Chapter 08
Business Income, Deductions, and Accounting Methods

True / False Questions 1. The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary".
True False 2. Business activities are distinguished from other activities in that business activities are motivated by the pursuit of profits.
True False 3. The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.
True False 4. Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.
True False 5. The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.
True False 6. Illegal bribes and kickbacks are not deductible as business expenses, but this prohibition does not include fines incurred in the ordinary course of business.
True False

7. Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.
True False 8. When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.
True False 9. Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.
True False 10. Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.
True False 11. Taxpayers must maintain written contemporaneous records of business purpose when entertaining clients.
True False 12. The domestic manufacturing deduction is a deduction for the incremental cost of manufacturing