Fed income tax TBChap008 Essay

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Chapter 08
Business Income, Deductions, and Accounting Methods

True / False Questions 1.
The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary". True False 2.
Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits. True False 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. True False 4.
Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit. True False 5.
The test for whether an expenditure is reasonable in
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D. appropriate and measurable

E. personal and justifiable

Which of the following is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

A. cost of fertilizer

B. accounting fees

C. cost of a greenhouse

D. cost of uniforms for employees

E. a cash settlement for trade name infringement

The IRS would most likely apply the arm's length transaction test to determine which of the following?

A. whether an expenditure is related to a business activity

B. whether an expenditure will be likely to produce income

C. timeliness of an expenditure

D. reasonableness of an expenditure

All of these

Which of the following business expense deductions is most likely to be unreasonable in amount?

Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.

Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.

Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.

All of these are likely to be unreasonable in amount.

Which of the following is a true statement?

Interest expense is not deductible if the loan is used to purchase municipal bonds.

Insurance premiums are not deductible if paid for "key man" life insurance.

One half of the cost of

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