented business purpose
Substantiated (receipts)
Not lavish or extravagant
True/False:
Federal income taxes are NOT a tax deduction by any taxpayer for any reason - True
State and Local income taxes are generally deductible as follows: - Accrual basis -
based upon the tax filing year to which they relate
Cash basis - based upon when the taxes are paid
True/False:
Uniforms are only deductible if required as condition of employment and not suitable for
everyday use - True
Uniforms that are deductible: - Work boots and protective gear worn by a constructive
worker or a landscaper
Scrubs worn by a physician or nurse
Answers Graded A+ 2025/2026
May use Accrual Method (basis) if: - sells products, inventory based, required to use if
average gross receipts > $30M (2023)
If you switch between methods, you have to wait ____ to request to change again. - 5
years
Accrual method- all events test: - Everything necessary to establish legal liability has
occurred. Amount can be determined.
Accrual Method- Economic Performance Test - Party legally required to perform/
provide has done so.
aka: When the revenues are earned and expenses are incurred.
Expenses are: - Not deductible unless the tax law says they are
Something has to be _____, _______, and ______ to be deductible - Ordinary,
necessary, and reasonable
Requirements for deductible business expenses:
Ordinary - Normal, usual or customary for the business type
Ordinary is different depending on: - The type of business.
Ex. an office has computers, desks, etc
A salon has shampoo, scissors, blowdryers, etc.
What is "normal"/ordinary varies by business
Requirements for deductible business expenses:
Necessary - Appropriate and helpful in taxpayer's business
ex. A computer is helpful but not NEEDED or else business will fail
Requirements for deductible business expense:
Reasonable in amount - Fair, equitable, justifiable based upon facts and circumstances
(small banks vs national bank)
Common business deductions: - Advertising
Bad Debt
Commissions & Fees
Depreciation & Amortization
Insurance
Interest
Professional Fees
Taxes & Licenses
Supplies
,Salaries & Wages
Office Expense & Postage
Payroll Taxes
Employee Benefit Programs
Pension & Profit-Sharing Plans
Rents
Repairs & Maintenance
Travel
Utilities
Non deductible expenses: - Federal Income Tax
Personal Expenses
Social Club Dues (lake club, etc)
Entertainment Expenses
Political & Lobbying Expenses (if you're paying to lobby, non-deductible)
Bribes & Kickbacks
Fines & Penalties due to Law Violations (trucking companies probably have many
speeding tickets but they are not deductible)
Clothing that can be worn "every day" (things that are not a uniform)
Expenses related to Tax Exempt Income (if income isn't taxable--->related expenses
aren't)
Combination expenses can be: - Business, personal or both
Combination expenses are known as: - IRS Audit Targets
Examples of combination expenses: - Company car, travel, meals, other business
expenses
If 100% is business related that is: - Deductible
If you go on a business trip and also go visit a friend it is: - Combination expense
Are transportation expenses deductible? - They may be
Commuting is not deductible unless: - Working outside the home AND work locations
where the taxpayer lives and normally works.
Working at a temporary work location IF taxpayer has a regular place of business.
Travel from taxpayer's home and other locations if the home is the principal place of
business.
Special types of deductions-Transportation. The two types are: - Standard mileage rate
-or- actual expenses
Special types of deductions-Transportation
Actual expenses - Gas & oil
, Insurance
Repairs & maintenance
Depreciation
Are these deductible?
Gas & oil
Insurance
Repairs & maintenance
Depreciation - If they're 100% business related
ex. landscaping truck only used for business and the expenses that go with it
Parking, tolls, interest on car loans and property taxes (are/are not) part of standard
mileage rate? - Are NOT
If you use the actual expense method the first year... - You must continue to use it
May switch from standard mileage method to actual cost method, but then you must
use: - straight-line depreciation (accelerated tax methods NOT permitted).
Actual cost method requires: - very detailed record keeping
Special types of travel deductions: - Airfare, Bus Fare, Train Fare
Meals are only 50% deductible (was 100% in 2022 if "restaurant meal")
Lodging
Taxis/Rental Car
Tips
Laundry
For all special types of travel deductions you need: - Documented business purpose
Substantiated (receipts)
Not lavish or extravagant
True/False:
Federal income taxes are NOT a tax deduction by any taxpayer for any reason - True
State and Local income taxes are generally deductible as follows: - Accrual basis -
based upon the tax filing year to which they relate
Cash basis - based upon when the taxes are paid
True/False:
Uniforms are only deductible if required as condition of employment and not suitable for
everyday use - True
Uniforms that are deductible: - Work boots and protective gear worn by a constructive
worker or a landscaper
Scrubs worn by a physician or nurse
