4. Business Deductions

Question 1

What is the difference between above-the-line deductions and below-the-line deductions?

Answer 1

Above-the-line deductions are deducted from gross income to arrive at adjusted gross income (AGI). Below-the-line deductions are deducted from AGI to arrive at taxable income.

Question 2

A deduction from gross income is allowed for which expenses incurred while carrying on a trade or business?

Answer 2

A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business.

Question 3

What is a trade or business?

Answer 3

A trade or business is a regular and continuous activity that is entered into with the expectation of making a profit.

Question 4

What is an activity not engaged in for a profit?

Answer 4

An activity that is not engaged in for a profit is a hobby (personal).

Question 5

When is an activity presumed not to be a hobby?

Answer 5

An activity that results in a profit in any 3 of 5 consecutive tax years (2 out of 7 for the breeding and racing of horses) is presumed not to be a hobby.

Question 6

An expense must be both ______ and necessary to be deductible.

Answer 6

Ordinary.

Question 7

What is an “ordinary” expense?

Answer 7

“Ordinary” implies that the expense normally occurs or is likely to occur in connection with businesses similar to the one operated by the taxpayer claiming the deduction.

Question 8

What is a “necessary” expense?

Answer 8

“Necessary” implies that the expenditure must be appropriate and helpful in developing or maintaining the trade or business.

Question 9

Which expenses are included in deductible travel expenses?

Answer 9

While away from home overnight on business, travel expenses are deductible. Travel expenses include
1.Transportation
2.Lodging

Question 10

When are travel expenses for a spouse deductible?

Answer 10

Travel expenses for a spouse are deductible when
1.There is a bona fide business purpose for the spouse’s presence,
2.The spouse is an employee, and
3.The expenses would be otherwise deductible.

Question 10

When are travel expenses for a spouse deductible?

Answer 10

Travel expenses for a spouse are deductible when
1.There is a bona fide business purpose for the spouse’s presence,
2.The spouse is an employee, and
3.The expenses would be otherwise deductible.

Question 11

What travel expenses are generally not deductible?

Answer 11

No deduction is allowed for
1.Travel expenses that are primarily personal in nature
2.Travel expenses of the taxpayer’s spouse unless certain exceptions apply
3.Attending investment meetings
4.Travel as a form of education

Question 12

What information about travel expenses must a taxpayer keep records of?

Answer 12

A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred while traveling away from home.

Question 13

What are the three factors used to determine what a taxpayer’s principal place of business is?

Answer 13

The three factors are
1.The total time spent at each place of business
2.The degree of business activity at each place of business
3.The relative income earned at each place of business

Question 14

Allocation of time spent on a trip for business and for pleasure is not required when

Answer 14

1.The trip is no more than 1 week,
2.The taxpayer can establish that a personal vacation was not the major consideration,
3.The personal time spent on the trip is less than 25% of the total time away from home.

Question 15

Are travel expenses for attending a convention deductible?

Answer 15

Yes. Travel expenses for attending a convention related to the taxpayer’s business, even when the taxpayer is an employee, are deductible

Question 16

What convention travel expenses are not deductible?

Answer 16

Expenses for a convention or meeting in connection with investments, financial planning, or other income-producing property are not deductible.

Question 17

How does a taxpayer calculate how much automobile expenses are deductible as transportation expenses?

Answer 17

Actual expenses may be used for the deduction, or the taxpayer may use the standard 2022 mileage rate of $0.585/mile for Jan.-June and $0.625/mile for July-Dec., plus parking fees and tolls.

Question 18

Is trade or business insurance expense a deductible expense?

Answer 18

Yes, trade or business insurance expense paid or incurred during the tax year is deductible. Prepaid insurance must be apportioned over the period of coverage.

Question 19

May a cash-method taxpayer deduct an insurance premium?

Answer 19

Yes, but a cash-method taxpayer may not deduct a premium before it is paid.

Question 20

For what debts could a bad-debt deduction be allowed?

Answer 20

A bad-debt deduction is allowed only for a bona fide debt arising from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money.

Question 21

What is business bad debt?

Answer 21

A business bad debt is one incurred or acquired in connection with the taxpayer’s trade or business. A cash-basis taxpayer has no basis in accounts receivable and generally has no deduction for bad debts.

Question 22

* test*
What amount of partially worthless business bad debt is deductible?

Answer 22

Partially worthless business debts may be deducted to the extent they are worthless and specifically written off.

Question 23

What is a nonbusiness bad debt?

Answer 23

A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the taxpayer’s trade or business.

Question 24

What amount of a partially worthless nonbusiness bad debt is deductible?

Answer 24

A partially worthless nonbusiness bad debt is not deductible.

Question 25

A deduction from gross income is allowed for which expenses incurred while carrying on a trade or business?

Answer 25

A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business.

Question 26

A deduction from gross income is allowed for which expenses incurred while carrying on a trade or business?

Answer 26

A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business.

Question 27

What is a trade or business?

Answer 27

A trade or business is a regular and continuous activity that is entered into with the expectation of making a profit.

Question 28

What is a trade or business?

Answer 28

A trade or business is a regular and continuous activity that is entered into with the expectation of making a profit.

