ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilker
g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
Chapter 1 Busi g g
ness Income, Deductions, and Accounting Methods
g g g g g
SOLUTIONS MANUAL g
Discussion Questions g
1. [LOg1]gWhatgisgang“ordinarygandgnecessary”gbusinessgexpenditure?
“Ordinary”gandg“necessary”gimplygthatgangexpensegmustgbegcustomarygandghelpful,grespect
ively.gBecausegthesegtermsgaregsubjective,gthegtestsgaregambiguous.gHowever,gordinarygisgint
erpretedgbygthegcourtsgasgincludinggexpensesgwhichgmaygbegunusualgforgagspecificgtaxpayerg(
butgnotgunusualgforgthatgtypegofgbusiness)gandgnecessarygisgnotginterpretedgasgonlygessentialge
xpenses.gTheseglimitsgcangbegcontrastedgwithgthegreasonableglimitgongamountsgandgthegbonagfi
degrequirementgforgprofitgmotivation.
2. [LOg1]gExplainghowgcostgofggoodsgisgtreatedgwhengagbusinessgsellsginventory.
Undergthegreturngofgcapitalgprinciple,gcostgofggoodsgsoldgrepresentsgagreductionginggrossginco
megrathergthangagbusinessgexpense.gForgexample,gifgagtaxpayergsellsginventorygfor
$100,000gandgreportsgagcostgofggoodsgsoldgofg$40,000,gthegbusiness’sggrossgincomegis
$60,000g($100,000g–g40,000)gnotg$100,000.
3. [LOg1]gWhethergagbusinessgexpensegisg“reasonablegingamount”gisgoftengagdifficultgquestion.g
Explaingwhygdetermininggreasonablenessgisgdifficultgandgdescribegagcircumstancegwheregrea
sonablenessgisglikelygtogbegquestionedgbygthegIRS.
Reasonablenessgisgangissuegofgfactgandgcircumstance,gandgextravagancegisgdifficultgtogdeterm
inegbecausegofgthegsubjectivitygandgmultitudegofgfactorsginvolvedgingdetermininggprice.gReaso
nablenessgisgmostglikelygtogbegangissuegwhengagpaymentgisgmadegtogagrelatedgindividualgorgtheg
taxpayergenjoysgsomegpersonalgbenefitgincidentalgtogthegexpenditure.
4. [LOg1]gJakegisgagprofessionalgdoggtrainergwhogpurchasesgandgtrainsgdogsgforgusegbyglawgenf
orcementgagencies.gLastgyeargJakegpurchasedg500gbagsgofgdoggfoodgfromgaglargegpetgfoodgc
ompanygatgangaveragegcostgofg$30gpergbag.gThisgyear,ghowever,gJakegpurchasedg500gbagsgofg
doggfoodgfromgaglocalgpetgfoodgcompanygatgangaveragegcostgofg$45gpergbag.gUndergwhatgcirc
umstancesgwouldgthegIRSglikelygchallengegthegcostgofgJake’sgdoggfoodgasgunreasonable?
Agcommongtestgforgreasonablenessgisgwhethergthegexpendituregisgcomparablegtogangarm'sglen
gthgamountg–
gagpricegchargedgbygobjectiveg(unrelated)gindividualsgwhogdognotgreceiveganygincidentalgpers
onalgbenefits.gHence,gthegIRSgisgmostglikelygtogchallengegthegcostgofgthegdoggfoodgifgJake’sgrel
ativesgcontrolgorgowngtheglocalgpetgfoodgcompanygandgwasgbenefitinggfromgthegincreasedgpric
e.
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 1
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilker
g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
5. [LOg2]gWhatgkindsgofgdeductionsgaregprohibitedgasgagmattergofgpublicgpolicy? gWhygmightgC
ongressgdeemgitgimportantgtogdisallowgdeductionsgforgexpendituresgthatgaregagainstgpublicgpo
licy?
ThegCodeglistsgbribes,gkickbacks,gandg“other”gillegalgpaymentsgasgnondeductible.gCongressg
didn’tgwantgthegtaxgbenefitsgassociatedgwithgdeductionsgtogbenefitgorgsubsidizegwrongdoing.g
Ofgcourse,gthisgrationalegdoesn’tgreallygexplaingthegprohibitiongagainstgdeductinggpoliticalgc
ontributionsgwhichgisgprobablygbettergexplainedgbygthegpotentialgperceptiongthatgpoliticalgeff
ortsgaregbeinggsubsidizedgbygtaxpayers.
