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