Question 29

When is an activity presumed not to be a hobby?

Answer 29

An activity that results in a profit in any 3 of 5 consecutive tax years (2 out of 7 for the breeding and racing of horses) is presumed not to be a hobby.

Question 30

Which expenses are included in deductible travel expenses?

Answer 30

While away from home overnight on business, travel expenses are deductible. Travel expenses include
1.Transportation
2.Lodging

Question 30

Which expenses are included in deductible travel expenses?

Answer 30

While away from home overnight on business, travel expenses are deductible. Travel expenses include
1.Transportation
2.Lodging

Question 31

When are travel expenses for a spouse deductible?

Answer 31

Travel expenses for a spouse are deductible when
1.There is a bona fide business purpose for the spouse’s presence,
2.The spouse is an employee, and
3.The expenses would be otherwise deductible.

Question 32

When are travel expenses for a spouse deductible?

Answer 32

Travel expenses for a spouse are deductible when
1.There is a bona fide business purpose for the spouse’s presence,
2.The spouse is an employee, and
3.The expenses would be otherwise deductible.

Question 33

What travel expenses are generally not deductible?

Answer 33

No deduction is allowed for
1.Travel expenses that are primarily personal in nature
2.Travel expenses of the taxpayer’s spouse unless certain exceptions apply
3.Attending investment meetings
4.Travel as a form of education

Question 34

What travel expenses are generally not deductible?

Answer 34

No deduction is allowed for
1.Travel expenses that are primarily personal in nature
2.Travel expenses of the taxpayer’s spouse unless certain exceptions apply
3.Attending investment meetings
4.Travel as a form of education

Question 35

What information about travel expenses must a taxpayer keep records of?

Answer 35

A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred while traveling away from home.

Question 36

What are the three factors used to determine what a taxpayer’s principal place of business is?

Answer 36

The three factors are
1.The total time spent at each place of business
2.The degree of business activity at each place of business
3.The relative income earned at each place of business

Question 37

Are travel expenses for attending a convention deductible?

Answer 37

Yes. Travel expenses for attending a convention related to the taxpayer’s business, even when the taxpayer is an employee, are deductible.

Question 38

What convention travel expenses are not deductible?

Answer 38

Expenses for a convention or meeting in connection with investments, financial planning, or other income-producing property are not deductible.

Question 39

What amount of worthless debt is deductible?

Answer 39

Worthless debt is deductible only to the extent of adjusted basis in the debt.

Question 40

Are worthless corporate securities deductible as bad debt?

Answer 40

Worthless corporate securities are not considered bad debts. They are generally treated as a capital loss.
-Taxpayer can have up to 7 years to amend the returns

Question 41

In order for a taxpayer to take a deduction for a business gift, what must the taxpayer keep a record of?

Answer 41

The taxpayer must keep a record of the
1.Amount (cost) of the gift,
2.Date of the gift,
3.Description of the gift,
4.Business purpose of the gift, and
5.Business relation of the recipient to the taxpayer.

Question 42

In order for a taxpayer to take a deduction for a business gift, what must the taxpayer keep a record of?

Answer 42

The taxpayer must keep a record of the
1.Amount (cost) of the gift,
2.Date of the gift,
3.Description of the gift,
4.Business purpose of the gift, and
5.Business relation of the recipient to the taxpayer.

Question 43

The $25 deduction limit for business gifts does not apply to what gifts?

Answer 43

The $25 limit does not apply to incidental items costing (the giver) not more than $4 each, and other promotional materials including signs and displays.

Question 44

What is an employee achievement award?

Answer 44

An employee achievement award is tangible personal property awarded as part of a meaningful presentation for safety achievement or length of service.

Question 44

Up to how much of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards?

Answer 44

Up to $400 of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards.

Question 45

What is the yearly deduction for qualified employee achievement plan awards?

Answer 45

Deduction of qualified employee achievement plan awards is limited to $1,600 per year.

Question 46

What is a qualified plan award?

Answer 46

A qualified plan award is an employee achievement award provided under an established written program that does not discriminate in favor of highly compensated employees.

Question 47

Up to how much of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards?

Answer 47

Up to $400 of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards.

Question 48

Is deduction permitted for depreciation of equipment and fixed assets?

Answer 48

Deduction is permitted for obsolescence or wear and tear of property used in a trade or business.

Question 49

What amount of start-up costs and organizational expenditures can a taxpayer deduct in the year in which business begins?

Answer 49

Taxpayers can deduct up to $5,000 of start-up costs and $5,000 of organizational expenditures in the taxable year in which business begins. These amounts are reduced, but not below zero, by the cumulative cost of the start-up costs or organizational expenditures that exceed $50,000.

Question 50

If a taxpayer has start-up costs or organizational expenditures in excess of the $5,000 limit, when can the taxpayer deduct these costs?

Answer 50

Any start-up costs or organizational expenditures in excess of the $5,000 limit are capitalized and amortized proportionally over a 15-year period beginning with the month in which the active trade or business begins.

Question 51

When is a loss for an abandoned asset deductible?

Answer 51

A loss is deductible in the year the assets are actually abandoned with no claim for reimbursement.