6. [LOg2]gProvidegangexamplegofgangexpensegassociatedgwithgthegproductiongofgtax-
exemptgincome,gandgexplaingwhatgmightghappengifgCongressgrepealedgthegprohibitiongaga
instgdeductinggexpensesgincurredgtogproducegtax-exemptgincome.
Twogcommongexamplesgareginterestgexpensegassociatedgwithgdebtgusedgtogpurchasegmunicip
algbondsgandglifeginsurancegpremiumsgpaidgongkeygmanginsurance.gIfgthisgprohibitiongweregr
epealed,gthengtaxpayersgwouldghavegangincentivegtogborrowgtoginvestgingmunicipalgbondsgorg
borrowgtoginvestgingemployeeglifeginsurance.gThisgformergpracticegwouldgleadgtoghighergdem
andgforgmunicipalgbondsg(lessgyield)gandglessgrevenuegforgtheggovernment.gTheglattergpractic
egwouldgleadgtoghighergdemandgforginsuranceg(highergpremiums?)gandglessgrevenuegforgthegg
overnment.gBothgpracticesgcouldgleadgtogagperceptiongofginequitygbetweengthosegtaxpayersga
blegtogutilizegthegtaxgarbitragegtogreducegtaxesgandgthosegwhogcouldgnotgusegthegpractice.
7. [LOg2]g{Research}gPeggygisgagrodeogclown,gandgthisgyeargshegexpendedg$1,000gongspecialg“
funny”gclothesgandgoutfits.gPeggygwouldglikegtogdeductgthegcostgofgthesegclothesgasgwork-
grelatedgbecausegshegrefusesgtogweargthegclothesgunlessgshegisgworking.gUndergwhatgcircums
tancesgcangPeggygdeductgthegcostgofghergclowngclothes?
Taxpayersgmaygdeductgthegcostgofguniformsgorgspecialgclothinggtheygusegingtheirgbusinessgwhe
ngthegclothinggisgnotgappropriategtogweargasgordinarygclothinggoutsidegthegplacegofgbusiness.g
IngPeggy’sgcase,gthegclowngclothesgareganalogousgtogspecialguniformsgorgprotectiveggarment
sgandgcouldgbegdeductible.gSeegD.gTechner,gTCgMemog1997-
498.gErhardgSeminargTraining,gTCgMemog1986-
526gprovidesgangexamplegofgclothesgthatgweregnotgdeductiblegbecausegtheygweregappropriateg
forgnormalgwear.gHowever,gthegcostgofgclothinggwouldgnotglikelygbegdeductiblegifgthegclothesg
weregunacceptablegsolelygbecausegofgthegtaxpayer’sgsensegofgfashion.
8. [LOg2]gJimmygisgagsolegproprietorgofgagsmallgdry-
cleaninggbusiness.gThisgmonthgJimmygpaidgforghisggroceriesgbygwritinggchecksgfromgthegc
heckinggaccountgdedicatedgtogthegdry-
gcleaninggbusiness.gWhygdogyougsupposegJimmygisgusingghisgbusinessgcheckinggaccountgra
thergthanghisgpersonalgcheckinggaccountgtogpaygforgpersonalgexpenditures?
Jimmygmightgbegtryinggtogreduceghisgbankgchargesgbygusinggonegaccountgforgbothgpersonalga
ndgbusinessgexpenditures,gbutghegcouldgalsogbegtryinggtogdisguisegpersonalgexpendituresgas
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 2
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilkerg g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
businessgexpenses.gBygcomminglinggbusinessgandgpersonalgexpenditures,gJimmygwillgneedgto
gseparategpersonalgandgbusinessgexpendituresgbeforegclaimingganygbusinessgdeductions.
9. [LOg2]gTroygoperatesgangeditorialgservicegthatgoftengentertainsgprospectivegauthorsgtogencour
agegthemgtogusegTroy'sgservice.gThisgyeargTroygpaidg$3,000gforgthegcostgofgmealsgand
$6,200gforgthegcostgofgentertaininggauthors.gDescribegthegconditionsgundergwhichgTroygcangde
ductgagportiongofgthegcostgofgthegmealsgasgagbusinessgexpense.
