,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
1
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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
2
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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
3
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
1
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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
2
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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
3
Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
