Chapter 7 T/F

Question 1

A business expense need not be made at regular intervals in order to be considered ordinary and necessary.

Answer 1

True

Question 2

Business expenditures are not deductible if they are illegal under state or federal law.

Answer 2

True

Question 3

All business expenditures, including fines and penalties, are deductible.

Answer 3

False. There are certain expenditures that are not deductible because to allow them would be against public policy. Included in this category are fines or similar penalties paid to a government for a violation of a law as well as illegal bribes and kickbacks.

Question 4

Although ordinary and necessary business expenses are generally deductible, the expense must be reasonable to be deductible when it arises in the area of compensation.

Answer 4

True

Question 5

The deduction for qualified higher education expenses is available regardless of the taxpayer’s income.

Answer 5

False. The deduction is disallowed when the taxpayer’s adjusted gross income exceeds a specified amount based on filing status

Question 6

A taxpayer has a choice between itemizing business transportation expenses or taking a standard mileage rate specified by the IRS.

Answer 6

True

Question 7

Expenses for commuting are nondeductible.

Answer 7

True

Question 8

A taxpayer who invited some of his business customers to his daughter’s wedding may deduct the cost of the wedding as a business entertainment expense.

Answer 8

False. Although the guests were mostly business customers, the expense would be denied because the event was not related to the taxpayer’s trade or business.

Question 9

A taxpayer who invites a business client and spouse to a nightclub may deduct the expense, even if no business discussion took place before or after the nightclub visit.

Answer 9

False. The deduction would be denied because the setting was such that there was little or no possibility of engaging in the conduct of business. Discussions at nightclubs, theaters, or sporting events are not generally considered directly related to the business.

Question 10

Meals furnished to employees on business premises are deductible without regard to the 50 percent limitation.

Answer 10

True

Question 11

Business expense deductions for tickets to entertainment events are limited to 50 percent of the face amount of the tickets and 100 percent of any premiums paid to a ticket agency.

Answer 11

False. The deductible amount for tickets is limited to the face amount only, subject to the 50 percent limitation. There is no deduction allowed for any premiums paid.

Question 12

Country club dues are deductible entertainment expenses if the use of the facility is primarily for furtherance of the taxpayer’s business.

Answer 12

False. Country club dues are not deductible.

Question 13

If a taxpayer does not keep records of the use of an entertainment facility, then for tax purposes the use of the facility will probably be treated as a personal expense.

Answer 13

True

Question 14

If an entertainment expense is associated with the taxpayer’s business, the taxpayer should record the place and time of the business discussion as well as the persons who were entertained and participated.

Answer 14

True

Question 15

Expenses for tax advice are deductible as expenses for the production of income.

Answer 15

True

Question 16

Business deductions are allowed for an office in the home whether or not the office is used exclusively for the taxpayer’s business.

Answer 16

False. Deductions are generally available for an office at home only if the taxpayer uses the office exclusively for business.

Question 17

Home-office deductions (excluding mortgage interest expense and real estate taxes) may have the effect of creating a net loss from business activities.

Answer 17

False. Home-office deductions (excluding mortgage interest expense and real estate taxes) are not permitted to the extent they create or increase a net loss from business activities. Disallowed deductions may be carried over and deducted in succeeding years subject to the same limitations.

Question 18

A vacation home will not be treated as rental property if the home is used as a personal residence for a 30-day period during the year, and rented for 200 days during the year.

Answer 18

True

Question 19

The 2 percent floor for itemized deductions applies to the deduction for annuity payments ceasing before the taxpayer’s recovery of his investment.

Answer 19

False. The deduction for unrecovered basis in an annuity is a miscellaneous itemized deduction that is not subject to the 2 percent floor.

Question 20

Itemized deductions for gambling losses to the extent of gambling winnings are not subject to the 2 percent floor that applies to many types of miscellaneous deductions.

Answer 20

True