,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
Chapter 1 Busi n n
ness Income, Deductions, and Accounting Methods
n n n n n
SOLUTIONS MANUAL n
Discussion Questions n
1. [LO n 1]n What n isn ann “ordinaryn and n necessary”n businessn expenditure?
“Ordinary”n andn “necessary”n implyn thatn ann expensen mustn ben customaryn andn helpful,n respect
ively.n Becausen thesen termsn aren subjective,n then testsn aren ambiguous.n However,n ordinaryn isn int
erpretedn byn then courtsn asn includingn expensesn whichn mayn ben unusualn forn an specificn taxpayern (
butn notn unusualn forn thatn typen ofn business)n andn necessaryn isn notn interpretedn asn onlyn essentialn e
xpenses.n Thesen limitsn cann ben contrastedn withn then reasonablen limitn onn amountsn andn then bonan fi
den requirementn forn profitn motivation.
2. [LO n 1]n Explainn hown cost n of n goodsn isn treated n whenn an businessn sellsn inventory.
Undern then returnn ofn capitaln principle,n costn ofn goodsn soldn representsn an reductionn inn grossn inco
men rathern thann an businessn expense.n Forn example,n ifn an taxpayern sellsn inventoryn for
$100,000n andn reportsn an costn ofn goodsn soldn ofn $40,000,n then business’sn grossn incomen is
$60,000n ($100,000n –n 40,000)n notn $100,000.
3. [LO n 1]n Whethern an businessn expensen isn“reasonablen inn amount”n isn oftenn an difficult n question.n
Explainn whyn determiningn reasonablenessn isn difficult n and ndescriben an circumstancen wheren rea
sonablenessn isn likelyn ton ben questioned n byn then IRS.
Reasonablenessn isn ann issuen ofn factn andn circumstance,n andn extravagancen isn difficultn ton determ
inen becausen ofn then subjectivityn andn multituden ofn factorsn involvedn inn determiningn price.n Reaso
nablenessn isn mostn likelyn ton ben ann issuen whenn an paymentn isn maden ton an relatedn individualn orn then
taxpayern enjoysn somen personaln benefitn incidentaln ton then expenditure.
4. [LO n 1]n Jaken isn an professionaln dogn trainern whon purchasesn andn trainsn dogsnforn usen byn law n enf
orcement n agencies.n Last n yearn Jaken purchased n 500n bagsn ofn dognfoodn fromn an largen pet nfood n c
ompanyn at n ann averagen cost nof n$30npern bag.nThisn year,n however,n Jakenpurchased n500n bagsnofn
dogn foodn fromn anlocaln pet nfoodncompanyn at nannaveragen cost nofn $45npernbag.n Undern whatn circ
umstancesn would n then IRSn likelyn challengen then cost n of n Jake’sn dogn food n asn unreasonable?
An commonn testn forn reasonablenessn isn whethern then expendituren isn comparablen ton ann arm'sn len
gthn amountn –
n an pricen chargedn byn objectiven (unrelated)n individualsn whon don notn receiven anyn incidentaln pers
onaln benefits.n Hence,n then IRSn isn mostn likelyn ton challengen then costn ofn then dogn foodn ifn Jake’sn rel
ativesn controln orn ownn then localn petn foodn companyn andn wasn benefitingn fromn then increasedn pric
e.
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.1
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
5. [LO n 2]n What n kindsn ofndeductionsn aren prohibited n asn an mattern of n publicn policy?n Whyn might n C
ongressn deemn it n important n ton disallow n deductionsn fornexpendituresn that naren against npublicn po
licy?
Then Coden listsn bribes,n kickbacks,n andn “other”n illegaln paymentsn asn nondeductible.n Congressn
didn’tn wantn then taxn benefitsn associatedn withn deductionsn ton benefitn orn subsidizen wrongdoing.n
Ofn course,n thisn rationalen doesn’tn reallyn explainn then prohibitionn againstn deductingn politicaln c
ontributionsn whichn isn probablyn bettern explainedn byn then potentialn perceptionn thatn politicaln eff
ortsn aren beingn subsidizedn byn taxpayers.
