TAXATION OF BUSINESS ENTITIES CHAPTER 1-3 QUESTIONS WITH VERIFIED ANSWERS2024

TAXATION OF BUSINESS ENTITIES
CHAPTER 1-3 QUESTIONS WITH
VERIFIED ANSWERS2024
GrossYIncomeY-YcorrectYanswer-IncludesYallYincomeYfromYwhatYeverYsourceYderived.

-
YincomeYfromYbusinessYincludesYgrossYprofitYfromYinventoryYsales(YsalesYminusYcostYofYgoodsYsold)YincomeY

fromYservices,incomeYfromYrenting.



BusinessYDeductionsY-YcorrectYanswer--
AYdeductionYmustYbeYordinaryYandYnecessary(YappropriateYandYhelpfulYorYconduciveYtoYbusinessYactivityY.

-OnlyYreasonableYamountsYareYallowedYasYdeduction.

-YBusinessYexpensesYmustYbeYincurredYinYpursuitYofYprofits,notYpersonalYgoals.



ReasonableYinYamountY-YcorrectYanswer-
OrdinaryYandYnecessaryYbusinessYexpenseYareYdeductibleYonlyYtoYtheYextentYtheyYareYalsoYreasonableYinYa
mount.Y(YnotYreasonableYwhenYitYisYextravagantYorYexorbitant.



LimitationsYonYbusinessYdeductionsY-YcorrectYanswer-
CannotYdeductYexpendituresYthatYagainstYpublicYpolicyY(Ybribes),politicalYcontribution,Yfines,penalty.

-YnoYdeductionYareYallowableYforYexpendituresYassociatedYwithYtheYproductionYofYtaxYexempt.

-YpersonalYexpendituresYareYnotYdeductible.

-YexpendituresYthatYbenefitYaYperiodYlongerYthanY12YmonthsYgenerallyYmustYbeYcapitalized.



CapitalYexpenditureY-YcorrectYanswer-
WhetherYbusinessYusesYcash/YaccrualYitYmustYcapitalizeYexpenditureYforYtangibleYassets,suchYasYbuilding,m
achineryYandYequip,YfurnitureYandYfixtures.



ExpensesYwithYtaxYexemptYincomeY-YcorrectYanswer-
NotYallowedYtoYdeductY.exYmunicipalYbond,lifeYinsuranceYpremium



PersonalYexpenditureY-YcorrectYanswer-
NotYallowedYtoYtotalYunlessYtheYexpensesYareYexpresslyYauthorizedYbyYaYprovisionYinYtheYlaw.

, EducationalYexpendituresY-YcorrectYanswer-
AreYnotYdeductibleYasYbusinessYexpenseYunlessYeducationY1.Y)YmaintainYorYimproveYskillsYrequiredYfromYhis
Yemployment.



2.)YmeetsYtheYexpressYrequirementsYofYindividualYemployer.



MealsYandYentertainmentY-YcorrectYanswer-DeductibleY50%



TravelYandYtransportationY-YcorrectYanswer-
MileageYrateY2017Y53.5YcentYperYmile,YtravelYincludeYmeal,lodging,incidental



DomesticYproductionYactivitiesYdeductionYQPADYformulaY-YcorrectYanswer-9%YxYtheYlesserYofY

1.)YbusinessYtaxableYincomeYbeforeYdeductionYorY(YmodifiedYAGIYforYindividual.

2.)YqualifiedYproductionYactivitiesY(QPAI)Y

(YQPAI=Yrevenues,cogs,expenses

*TheYfinalYDPADYcannotYexceedY50Y%YofYwagesY.



BusinessYcasualtyYlossesY-YcorrectYanswer-
DeductionsYdependYwhetherYtheYassetYis;1.)YCompletelyYdestroyedYtoYstolen.Y2.)YonlyYpartialYdestroyed.



AssetYcompletelyYdestroyedYorYstolen.Y-YcorrectYanswer-
BusinessYcalculateYtheYamountYofYtheYlossYasYthoughYitYsoldYtheYassetYforYtheYinsuranceYproceeds

InsuranceYproceeds-YadjustedYtaxYbasisY=Yloss/Ygain



IfYassetYisYdamagedYbutYnotYcompletelyYdestroyedY-YcorrectYanswer-
LossesYisYtheYlesserYofYinsuranceYproceedsYminusYtheYlesserYofY1.)theYassetsYtaxYbasis

2.YTheYdeclineYinYtheYvalueYofYtheYassetYdueYtoYtheYcasualty.



CashYmethodY-YcorrectYanswer--
RecognizeYrevenueYwhenYpropertyYorYservicesYareYactuallyYorYconstructivelyYreceived.

-YRecognizedYdeductionYwhenYexpensesYisYpaid.