Tax Lesson 22 - Deducting Business Expenses

1. There is a difference between capital and deductible expenses. The following is a deductible expense.

A. Cost of a motor vehicle you use in your business.
B. The cost of building a private road on your business property and the cost of replacing a gravel driveway.
C. Amounts spent for tools used in your business if the tools have a life expectancy of less than 1 year. 
D. The cost of changing from one heating system to another.

2. To be deductible, your employee's pay must be an ordinary and necessary expense and you must pay or incur it. The pay must be

A. Reasonable.
B. For services performed.
C. Pay figured using acceptable pay methods. 
D. Both A and B above.

3. When you start a business, treat all eligible costs you incur before you begin operating the business as capital expense which are part of the basis of the business. Generally,

A. You can recover the costs for particular assets through depreciation, amortization or depletion deductions.
B. You cannot recover other costs until you sell the business.
C. You cannot recover other costs until you go out of business.
D. None of the above.

4 . These are the costs of carrying on a trade or business and they are usually deductible if the business is operated to make a profit.

A. Business assets.
B. Improvements.
C. Business expenses.
D. All of the above.

5. If you use part of your home for business (office in the home), you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. To qualify to claim expenses for the business use of your home,

A. The business part of your home must be used exclusively and regularly for the trade or business.
B. The business part of your home must be your principal place of business or a place where you meet with or deal with patients, clients, or customers in the normal course of your trade or business.
C. The business part of your home must be a separate structure (not attached to your home) used in connection with your trade or business.
D. All of the above.

6. To be deductible, a business expense is helpful and appropriate for your business. It is an expense that is common and accepted in your field of business and it does not have to be indispensable to be considered necessary. To be deductible the business expense must be

A. Ordinary and necessary.
B. An indispensable expense.
C. An expense that is absolutely necessary.
D. An expense that is private and personal.

7. When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported. The method you use must clearly reflect income. The two basic methods are 

A. The ordinary method and the necessary method.
B. The cash method and the accrual method.
C. The expense method and the absolute method.
D. The business method and the personal method.

8. You generally can deduct premiums you pay for insurance related to your trade or business. One kind of insurance is group hospitalization and medical insurance for employees, including long-term care insurance. You can deduct as business expenses life insurance covering your officers and employees if

A. You pay for the plan for the whole tax year.
B. You are not directly or indirectly a beneficiary under the contract.
C. You also are a beneficiary under the contract.
D. If the life insurance also covers your car.

9. Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. These costs

A. Should be included in the basis of property you produce or acquire for resale.
B. Should be claimed as a current deduction.
C. Are produced for your personal use and are not business costs.
D. Both A and B above.

10. You are able to deduct the following expense as cost of goods sold from your gross receipts on Schedule C.

A. Factory overhead.
B. Storage and direct labor for workers who produce the products.
C. Costs of products or raw materials, including freight.
D. All of the above.

11. This debt is a loss from the worthlessness of a debt that was either created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless.

A. A non-business bad debt.
B. A business bad debt.
C. A personally motivated bad debt.
D. An investment bad debt.

12. An accountable plan, requires your employees to meet the following requirement.

A. Employee must have paid or incurred deductible expenses while performing services as your employee.
B. Employee must have adequately account to employer for deductible expenses within a reasonable period of time.
C. Employee must return any excess reimbursement or allowance within a reasonable period of time.
D. All of the above.

13. You employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. For 2008, the standard mileage rate for each business mile is

A. 50.5 cents per mile for the period January 1 through June 30, 2008.
B. 58.5 cents per mile the period July 1, through December 31, 2008.
C. 48.5 cents per mile for the period January 1 through December December 31, 2008.
D. Both A and B above.

14. To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also must show that they are

A. Directly related to or associated with the conduct of your trade or business.
B. Indispensable to your business.
C. The most inexpensive expense possible.
D. All of the above.

15. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in taxes from your own funds. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as

A. Expenses for going into business.
B. Factory rent.
C. Taxes.
D. All of the above.

16.  As an employer you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as

A. Employee fringe benefits.
B. Taxes paid.
C. Organization costs.
D. All of the above.

17. If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are

A. Contingent on productivity, use, or disposition of the item.
B. Payable at least annually for the entire term of the transfer agreement.
C. Substantially equal in amount (or payable under a fixed formula).
D. All of the above.

18. The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. The cost of repairs includes the costs of labor, supplies, and certain other items. An example of a repair would be

A. Reconditioning floors (but not replacement).
B. Repainting the interior and exterior walls of a building.
C. Fixing plumbing leaks (but not replacement of fixtures).
D. Any of the above.

19. Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the year. If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if

A. You do not keep a record of when they are used.
B. You do not take an inventory of the amount on hand at the beginning and end of the year.
C. This method does not distort your income.
D. All of the above.

20. The cost of making improvements to a business asset are capital expenses if the improvements

A. Add to the value of the asset.
B. Appreciably lengthen the time you can use it.
C. Adapt it to a different use.
D. Any of the above.