6. [LO n 2]n Providen ann examplen of n ann expensen associated n withn then productionn of n tax-
exempt n income,n and n explainn what n might n happenn ifn Congressn repealed n thenprohibitionn aga
inst n deductingn expensesn incurred n ton producen tax-exempt n income.
Twon commonn examplesn aren interestn expensen associatedn withn debtn usedn ton purchasen municip
aln bondsn andn lifen insurancen premiumsn paidn onn keyn mann insurance.n Ifn thisn prohibitionn weren r
epealed,n thenn taxpayersn wouldn haven ann incentiven ton borrown ton investn inn municipaln bondsn orn
borrown ton investn inn employeen lifen insurance.n Thisn formern practicen wouldn leadn ton highern dem
andn forn municipaln bondsn (lessn yield)n andn lessn revenuen forn then government.n Then lattern practic
en wouldn leadn ton highern demandn forn insurancen (highern premiums?)n andn lessn revenuen forn then g
overnment.n Bothn practicesn couldn leadn ton an perceptionn ofn inequityn betweenn thosen taxpayersn a
blen ton utilizen then taxn arbitragen ton reducen taxesn andn thosen whon couldn notn usen then practice.
7. [LO n 2]n {Research}n Peggyn isnan rodeonclown,n andnthisn yearn shenexpendedn$1,000nonn specialn “
funny”n clothesn and n outfits.n Peggyn would n liken ton deduct n then cost n of n thesen clothesn asn work-
n related n becausen shen refusesn tonwearn then clothesnunlessn shen isn working.n Undernwhat n circums
tancesn cann Peggyn deduct n then cost n of n hern clownn clothes?
Taxpayersn mayn deductn then costn ofn uniformsn orn specialn clothingn theyn usen inn theirn businessn whe
nn then clothingn isn notn appropriaten ton wearn asn ordinaryn clothingn outsiden then placen ofn business.n
Inn Peggy’sn case,n then clownn clothesn aren analogousn ton specialn uniformsn orn protectiven garment
sn andn couldn ben deductible.n Seen D.n Techner,n TCn Memon 1997-
498.n Erhardn Seminarn Training,n TCn Memon 1986-
526n providesn ann examplen ofn clothesn thatn weren notn deductiblen becausen theyn weren appropriaten
forn normaln wear.n However,n then costn ofn clothingn wouldn notn likelyn ben deductiblen ifn then clothesn
weren unacceptablen solelyn becausen ofn then taxpayer’sn sensen ofn fashion.
8. [LO n 2]n Jimmyn isn an solen proprietorn of n an smalln dry-
cleaningn business.n Thisn monthn Jimmyn paid n forn hisn groceriesn byn writingn checksn fromn then c
heckingn account n dedicated n ton then dry-
n cleaningn business.n Whyn don youn supposen Jimmyn isn usingn hisn businessn checkingn account n ra
thern thann hisn personaln checkingn account n ton payn forn personaln expenditures?
Jimmyn mightn ben tryingn ton reducen hisn bankn chargesn byn usingn onen accountn forn bothn personaln a
ndn businessn expenditures,n butn hen couldn alson ben tryingn ton disguisen personaln expendituresn as
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.2
mynursytest.store
, ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
businessn expenses.n Byn comminglingn businessn andn personaln expenditures,n Jimmyn willn needn to
n separaten personaln andn businessn expendituresn beforen claimingn anyn businessn deductions.
9. [LO n 2]n Troyn operatesn ann editorialn servicen that n oftennentertainsn prospectiven authorsn ton encour
agen themn ton usen Troy'sn service.n Thisn yearn Troyn paid n $3,000n forn then cost n of n mealsn and
$6,200n forn then costnof nentertainingn authors.n Describen thenconditionsn undern whichn Troyn cann de
duct n an portionn of n then cost n of n then mealsn asn an businessn expense.
