McGraw-Hill’s Taxation of Business Entities, 2018 Edition, 9e (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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and identify common business deductions.
Bloom's: Analyze
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
,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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and 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 against public policy.
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Apply the limitations on business deductions to distinguish
between deductible and nondeductible business expenses.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and identify common business deductions.
Bloom's: Analyze
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
,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 Describe the general requirements for deducting business
expenses and 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 Describe the general requirements for deducting business
expenses and 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 against public policy.
Difficulty: 2 Medium
Topic: Limitations on Business Deductions
Learning Objective: 01-02 Apply the limitations on business deductions to distinguish
between deductible and nondeductible business expenses.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
