Test Bank for Taxation of Business Entities 2020 11th Edition By Spilker

Test Bank for Taxation of Business Entities 2020 11th Edition By 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

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

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