Ton deductn 100n percentn ofn then costn ofn mealsn asn an businessn expense,n then mealsn mustn ben ordinar
yn andn necessaryn ton Troy’sn business,n providedn byn an restaurant,n andn then amountn mustn ben reaso
nablen undern then circumstances.n Inn addition,n Troyn orn ann employeen mustn ben presentn whenn then
mealn isn furnished,n andn then mealn mustn ben furnishedn ton ann actualn orn potentialn businessn associat
e.n Finally,n then costn ofn then mealsn mustn ben separatelyn statedn (byn invoice)n from n then costn ofn then en
tertainmentn (then costn ofn then entertainmentn isn notn deductible).n Ifn then mealsn andn beveragesn aren
notn providedn byn an restaurant,n thenn onlyn 50n percentn isn deductiblen (assumingn alln ofn then othern re
quirementsn aren met).
10. [LO n 2]n Susmitan purchased n an carn thisn yearnand nusesn it nforn bothn businessn and n personaln purp
oses.n Susmitan droven then carn 11,000n milesn onn businessn tripsn and n9,000nmilesn forn personaln t
ransportation.n Describen hown Susmitan willn determinen thenamount nof n deductiblen expensesn
associated n withn then auto.
Becausen onlyn then expensen relatingn ton businessn usen isn deductible,n then taxpayern mustn allocaten t
hen expensesn betweenn then businessn andn personaln usen portions.n An commonn methodn ofn allocatio
nn isn relativen use.n Inn thisn instance,n Susmitan wouldn calculaten then businessn portionn basedn uponn t
hen ration ofn businessn milesn ton totaln milesn (11/20n orn 55n percent).n Shen wouldn thenn deductn then cos
tsn ofn operatingn then vehiclen forn businessn purposesn plusn depreciationn onn then businessn portionn (
55n percent)n ofn then vehicle’sn taxn basis.n Alternatively,n inn lieun ofn deductingn thesen costs,n Susmitan
mayn electn ton deductn an standardn amountn forn eachn businessn milen shen drives.n Then standardn mile
agen raten (58.5n centsn pern milen forn then firstn sixn monthsn ofn 2022n andn 62.6n centsn forn then finaln sixnm
onths)n representsn then per-
milen costn ofn operatingn ann automobilen (includingn depreciationn orn leasen payments).n Oncen Sus
mitan hasn maden thisn election,n shen mustn continuen ton usen itn throughoutn then lifen ofn then auto.
11. [LO n 1,n LOn 2]n What n expensesn arendeductiblen whenn an taxpayern combinesn bothn businessn andn p
ersonaln activitiesn onn antrip?nHowndon then rulesn forn internationaln travelndiffern fromnthen rulesn fo
rn domesticn travel?
Ifn then taxpayern hasn bothn businessn andn personaln motivesn forn an trip,n butn then primaryn orn domina
ntn motiven isn business,n then taxpayern mayn deductn then transportationn costsn ton getn ton then placen ofn
business,n butn shen mayn deductn onlyn mealsn (50%n orn 100%n ifn providedn byn an restaurant),n lodgin
g,n transportationn onn site,n andn incidentaln expendituresn forn then businessn portionn ofn then travel.n
Ifn then taxpayer’sn primaryn purposen forn then tripn isn personal,n then taxpayern mayn notn deductn trans
portationn costsn ton traveln ton andn fromn then location,n butn then taxpayern mayn deductn mealsn (50%n
orn 100%n ifn providedn byn an restaurant),n lodging,n transportation,n andn incidentaln expendituresn f
orn then businessn portionn ofn then trip.n For
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.3
mynursytest.store
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
Chapter 1 Busi n n
ness Income, Deductions, and Accounting Methods
n n n n n
SOLUTIONS MANUAL n
Discussion Questions n
1. [LO n 1]n What n isn ann “ordinaryn and n necessary”n businessn expenditure?
