Taxation of Business Entities Brian Spilker 11e

,Taxation of Business Entities, 11e (Spilker)
Chapter 1 Business Income, Deductions, and Accounting Methods

1) The Internal Revenue Code authorizes deductions for trade or business activities if the
expenditure is "ordinary and necessary."

Answer: TRUE
Difficulty: 1 Easy
Topic: Business Deductions
Learning Objective: 01-01 Identify common business deductions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

2) Business activities are distinguished from personal activities in that business activities are
motivated by the pursuit of profits.

Answer: TRUE
Difficulty: 1 Easy
Topic: Business Deductions
Learning Objective: 01-01 Identify common business deductions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

3) The phase "ordinary and necessary" has been defined to mean that an expense must be
essential and indispensable to the conduct of a business.

Answer: FALSE
Explanation: A necessary expense is an expense that is helpful or conducive to the business
activity.
Difficulty: 2 Medium
Topic: Business Deductions
Learning Objective: 01-01 Identify common business deductions.
Bloom's: Analyze
AACSB: Reflective Thinking
AICPA: BB Critical Thinking




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written consent of McGraw-Hill Education.

,4) Reasonable in amount means that expenditures can be exorbitant as long as the activity is
motivated by profit.

Answer: FALSE
Difficulty: 2 Medium
Topic: Business Deductions
Learning Objective: 01-01 Identify common business deductions.
Bloom's: Analyze
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

5) The test for whether an expenditure is reasonable in amount is whether the expenditure was
for an "arm's length" amount.

Answer: TRUE
Difficulty: 2 Medium
Topic: Business Deductions
Learning Objective: 01-01 Identify common business deductions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

6) Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a
governmental unit are deductible as long as the fines are incurred in the ordinary course of
business.

Answer: FALSE
Explanation: No deductions are allowed for expenditures that are against public policy.
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

7) Although expenses associated with illegal activities are not deductible, political contributions
can be deducted as long as the donation is not made to a candidate for public office.

Answer: FALSE
Difficulty: 1 Easy
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking


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written consent of McGraw-Hill Education.

, 8) When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the
interest paid by the taxpayer on the debt will not be deductible.

Answer: TRUE
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

9) A business can deduct the cost of uniforms supplied to employees.

Answer: FALSE
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

10) Only half the cost of a business meal is deductible even if the meal is extravagant.

Answer: FALSE
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

11) Taxpayers must maintain written contemporaneous records of business purpose when
traveling in order to claim a deduction for the expenditures.

Answer: TRUE
Difficulty: 1 Easy
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Determine the limits on deducting business expenses.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking




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Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.