Togdeductg100gpercentgofgthegcostgofgmealsgasgagbusinessgexpense,gthegmealsgmustgbegordinar
ygandgnecessarygtogTroy’sgbusiness,gprovidedgbygagrestaurant,gandgthegamountgmustgbegreaso
nablegundergthegcircumstances.gIngaddition,gTroygorgangemployeegmustgbegpresentgwhengtheg
mealgisgfurnished,gandgthegmealgmustgbegfurnishedgtogangactualgorgpotentialgbusinessgassociat
e.gFinally,gthegcostgofgthegmealsgmustgbegseparatelygstatedg(byginvoice)gfromgthegcostgofgthegen
tertainmentg(thegcostgofgthegentertainmentgisgnotgdeductible).gIfgthegmealsgandgbeveragesgareg
notgprovidedgbygagrestaurant,gthengonlyg50gpercentgisgdeductibleg(assuminggallgofgthegothergre
quirementsgaregmet).
10. [LOg2]gSusmitagpurchasedgagcargthisgyeargandgusesgitgforgbothgbusinessgandgpersonalgpurp
oses.gSusmitagdrovegthegcarg11,000gmilesgongbusinessgtripsgandg9,000gmilesgforgpersonalgt
ransportation.gDescribeghowgSusmitagwillgdeterminegthegamountgofgdeductiblegexpensesg
associatedgwithgthegauto.
Becausegonlygthegexpensegrelatinggtogbusinessgusegisgdeductible,gthegtaxpayergmustgallocategt
hegexpensesgbetweengthegbusinessgandgpersonalgusegportions.gAgcommongmethodgofgallocatio
ngisgrelativeguse.gIngthisginstance,gSusmitagwouldgcalculategthegbusinessgportiongbasedgupongt
hegratiogofgbusinessgmilesgtogtotalgmilesg(11/20gorg55gpercent).gShegwouldgthengdeductgthegcos
tsgofgoperatinggthegvehiclegforgbusinessgpurposesgplusgdepreciationgongthegbusinessgportiong(
55gpercent)gofgthegvehicle’sgtaxgbasis.gAlternatively,ginglieugofgdeductinggthesegcosts,gSusmitag
maygelectgtogdeductgagstandardgamountgforgeachgbusinessgmilegshegdrives.gThegstandardgmile
agegrateg(58.5gcentsgpergmilegforgthegfirstgsixgmonthsgofg2022gandg62.6gcentsgforgthegfinalgsixgm
onths)grepresentsgthegper-
milegcostgofgoperatinggangautomobileg(includinggdepreciationgorgleasegpayments).gOncegSus
mitaghasgmadegthisgelection,gshegmustgcontinuegtogusegitgthroughoutgtheglifegofgthegauto.
11. [LOg1,gLOg2]gWhatgexpensesgaregdeductiblegwhengagtaxpayergcombinesgbothgbusinessgandgp
ersonalgactivitiesgongagtrip?gHowgdogthegrulesgforginternationalgtravelgdiffergfromgthegrulesgfo
rgdomesticgtravel?
Ifgthegtaxpayerghasgbothgbusinessgandgpersonalgmotivesgforgagtrip,gbutgthegprimarygorgdomina
ntgmotivegisgbusiness,gthegtaxpayergmaygdeductgthegtransportationgcostsgtoggetgtogthegplacegofg
business,gbutgshegmaygdeductgonlygmealsg(50%gorg100%gifgprovidedgbygagrestaurant),glodgin
g,gtransportationgongsite,gandgincidentalgexpendituresgforgthegbusinessgportiongofgthegtravel.g
Ifgthegtaxpayer’sgprimarygpurposegforgthegtripgisgpersonal,gthegtaxpayergmaygnotgdeductgtrans
portationgcostsgtogtravelgtogandgfromgtheglocation,gbutgthegtaxpayergmaygdeductgmealsg(50%g
org100%gifgprovidedgbygagrestaurant),glodging,gtransportation,gandgincidentalgexpendituresgf
orgthegbusinessgportiongofgthegtrip.gFor
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 3
mynursytest.store
, ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilker g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
internationalgtravelgingexcessgofgonegweek,gthegtaxpayergmustgallocategthegcostgofgthegtranspo
rtationgbetweengpersonalg(nondeductible)gandgbusinessg(deductible)gactivities.gTaxpayersgge
nerallygdeterminegthegnondeductiblegportiongofgthegtransportationgcostsgbygmultiplyinggthegtr
avelgcostsgbygagratiogofgpersonalgactivitygdaysgtogtotalgdaysgtravelling.gFinally,gremembergtha
tgtravelgdaysgaregconsideredgbusinessgactivitygdaysgforgbothgdomesticgandginternationalgtravel
.