Question 52

Are political contributions deductible?

Answer 52

Contributions to a political party or candidate and, generally, lobbying expenses are not deductible.

Question 53

Is payment of a debt of another party deductible?

Answer 53

No, payment of a debt of another party is generally not ordinary for a trade or business and thus is not deductible.

Question 54

Are expenditures related to producing tax-exempt income deductible?

Answer 54

No, these expenses are not deductible.

Question 55

Some examples of business expenses that are nondeductible because allowing the deduction would frustrate public policy include

Answer 55

1.Fines and penalties paid to the government for violation of the law
2.Illegal bribes and kickbacks
3.Two-thirds of damages for violation of federal antitrust law
4.Expenses of dealers in illegal drugs

Question 56

When are expenses incurred for the use of a person’s home for business purposes deductible?

Answer 56

The portion of the home must be used exclusively and regularly as
1.The principal place of business for any trade or business of the taxpayer;
2.A place of business that is used by patients, clients, or customers in the normal course of the taxpayer’s trade or business; or
3.A separate structure that is not attached to the dwelling unit that is used in the taxpayer’s trade or business.

Question 57

Will a taxpayer who uses the business portion of his or her home for personal use be allowed to deduct his or her home business expenses?

Answer 57

No. The exclusive-use test is strictly applied. Any personal use of the business portion of the home by anyone results in complete disallowance of the deductions.

Question 58

If a taxpayer has more than one business location, what is the primary factor in determining whether the business portion of their home is the taxpayer’s principal place of business?

Answer 58

If a taxpayer has more than one business location, the primary factor in determining whether a home office is the taxpayer’s principal place of business is the relative importance of the activities performed at each business location.

Question 59

Assuming that the business use of the home meets the three conditions in the exclusive-use test, when does a home office qualify as a “principal place of business?”

Answer 59

A home office qualifies as a “principal place of business” if used by the taxpayer to conduct administrative or management activities of the taxpayer’s trade or business and there is no other fixed location where the taxpayer conducts such activities.

Question 60

What amount of business meal expenses is deductible?

Answer 60

The amount deductible for business meal expenses provided to a current or potential business customer, client, consultant, or similar business contact is 100% of the actual expense for food or beverages provided by a restaurant.

Question 61

In order to deduct meal expenses over $75, certain information must be substantiated including

Answer 61

1.Documented dates,
2.Amounts,
3.Location,
4.Purpose, and
5.Business relationship.

Question 62

In order for a meal expense to be deductible, who must be present at the meal?

Answer 62

The taxpayer or an employee of the taxpayer must be present at the meal.

Question 63

Up to how much of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards?

Answer 63

Up to $400 of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards.

Question 64

Are entertainment expenses deductible?

Answer 64

Most entertainment expenses are nondeductible. However, entertainment expenses for recreational, social, or similar activities primarily for the benefit of employees are 100% deductible.

Question 65

The $25 deduction limit for business gifts does not apply to what gifts?

Answer 65

The $25 limit does not apply to incidental items costing (the giver) not more than $4 each, and other promotional materials including signs and displays.

Question 65

When are travel expenses for a spouse deductible?

Answer 65

Travel expenses for a spouse are deductible when
1.There is a bona fide business purpose for the spouse’s presence,
2.The spouse is an employee, and
3.The expenses would be otherwise deductible.

Question 65

Up to how much of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards?

Answer 65

Up to $400 of the cost of employee achievement awards is deductible by an employer for all nonqualified plan awards.

Question 65

What are the three factors used to determine what a taxpayer’s principal place of business is?

Answer 65

The three factors are
1.The total time spent at each place of business
2.The degree of business activity at each place of business
3.The relative income earned at each place of business

Question 66

What information about travel expenses must a taxpayer keep records of?

Answer 66

A taxpayer must substantiate the amount, time, place, and business purpose of expenses paid or incurred while traveling away from home.

Question 66

Are expenses in connection with the use of an entertainment facility that the taxpayer owns deductible as business expenses?

Answer 66

No, these expenses are not deductible as a business expense.

Question 66

What is a trade or business?

Answer 66

A trade or business is a regular and continuous activity that is entered into with the expectation of making a profit.

Question 67

Are entertainment expenses deductible?

Answer 67

Most entertainment expenses are nondeductible. However, entertainment expenses for recreational, social, or similar activities primarily for the benefit of employees are 100% deductible.

Question 67

Is deduction permitted for depreciation of equipment and fixed assets?

Answer 67

Deduction is permitted for obsolescence or wear and tear of property used in a trade or business.

Question 68

When is an activity presumed not to be a hobby?

Answer 68

An activity that results in a profit in any 3 of 5 consecutive tax years (2 out of 7 for the breeding and racing of horses) is presumed not to be a hobby.

Question 68

What amount of start-up costs and organizational expenditures can a taxpayer deduct in the year in which business begins?

Answer 68

Taxpayers can deduct up to $5,000 of start-up costs and $5,000 of organizational expenditures in the taxable year in which business begins. These amounts are reduced, but not below zero, by the cumulative cost of the start-up costs or organizational expenditures that exceed $50,000.