ch 9

Question 1

business gross income

Answer 1

all income from whatever source derived (broadly defined– income unless Congress says it’s not)

Question 2

criteria for business deductions

Answer 2

ordinary, necessary, and reasonable in amount

Question 3

ordinary

Answer 3

normal and appropriate for the business under the circumstances. NOT required to be typical or repetitive in nature

Question 4

necessary

Answer 4

helpful or conducive to business activity. NOT required to be essential or indispensible

Question 5

reasonable in amount

Answer 5

not extravagant or exorbitant, with arms-length practices

Question 6

non-deductible business expense

Answer 6

expenditures against public policy, political contributions and/or lobbying costs, expenses associated with the production of tax-exempt income, personal expenditures, and federal income taxes

Question 7

expenditures against public policy

Answer 7

illegal stuff: fines, penalties, illegal bribes, kickbacks. Illegal activity expenses

Question 8

kickback

Answer 8

someone decides how their entire entity will spend && so if a company suggests they spend it to benefit them, then they’ll pay the person back

Question 9

political contributions

Answer 9

NEVER deductible

Question 10

lobbying expenses

Answer 10

NEVER deductible

Question 11

mixed-motive expenses

Answer 11

meals, entertainment, and travel expenses.
DEDUCTIBLE IF: away from home/overnight, expense is for legit business purpose, or primary purpose for the trip is business

Question 12

meals

Answer 12

mixed-motive exp: deduction is limited to 50% of meal expenses– if directly related or associated with business or substantive business deduction before, during, or after the meal

Question 13

entertainment

Answer 13

mixed-motive exp: no deduction!

Question 14

whose expenses are deductible?

Answer 14

1. business owner or EE present
2. busn “associate” present
3. another owner or EE
4. prospective EEs

Question 15

travel expense

Answer 15

Mixed-motive exp: meals, lodging, tips, cost of getting there/returning, and cost of getting around while you’re there

Question 16

primary purpose

Answer 16

50% of more days must be business days. Count # of days spend on business and personal activities

Question 17

personal primary purpose

Answer 17

can’t deduct the airfare or any cost of getting there/returning

Question 18

home office deduction

Answer 18

to qualify: part of your home must be used for busn “regularly and exclusively” = (sq footage of busn portion/total sq footage) x actual indirect expenses

Question 19

actual indirect expenses (home office deduction)

Answer 19

mortgage exp, property tax, repairs/maintenance, utilities, depreciation, lawn care/maintenance

Question 20

mixed use property expenses

Answer 20

for automobiles, cell phones, computers, and homes. Deduct to the proportion or part of property used for business

Question 21

automobile deductions

Answer 21

standard mileage or actual cost method

Question 22

standard mileage method

Answer 22

56 cents per mile plus tolls and parking (2022: 58.5 for first 6, then 62.5 for next). If self-employed, deduct using contemporaneous documentation (log book!)

Question 23

contemporaneous deduction

Answer 23

log book to determine business versus personal use of automobile (standard mileage method)

Question 24

actual cost method

Answer 24

deduct actual costs (depreciation, repairs, oil, licenses, etc.) plus tolls and parking. %=business miles/total miles

Question 25

business use of an automobile

Answer 25

out of town travel, drive from residence to temporary worksite, drive from regular workplace to temporary, from regular or temporary to 2nd job

Question 26

limitation on business interest deduction

Answer 26

to the total of business interest income AND 30% of adjusted taxable income. doesn’t apply to businesses with average annual gross receipt less than $25 million over last 3 year pd.
- excess business expense is carried forward indefinitely

Question 27

business interest expense

Answer 27

interest paid or accrued on loans taken out related to business operations

Question 28

adjusted taxable income

Answer 28

income allocable to the business excluding interest income and before depreciation, amortization, and interest expense deduction

Question 29

accounting periods

Answer 29

assume all taxpayers year ends on December 31st

Question 30

accounting methods

Answer 30

timing of revenues and expenses for tax purposes

Question 31

cash method

Answer 31

income when received, expenses when paid. Exceptions: prepaid int, expenses for tangible/intangible asset.

Question 32

prepaid interest

Answer 32

deduct in year you incur that interest

Question 33

expenses that create tangible or intangible asset

Answer 33

12 month rule: prepmt related to intangible asset may be fully deductible in the current year if it’s less than 12 mo or doesn’t extend beyond the end of next taxable year