Chapter 9 Flashcards
What are the 3 criteria for an expense to be considered a business expense?
ordinary, necessary, reasonable
What are examples of ordinary and necessary busa expenses?
- advertising
- car & truck expenses
- depreciation
- insurance
- interest
- legal fees
- repairs
What are the 6 types of disallowance & limits on busa expense deductions?
(1) Expenditures against public policy
(2) Expenditures for political contributions & lobbying costs
(3) Expenses relating to tax-exempt income
(4) Capital Expenditures
(5) Personal Expenditures
(6) Mixed-Motive Expenditures
Is there a tax deduction for fines, penalties, etc?
NO
There is a tax deduction for political contributions and most lobbying expenses.
FALSE
Expenses that do NOT help businesses generate taxable income are not allowed to offset taxable income.
TRUE
How do businesses recover the cost of capitalized tangible assets (other than land)? What about intangible assets?
(a) depreciation
(b) amortization/disposition of the assets
Are personal living expenses deductible?
NO
What is the exception to personal expenditures?
when otherwise personal items are specifically adapted to busa use
(Ex: uniforms or special clothing)
Can some expenditures be motivated by both business and personal concerns?
YES
Are entertainment expenditures generally deductible?
NO
Exception:
(1) if primarily for the benefit of the taxpayer’s employees -or-
(2) entertainment exp’s that will be included in the employee’s compensation
Are meal expenditures generally deductible?
Yes, taxpayers can only deduct 50% of the cost of busa meals
The cost of meals provided during employee appreciation-type
activities (example: holiday parties) are fully deductible as long as the activity is not limited to only highly compensated employees
TRUE
The cost of commuting between the taxpayer’s home and
regular place of business is deductible.
FALSE
What are the 2 methods a taxpayer can use to deduct the business-use of the vehicle?
(1) Actual Cost method
(2) Standard Mileage rate method
What is the formula for Actual Cost method?
cost of operating the vehicle + deprciation
What is the formula for Standard Mileage rate method? (2024)
business miles x $0.67
When are travel expenses considered deductible?
when the taxpayer is AWAY from home overnight
How much can you deduct if the travel was solely for business?
all the costs of travel are deductible
How much can you deduct if the travel was DOMESTIC and has both business and personal aspects?
if the PRIMARY purpose was:
(1) Business- transportation costs FULLY deductible; meals, lodging, & incidental exp limited those incurred during the business portion of the travel
(2) Personal - transportation costs are NOT deductible; meals, lodging, & incidental exp limited….
How much can you deduct if the travel was FOREIGN and has both business and personal aspects?
if the PRIMARY purpose was:
(1) Business- transportation costs must be PRORATED & personal % is NOT deductible; meals, lodging, & incidental exp limited those incurred during the business portion of the travel
(2) Personal - transportation costs are NOT deductible; meals, lodging, & incidental exp limited….
What is the formula to calculate the prorated transportation costs?
transportation costs x (busa days/total days)
What are “casualties”?
Businesses can incur losses when their assets are stolen, damaged, or completely destroyed by a force outside the control of the business
What are the 2 types of casualty losses?
(1) Stolen or completely destroyed
(2) partially destroyed
Hoe do you calculate the loss of a stolen or completely destroyed asset?
Adj basis in property - insurance proceeds
Hoe do you calculate the loss of a partially destroyed asset?
LESSOR of:
(1) decline in value (or repair cost)
(2) Adj basis in property
then, SUBTRACT insurance process
What are the 2 types of accounting periods?
(1) Annual period
(2) Year-end
What classifies as an annual period?
- usually, full tax year is 12 months long
- RARE: short tax year is <12 months
What classifies as year-end?
- calendar year-end 12/31
- fiscal year-end ends on the last day of a month other than December
What are the 2 most common accounting methods allowed for tax purposes?
(1) Cash
(2) Accrual
What is the cash accounting method?
recognize income when receive and recognize deduction when paid
What is the accrual accounting method?
recognize income when earned and recognize deductions when incurred
When is the accounting method adopted?
with the 1st tax return
Large corporations must use accrual.
TRUE
A business expending cash may NOT be allowed to currently deduct the expense at the time of
payment, for which expense?
prepaid interest expense
What is the 12-month rule?
regulation that allows prepaid business expenses to be currently deducted when
(1) the contract does NOT extend beyond 12 months and
(2) the contract period does NOT extend beyond the end of the tax year following the year of the payment.
What is the “One-year deferral rule”?
Businesses receiving advance payments for goods and services may elect to defer recognizing the advance payment as income until the following tax year
When is a taxpayer NOT allowed to defer recognition of “unearned income” to the following year?
(1) income is EARNED
(2) the income was recognized for FINANCIAL records (GAAP)
(3) if the advance was for unearned INTEREST income/RENTAL income
When must businesses recognize unearned rental income & unearned interest income?
IMMEDIATELY upon receipt
Security deposits received from rental customer are income.
NO, it is a liability