“Ordinary”n andn “necessary”n implyn thatn ann expensen mustn ben customaryn andn helpful,n respect
ively.n Becausen thesen termsn aren subjective,n then testsn aren ambiguous.n However,n ordinaryn isn int
erpretedn byn then courtsn asn includingn expensesn whichn mayn ben unusualn forn an specificn taxpayern (
butn notn unusualn forn thatn typen ofn business)n andn necessaryn isn notn interpretedn asn onlyn essentialn e
xpenses.n Thesen limitsn cann ben contrastedn withn then reasonablen limitn onn amountsn andn then bonan fi
den requirementn forn profitn motivation.
2. [LO n 1]n Explainn hown cost n of n goodsn isn treated n whenn an businessn sellsn inventory.
Undern then returnn ofn capitaln principle,n costn ofn goodsn soldn representsn an reductionn inn grossn inco
men rathern thann an businessn expense.n Forn example,n ifn an taxpayern sellsn inventoryn for
$100,000n andn reportsn an costn ofn goodsn soldn ofn $40,000,n then business’sn grossn incomen is
$60,000n ($100,000n –n 40,000)n notn $100,000.
3. [LO n 1]n Whethern an businessn expensen isn“reasonablen inn amount”n isn oftenn an difficult n question.n
Explainn whyn determiningn reasonablenessn isn difficult n and ndescriben an circumstancen wheren rea
sonablenessn isn likelyn ton ben questioned n byn then IRS.
Reasonablenessn isn ann issuen ofn factn andn circumstance,n andn extravagancen isn difficultn ton determ
inen becausen ofn then subjectivityn andn multituden ofn factorsn involvedn inn determiningn price.n Reaso
nablenessn isn mostn likelyn ton ben ann issuen whenn an paymentn isn maden ton an relatedn individualn orn then
taxpayern enjoysn somen personaln benefitn incidentaln ton then expenditure.
4. [LO n 1]n Jaken isn an professionaln dogn trainern whon purchasesn andn trainsn dogsnforn usen byn law n enf
orcement n agencies.n Last n yearn Jaken purchased n 500n bagsn ofn dognfoodn fromn an largen pet nfood n c
ompanyn at n ann averagen cost nof n$30npern bag.nThisn year,n however,n Jakenpurchased n500n bagsnofn
dogn foodn fromn anlocaln pet nfoodncompanyn at nannaveragen cost nofn $45npernbag.n Undern whatn circ
umstancesn would n then IRSn likelyn challengen then cost n of n Jake’sn dogn food n asn unreasonable?
An commonn testn forn reasonablenessn isn whethern then expendituren isn comparablen ton ann arm'sn len
gthn amountn –
n an pricen chargedn byn objectiven (unrelated)n individualsn whon don notn receiven anyn incidentaln pers
onaln benefits.n Hence,n then IRSn isn mostn likelyn ton challengen then costn ofn then dogn foodn ifn Jake’sn rel
ativesn controln orn ownn then localn petn foodn companyn andn wasn benefitingn fromn then increasedn pric
e.
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.1
mynursytest.store
,ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
5. [LO n 2]n What n kindsn ofndeductionsn aren prohibited n asn an mattern of n publicn policy?n Whyn might n C
ongressn deemn it n important n ton disallow n deductionsn fornexpendituresn that naren against npublicn po
licy?
Then Coden listsn bribes,n kickbacks,n andn “other”n illegaln paymentsn asn nondeductible.n Congressn
didn’tn wantn then taxn benefitsn associatedn withn deductionsn ton benefitn orn subsidizen wrongdoing.n
Ofn course,n thisn rationalen doesn’tn reallyn explainn then prohibitionn againstn deductingn politicaln c
ontributionsn whichn isn probablyn bettern explainedn byn then potentialn perceptionn thatn politicaln eff
ortsn aren beingn subsidizedn byn taxpayers.