12. [LOg2]gClydeglivesgandgoperatesgagsolegproprietorshipgingDallas,gTexas.gThisgyeargClydegf
oundgitgnecessarygtogtravelgtogFortgWorthg(aboutg25gmilesgaway)gforglegitimategbusinessgre
asons.gIsgClyde’sgtripglikelygtogqualifygasg“awaygfromghome,”gandgwhygwouldgthisgdesign
ationgmatter?
Besidesgthegcostgofgtransportation,gthegdeductiongforgtravelgexpensesgincludesgmealsg(50%gor
g100%gifgprovidedgbygagrestaurant),glodging,gandgincidentalgexpenses.gHowever,gtravelgexpen
sesgaregonlygdeductiblegifgthegtaxpayergisgawaygfromghomegovernightgwhilegtraveling.gForgthis
gpurpose,gagtaxpayergisgconsideredgtogbegawaygfromghomegovernightgifgthegtripgisgofgsufficientg
durationgtogrequiregsleepgorgrest.gIt’sglikelygthatgClyde’sgtripgwillgnotgsatisfygthisgconditiongan
dgthatghegwillgnotgbegablegtogdeductgcostsgforgmealsgandglodging.
13. [LOg2]gDescribegthegrecord-
keepinggrequirementsgforgdeductinggbusinessgexpenses,gincludinggmixed-
motivegexpenditures.
Taxpayersgmustgkeepgspecific,gwritten,gcontemporaneousgrecordsgofgtime,gamountgofgthegexpe
nditure,gandgbusinessgpurposegofgthegtravel.gNogdeductionsgaregallowedgabsentgsufficientgrec
ordsgtogdocumentgbusinessgpurpose.gRecordsgofgthegexpendituregamount,ghowever,gmaygnotgb
egnecessarygifgthegtaxpayergclaimsgpergdiemgamounts.
14. [LOg2]gDescribegthegcomputationgofgtheglimitgplacedgongthegbusinessginterestgdeduction.gIsgt
hegdisallowedgbusinessginterestgevergdeductible?
Thegdeductiongofgbusinessginterestgexpensegisglimitedgtogthegsumgofgbusinessginterestgincomegp
lusg30gpercentgofgthegbusiness'sgadjustedgtaxablegincome.gBusinessginterestgisgdefinedgasganygi
nterestgpaidgongdebtgallocablegtogagtradegorgbusinessgactivity,gandgadjustedgtaxablegincomegis
gtaxablegincomegallocablegtogthegbusinessgactivitygcomputedgbeforegdeductions gforginterestgex
pensegandgnetgoperatingglossgcarryovers.gDisallowedgbusinessginterestgcangbegcarriedgforwa
rdgindefinitely.
15. [LOg2]gDescribegtheggrossgreceiptsgtestgandgidentifyghowgthisgtestgrelatesgtogthegbusinessgi
nterestgdeduction.
Theggrossgreceiptsgtestgisgangannualgtestgdesignedgtogidentifygsmallgbusinessesgthatg Congressg
intendedgtogexemptgfromgsomegofgthegmoregcomplexgandgonerousgprovisionsgofgtheglaw,gsuchga
sgthegbusinessginterestgdeduction.gAsgthegnamegimplies,gsizegisgmeasuredgbygwhethergaverageg
grossgreceiptsgexceedsgagthresholdgamount,gandgbusinessesgwhoseggrossgreceiptsgdognotgexce
edgthegthresholdginganygtaxgyeargaregnotgsubjectgtogthisglimitationgingthatgyear.gThisgamountgw
asgoriginallygsetgatg$25gmillion,gbutgsincegitgisgindexedgforginflation,gthegamountging2022gisgsetg
atg$27gmillion.gThegaverageggrossgreceiptsgisgdeterminedgusinggthe
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 4
mynursytest.store
g g g g g g g g g g g
n 14th Edition Spilker
g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
Chapter 1 Busi g g
ness Income, Deductions, and Accounting Methods
g g g g g
SOLUTIONS MANUAL g
Discussion Questions g
1. [LOg1]gWhatgisgang“ordinarygandgnecessary”gbusinessgexpenditure?
