Business Deductions
Business expenditures must be both ____ & ____ to be deductible
Ordinary & Necessary
Expenditures that benefit a period longer than 12 months generally must be __.
Capitalized
A business using the ____ method of accounting recognizes revenue when property or services are actually or constructively received.
Cash
John owns a business. During the month of June, he incurred $400 in advertising expenses, $150 in utility expenses, $300 in legal fees, and $75 in fines. How much of these expenses is deductible?
$850 (400+150+300)
Can interest expense be a deduction for a company that invests its loan into municipal bonds?
No - Municipal bonds are tax-exempt and expenses that generate tax-exempt income are not allowed to offset taxable income
Under the ____ method of accounting, income is recognized when earned (all-events) or received (if earlier)
Accrual
For reasonable amount, the IRS and the court test for extravagance by comparing the amount of the expense to a ____ _____ or an ____-____ amount.
market price, arm’s-length
What is the current standard mileage rate for business travel?
56 cents/mi
Businesses meet the all-events requirement on the earliest of which 3 dates?
(1) When they complete the task to earn the income, (2) when the payment for the task is due from the customer, and (3) when the business receives payment for the task.
Tom hired 3 part-time employees to clean his office for $12 per hour. Tom released the part-time employees 2 months later after working for a combined total of 150 hours. Soon after that, Tom hired his nephew, Mark, to perform the same job and paid him $30 per hour. Mark worked for a total of 100 hours. What amount can be deducted from the compensation Tom gave to these employees.
$3,000
(12x150)+(12x100) (Amount paid about the $12 for Mark is considered unreasonable)
Maximus Decimus Meridius, commander of the Armies of the North, General of the Felix Legions, loyal servant to the true emperor, Marcus Aurelius, invited two prospective soldiers to a gladiator match in Rome. Maximus paid $700 for the tickets and spent $300 on food and beverages. Assuming that these meals were not provided by a restaurant and the amount was not extravagant, what amount can be deducted as a business expense?
$150 ($300 x 50%)
=> Cost of tickets is a nondeductible entertainment expense
=> The cost of food would have been 100% deductible if they were provided by a restaurant
The overriding requirement for all tax accounting methods is that the method must “clearly reflect income” and be applied _____.
Consistently