6. [LO n 2]n Providen ann examplen of n ann expensen associated n withn then productionn of n tax-
exempt n income,n and n explainn what n might n happenn ifn Congressn repealed n thenprohibitionn aga
inst n deductingn expensesn incurred n ton producen tax-exempt n income.
Twon commonn examplesn aren interestn expensen associatedn withn debtn usedn ton purchasen municip
aln bondsn andn lifen insurancen premiumsn paidn onn keyn mann insurance.n Ifn thisn prohibitionn weren r
epealed,n thenn taxpayersn wouldn haven ann incentiven ton borrown ton investn inn municipaln bondsn orn
borrown ton investn inn employeen lifen insurance.n Thisn formern practicen wouldn leadn ton highern dem
andn forn municipaln bondsn (lessn yield)n andn lessn revenuen forn then government.n Then lattern practic
en wouldn leadn ton highern demandn forn insurancen (highern premiums?)n andn lessn revenuen forn then g
overnment.n Bothn practicesn couldn leadn ton an perceptionn ofn inequityn betweenn thosen taxpayersn a
blen ton utilizen then taxn arbitragen ton reducen taxesn andn thosen whon couldn notn usen then practice.
7. [LO n 2]n {Research}n Peggyn isnan rodeonclown,n andnthisn yearn shenexpendedn$1,000nonn specialn “
funny”n clothesn and n outfits.n Peggyn would n liken ton deduct n then cost n of n thesen clothesn asn work-
n related n becausen shen refusesn tonwearn then clothesnunlessn shen isn working.n Undernwhat n circums
tancesn cann Peggyn deduct n then cost n of n hern clownn clothes?
Taxpayersn mayn deductn then costn ofn uniformsn orn specialn clothingn theyn usen inn theirn businessn whe
nn then clothingn isn notn appropriaten ton wearn asn ordinaryn clothingn outsiden then placen ofn business.n
Inn Peggy’sn case,n then clownn clothesn aren analogousn ton specialn uniformsn orn protectiven garment
sn andn couldn ben deductible.n Seen D.n Techner,n TCn Memon 1997-
498.n Erhardn Seminarn Training,n TCn Memon 1986-
526n providesn ann examplen ofn clothesn thatn weren notn deductiblen becausen theyn weren appropriaten
forn normaln wear.n However,n then costn ofn clothingn wouldn notn likelyn ben deductiblen ifn then clothesn
weren unacceptablen solelyn becausen ofn then taxpayer’sn sensen ofn fashion.
8. [LO n 2]n Jimmyn isn an solen proprietorn of n an smalln dry-
cleaningn business.n Thisn monthn Jimmyn paid n forn hisn groceriesn byn writingn checksn fromn then c
heckingn account n dedicated n ton then dry-
n cleaningn business.n Whyn don youn supposen Jimmyn isn usingn hisn businessn checkingn account n ra
thern thann hisn personaln checkingn account n ton payn forn personaln expenditures?
Jimmyn mightn ben tryingn ton reducen hisn bankn chargesn byn usingn onen accountn forn bothn personaln a
ndn businessn expenditures,n butn hen couldn alson ben tryingn ton disguisen personaln expendituresn as
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.2
mynursytest.store
, ACCESS Test Bank for McGraw Hill's Taxation of Business Entities 2023 Editio
n n n n n n n n n n n
n 14th Edition Spilker n n n
Solutionsn Manual—Taxationn ofn Businessn Entities,n byn Spilkern et n al.
businessn expenses.n Byn comminglingn businessn andn personaln expenditures,n Jimmyn willn needn to
n separaten personaln andn businessn expendituresn beforen claimingn anyn businessn deductions.
9. [LO n 2]n Troyn operatesn ann editorialn servicen that n oftennentertainsn prospectiven authorsn ton encour
agen themn ton usen Troy'sn service.n Thisn yearn Troyn paid n $3,000n forn then cost n of n mealsn and
$6,200n forn then costnof nentertainingn authors.n Describen thenconditionsn undern whichn Troyn cann de
duct n an portionn of n then cost n of n then mealsn asn an businessn expense.