“Ordinary”gandg“necessary”gimplygthatgangexpensegmustgbegcustomarygandghelpful,grespect
ively.gBecausegthesegtermsgaregsubjective,gthegtestsgaregambiguous.gHowever,gordinarygisgint
erpretedgbygthegcourtsgasgincludinggexpensesgwhichgmaygbegunusualgforgagspecificgtaxpayerg(
butgnotgunusualgforgthatgtypegofgbusiness)gandgnecessarygisgnotginterpretedgasgonlygessentialge
xpenses.gTheseglimitsgcangbegcontrastedgwithgthegreasonableglimitgongamountsgandgthegbonagfi
degrequirementgforgprofitgmotivation.
2. [LOg1]gExplainghowgcostgofggoodsgisgtreatedgwhengagbusinessgsellsginventory.
Undergthegreturngofgcapitalgprinciple,gcostgofggoodsgsoldgrepresentsgagreductionginggrossginco
megrathergthangagbusinessgexpense.gForgexample,gifgagtaxpayergsellsginventorygfor
$100,000gandgreportsgagcostgofggoodsgsoldgofg$40,000,gthegbusiness’sggrossgincomegis
$60,000g($100,000g–g40,000)gnotg$100,000.
3. [LOg1]gWhethergagbusinessgexpensegisg“reasonablegingamount”gisgoftengagdifficultgquestion.g
Explaingwhygdetermininggreasonablenessgisgdifficultgandgdescribegagcircumstancegwheregrea
sonablenessgisglikelygtogbegquestionedgbygthegIRS.
Reasonablenessgisgangissuegofgfactgandgcircumstance,gandgextravagancegisgdifficultgtogdeterm
inegbecausegofgthegsubjectivitygandgmultitudegofgfactorsginvolvedgingdetermininggprice.gReaso
nablenessgisgmostglikelygtogbegangissuegwhengagpaymentgisgmadegtogagrelatedgindividualgorgtheg
taxpayergenjoysgsomegpersonalgbenefitgincidentalgtogthegexpenditure.
4. [LOg1]gJakegisgagprofessionalgdoggtrainergwhogpurchasesgandgtrainsgdogsgforgusegbyglawgenf
orcementgagencies.gLastgyeargJakegpurchasedg500gbagsgofgdoggfoodgfromgaglargegpetgfoodgc
ompanygatgangaveragegcostgofg$30gpergbag.gThisgyear,ghowever,gJakegpurchasedg500gbagsgofg
doggfoodgfromgaglocalgpetgfoodgcompanygatgangaveragegcostgofg$45gpergbag.gUndergwhatgcirc
umstancesgwouldgthegIRSglikelygchallengegthegcostgofgJake’sgdoggfoodgasgunreasonable?
Agcommongtestgforgreasonablenessgisgwhethergthegexpendituregisgcomparablegtogangarm'sglen
gthgamountg–
gagpricegchargedgbygobjectiveg(unrelated)gindividualsgwhogdognotgreceiveganygincidentalgpers
onalgbenefits.gHence,gthegIRSgisgmostglikelygtogchallengegthegcostgofgthegdoggfoodgifgJake’sgrel
ativesgcontrolgorgowngtheglocalgpetgfoodgcompanygandgwasgbenefitinggfromgthegincreasedgpric
e.
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 1
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilker
g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
5. [LOg2]gWhatgkindsgofgdeductionsgaregprohibitedgasgagmattergofgpublicgpolicy? gWhygmightgC
ongressgdeemgitgimportantgtogdisallowgdeductionsgforgexpendituresgthatgaregagainstgpublicgpo
licy?
ThegCodeglistsgbribes,gkickbacks,gandg“other”gillegalgpaymentsgasgnondeductible.gCongressg
didn’tgwantgthegtaxgbenefitsgassociatedgwithgdeductionsgtogbenefitgorgsubsidizegwrongdoing.g
Ofgcourse,gthisgrationalegdoesn’tgreallygexplaingthegprohibitiongagainstgdeductinggpoliticalgc
ontributionsgwhichgisgprobablygbettergexplainedgbygthegpotentialgperceptiongthatgpoliticalgeff
ortsgaregbeinggsubsidizedgbygtaxpayers.
6. [LOg2]gProvidegangexamplegofgangexpensegassociatedgwithgthegproductiongofgtax-
exemptgincome,gandgexplaingwhatgmightghappengifgCongressgrepealedgthegprohibitiongaga
instgdeductinggexpensesgincurredgtogproducegtax-exemptgincome.
Twogcommongexamplesgareginterestgexpensegassociatedgwithgdebtgusedgtogpurchasegmunicip
algbondsgandglifeginsurancegpremiumsgpaidgongkeygmanginsurance.gIfgthisgprohibitiongweregr
epealed,gthengtaxpayersgwouldghavegangincentivegtogborrowgtoginvestgingmunicipalgbondsgorg
borrowgtoginvestgingemployeeglifeginsurance.gThisgformergpracticegwouldgleadgtoghighergdem
andgforgmunicipalgbondsg(lessgyield)gandglessgrevenuegforgtheggovernment.gTheglattergpractic
egwouldgleadgtoghighergdemandgforginsuranceg(highergpremiums?)gandglessgrevenuegforgthegg
overnment.gBothgpracticesgcouldgleadgtogagperceptiongofginequitygbetweengthosegtaxpayersga
blegtogutilizegthegtaxgarbitragegtogreducegtaxesgandgthosegwhogcouldgnotgusegthegpractice.
7. [LOg2]g{Research}gPeggygisgagrodeogclown,gandgthisgyeargshegexpendedg$1,000gongspecialg“
funny”gclothesgandgoutfits.gPeggygwouldglikegtogdeductgthegcostgofgthesegclothesgasgwork-
grelatedgbecausegshegrefusesgtogweargthegclothesgunlessgshegisgworking.gUndergwhatgcircums
tancesgcangPeggygdeductgthegcostgofghergclowngclothes?
Taxpayersgmaygdeductgthegcostgofguniformsgorgspecialgclothinggtheygusegingtheirgbusinessgwhe
ngthegclothinggisgnotgappropriategtogweargasgordinarygclothinggoutsidegthegplacegofgbusiness.g
IngPeggy’sgcase,gthegclowngclothesgareganalogousgtogspecialguniformsgorgprotectiveggarment
sgandgcouldgbegdeductible.gSeegD.gTechner,gTCgMemog1997-
498.gErhardgSeminargTraining,gTCgMemog1986-
526gprovidesgangexamplegofgclothesgthatgweregnotgdeductiblegbecausegtheygweregappropriateg
forgnormalgwear.gHowever,gthegcostgofgclothinggwouldgnotglikelygbegdeductiblegifgthegclothesg
weregunacceptablegsolelygbecausegofgthegtaxpayer’sgsensegofgfashion.
8. [LOg2]gJimmygisgagsolegproprietorgofgagsmallgdry-
cleaninggbusiness.gThisgmonthgJimmygpaidgforghisggroceriesgbygwritinggchecksgfromgthegc
heckinggaccountgdedicatedgtogthegdry-
gcleaninggbusiness.gWhygdogyougsupposegJimmygisgusingghisgbusinessgcheckinggaccountgra
thergthanghisgpersonalgcheckinggaccountgtogpaygforgpersonalgexpenditures?
Jimmygmightgbegtryinggtogreduceghisgbankgchargesgbygusinggonegaccountgforgbothgpersonalga
ndgbusinessgexpenditures,gbutghegcouldgalsogbegtryinggtogdisguisegpersonalgexpendituresgas
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 2
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilkerg g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
businessgexpenses.gBygcomminglinggbusinessgandgpersonalgexpenditures,gJimmygwillgneedgto
gseparategpersonalgandgbusinessgexpendituresgbeforegclaimingganygbusinessgdeductions.
9. [LOg2]gTroygoperatesgangeditorialgservicegthatgoftengentertainsgprospectivegauthorsgtogencour
agegthemgtogusegTroy'sgservice.gThisgyeargTroygpaidg$3,000gforgthegcostgofgmealsgand
$6,200gforgthegcostgofgentertaininggauthors.gDescribegthegconditionsgundergwhichgTroygcangde
ductgagportiongofgthegcostgofgthegmealsgasgagbusinessgexpense.