Ton deductn 100n percentn ofn then costn ofn mealsn asn an businessn expense,n then mealsn mustn ben ordinar
yn andn necessaryn ton Troy’sn business,n providedn byn an restaurant,n andn then amountn mustn ben reaso
nablen undern then circumstances.n Inn addition,n Troyn orn ann employeen mustn ben presentn whenn then
mealn isn furnished,n andn then mealn mustn ben furnishedn ton ann actualn orn potentialn businessn associat
e.n Finally,n then costn ofn then mealsn mustn ben separatelyn statedn (byn invoice)n from n then costn ofn then en
tertainmentn (then costn ofn then entertainmentn isn notn deductible).n Ifn then mealsn andn beveragesn aren
notn providedn byn an restaurant,n thenn onlyn 50n percentn isn deductiblen (assumingn alln ofn then othern re
quirementsn aren met).
10. [LO n 2]n Susmitan purchased n an carn thisn yearnand nusesn it nforn bothn businessn and n personaln purp
oses.n Susmitan droven then carn 11,000n milesn onn businessn tripsn and n9,000nmilesn forn personaln t
ransportation.n Describen hown Susmitan willn determinen thenamount nof n deductiblen expensesn
associated n withn then auto.
Becausen onlyn then expensen relatingn ton businessn usen isn deductible,n then taxpayern mustn allocaten t
hen expensesn betweenn then businessn andn personaln usen portions.n An commonn methodn ofn allocatio
nn isn relativen use.n Inn thisn instance,n Susmitan wouldn calculaten then businessn portionn basedn uponn t
hen ration ofn businessn milesn ton totaln milesn (11/20n orn 55n percent).n Shen wouldn thenn deductn then cos
tsn ofn operatingn then vehiclen forn businessn purposesn plusn depreciationn onn then businessn portionn (
55n percent)n ofn then vehicle’sn taxn basis.n Alternatively,n inn lieun ofn deductingn thesen costs,n Susmitan
mayn electn ton deductn an standardn amountn forn eachn businessn milen shen drives.n Then standardn mile
agen raten (58.5n centsn pern milen forn then firstn sixn monthsn ofn 2022n andn 62.6n centsn forn then finaln sixnm
onths)n representsn then per-
milen costn ofn operatingn ann automobilen (includingn depreciationn orn leasen payments).n Oncen Sus
mitan hasn maden thisn election,n shen mustn continuen ton usen itn throughoutn then lifen ofn then auto.
11. [LO n 1,n LOn 2]n What n expensesn arendeductiblen whenn an taxpayern combinesn bothn businessn andn p
ersonaln activitiesn onn antrip?nHowndon then rulesn forn internationaln travelndiffern fromnthen rulesn fo
rn domesticn travel?
Ifn then taxpayern hasn bothn businessn andn personaln motivesn forn an trip,n butn then primaryn orn domina
ntn motiven isn business,n then taxpayern mayn deductn then transportationn costsn ton getn ton then placen ofn
business,n butn shen mayn deductn onlyn mealsn (50%n orn 100%n ifn providedn byn an restaurant),n lodgin
g,n transportationn onn site,n andn incidentaln expendituresn forn then businessn portionn ofn then travel.n
Ifn then taxpayer’sn primaryn purposen forn then tripn isn personal,n then taxpayern mayn notn deductn trans
portationn costsn ton traveln ton andn fromn then location,n butn then taxpayern mayn deductn mealsn (50%n
orn 100%n ifn providedn byn an restaurant),n lodging,n transportation,n andn incidentaln expendituresn f
orn then businessn portionn ofn then trip.n For
©n McGrawnHillnLLC.nAllnrightsnreserved.nNonreproduction nor ndistribution nwithoutnthenprior n written n consentn of n McGrawn Hilln LLC.3
mynursytest.store