Togdeductg100gpercentgofgthegcostgofgmealsgasgagbusinessgexpense,gthegmealsgmustgbegordinar
ygandgnecessarygtogTroy’sgbusiness,gprovidedgbygagrestaurant,gandgthegamountgmustgbegreaso
nablegundergthegcircumstances.gIngaddition,gTroygorgangemployeegmustgbegpresentgwhengtheg
mealgisgfurnished,gandgthegmealgmustgbegfurnishedgtogangactualgorgpotentialgbusinessgassociat
e.gFinally,gthegcostgofgthegmealsgmustgbegseparatelygstatedg(byginvoice)gfromgthegcostgofgthegen
tertainmentg(thegcostgofgthegentertainmentgisgnotgdeductible).gIfgthegmealsgandgbeveragesgareg
notgprovidedgbygagrestaurant,gthengonlyg50gpercentgisgdeductibleg(assuminggallgofgthegothergre
quirementsgaregmet).
10. [LOg2]gSusmitagpurchasedgagcargthisgyeargandgusesgitgforgbothgbusinessgandgpersonalgpurp
oses.gSusmitagdrovegthegcarg11,000gmilesgongbusinessgtripsgandg9,000gmilesgforgpersonalgt
ransportation.gDescribeghowgSusmitagwillgdeterminegthegamountgofgdeductiblegexpensesg
associatedgwithgthegauto.
Becausegonlygthegexpensegrelatinggtogbusinessgusegisgdeductible,gthegtaxpayergmustgallocategt
hegexpensesgbetweengthegbusinessgandgpersonalgusegportions.gAgcommongmethodgofgallocatio
ngisgrelativeguse.gIngthisginstance,gSusmitagwouldgcalculategthegbusinessgportiongbasedgupongt
hegratiogofgbusinessgmilesgtogtotalgmilesg(11/20gorg55gpercent).gShegwouldgthengdeductgthegcos
tsgofgoperatinggthegvehiclegforgbusinessgpurposesgplusgdepreciationgongthegbusinessgportiong(
55gpercent)gofgthegvehicle’sgtaxgbasis.gAlternatively,ginglieugofgdeductinggthesegcosts,gSusmitag
maygelectgtogdeductgagstandardgamountgforgeachgbusinessgmilegshegdrives.gThegstandardgmile
agegrateg(58.5gcentsgpergmilegforgthegfirstgsixgmonthsgofg2022gandg62.6gcentsgforgthegfinalgsixgm
onths)grepresentsgthegper-
milegcostgofgoperatinggangautomobileg(includinggdepreciationgorgleasegpayments).gOncegSus
mitaghasgmadegthisgelection,gshegmustgcontinuegtogusegitgthroughoutgtheglifegofgthegauto.
11. [LOg1,gLOg2]gWhatgexpensesgaregdeductiblegwhengagtaxpayergcombinesgbothgbusinessgandgp
ersonalgactivitiesgongagtrip?gHowgdogthegrulesgforginternationalgtravelgdiffergfromgthegrulesgfo
rgdomesticgtravel?
Ifgthegtaxpayerghasgbothgbusinessgandgpersonalgmotivesgforgagtrip,gbutgthegprimarygorgdomina
ntgmotivegisgbusiness,gthegtaxpayergmaygdeductgthegtransportationgcostsgtoggetgtogthegplacegofg
business,gbutgshegmaygdeductgonlygmealsg(50%gorg100%gifgprovidedgbygagrestaurant),glodgin
g,gtransportationgongsite,gandgincidentalgexpendituresgforgthegbusinessgportiongofgthegtravel.g
Ifgthegtaxpayer’sgprimarygpurposegforgthegtripgisgpersonal,gthegtaxpayergmaygnotgdeductgtrans
portationgcostsgtogtravelgtogandgfromgtheglocation,gbutgthegtaxpayergmaygdeductgmealsg(50%g
org100%gifgprovidedgbygagrestaurant),glodging,gtransportation,gandgincidentalgexpendituresgf
orgthegbusinessgportiongofgthegtrip.gFor
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 3
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, ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
g g g g g g g g g g g
n 14th Edition Spilker g g g
SolutionsgManual—TaxationgofgBusinessgEntities,gbygSpilkergetgal.
internationalgtravelgingexcessgofgonegweek,gthegtaxpayergmustgallocategthegcostgofgthegtranspo
rtationgbetweengpersonalg(nondeductible)gandgbusinessg(deductible)gactivities.gTaxpayersgge
nerallygdeterminegthegnondeductiblegportiongofgthegtransportationgcostsgbygmultiplyinggthegtr
avelgcostsgbygagratiogofgpersonalgactivitygdaysgtogtotalgdaysgtravelling.gFinally,gremembergtha
tgtravelgdaysgaregconsideredgbusinessgactivitygdaysgforgbothgdomesticgandginternationalgtravel
.
12. [LOg2]gClydeglivesgandgoperatesgagsolegproprietorshipgingDallas,gTexas.gThisgyeargClydegf
oundgitgnecessarygtogtravelgtogFortgWorthg(aboutg25gmilesgaway)gforglegitimategbusinessgre
asons.gIsgClyde’sgtripglikelygtogqualifygasg“awaygfromghome,”gandgwhygwouldgthisgdesign
ationgmatter?
Besidesgthegcostgofgtransportation,gthegdeductiongforgtravelgexpensesgincludesgmealsg(50%gor
g100%gifgprovidedgbygagrestaurant),glodging,gandgincidentalgexpenses.gHowever,gtravelgexpen
sesgaregonlygdeductiblegifgthegtaxpayergisgawaygfromghomegovernightgwhilegtraveling.gForgthis
gpurpose,gagtaxpayergisgconsideredgtogbegawaygfromghomegovernightgifgthegtripgisgofgsufficientg
durationgtogrequiregsleepgorgrest.gIt’sglikelygthatgClyde’sgtripgwillgnotgsatisfygthisgconditiongan
dgthatghegwillgnotgbegablegtogdeductgcostsgforgmealsgandglodging.
13. [LOg2]gDescribegthegrecord-
keepinggrequirementsgforgdeductinggbusinessgexpenses,gincludinggmixed-
motivegexpenditures.
Taxpayersgmustgkeepgspecific,gwritten,gcontemporaneousgrecordsgofgtime,gamountgofgthegexpe
nditure,gandgbusinessgpurposegofgthegtravel.gNogdeductionsgaregallowedgabsentgsufficientgrec
ordsgtogdocumentgbusinessgpurpose.gRecordsgofgthegexpendituregamount,ghowever,gmaygnotgb
egnecessarygifgthegtaxpayergclaimsgpergdiemgamounts.
14. [LOg2]gDescribegthegcomputationgofgtheglimitgplacedgongthegbusinessginterestgdeduction.gIsgt
hegdisallowedgbusinessginterestgevergdeductible?
Thegdeductiongofgbusinessginterestgexpensegisglimitedgtogthegsumgofgbusinessginterestgincomegp
lusg30gpercentgofgthegbusiness'sgadjustedgtaxablegincome.gBusinessginterestgisgdefinedgasganygi
nterestgpaidgongdebtgallocablegtogagtradegorgbusinessgactivity,gandgadjustedgtaxablegincomegis
gtaxablegincomegallocablegtogthegbusinessgactivitygcomputedgbeforegdeductions gforginterestgex
pensegandgnetgoperatingglossgcarryovers.gDisallowedgbusinessginterestgcangbegcarriedgforwa
rdgindefinitely.
15. [LOg2]gDescribegtheggrossgreceiptsgtestgandgidentifyghowgthisgtestgrelatesgtogthegbusinessgi
nterestgdeduction.
Theggrossgreceiptsgtestgisgangannualgtestgdesignedgtogidentifygsmallgbusinessesgthatg Congressg
intendedgtogexemptgfromgsomegofgthegmoregcomplexgandgonerousgprovisionsgofgtheglaw,gsuchga
sgthegbusinessginterestgdeduction.gAsgthegnamegimplies,gsizegisgmeasuredgbygwhethergaverageg
grossgreceiptsgexceedsgagthresholdgamount,gandgbusinessesgwhoseggrossgreceiptsgdognotgexce
edgthegthresholdginganygtaxgyeargaregnotgsubjectgtogthisglimitationgingthatgyear.gThisgamountgw
asgoriginallygsetgatg$25gmillion,gbutgsincegitgisgindexedgforginflation,gthegamountging2022gisgsetg
atg$27gmillion.gThegaverageggrossgreceiptsgisgdeterminedgusinggthe
©gMcGrawgHillgLLC.gAllgrightsgreserved.gNogreproductiongorgdistributiongwithoutgthegpriorgwrittengconsentgofgMcGrawgHillgLLC. 4
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