ssq5 - Chapter 5 Self-Study Questions 3. What is the...

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Chapter 5 Self-Study Questions 3. What is the fundamental requirement that must be satisfied in order to deduct a business expense? The dominant motive for incurring the expense must be to earn an economic benefit that is independent of any tax savings. Thus, the business purpose of the transaction must be a profit motive other than tax avoidance. 4. What are the two primary categories of business expense? Why is it necessary to classify business expenses in these two categories? The two categories of business expense are: •Trade or business expenses, and •Expenses for the production of income (investment expenses). All expenses must be classified into one of the categories to determine the proper reporting and limitations on the deduction of the expenses. A trade or business expense is fully deductible in calculating adjusted gross income of an individual. An expense for the production of income is usually subtracted from adjusted gross income as an itemized deduction. As an itemized deduction, the expense may be limited based on the taxpayer's adjusted gross income. Also, the taxpayer will only receive a benefit from a production of income expense if the taxpayer itemizes his/her deductions. .
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28. Determine how each of the following expenses would be deducted for tax purposes. If the expense is not deductible, explain why not. a. Chander paid $500 in interest on a loan he used to purchase equipment he used in his retail business. The interest is related to a trade or business and is fully deductible. If the business is a sole proprietorship, it will be a deduction for adjusted gross income. b. Peter paid $500 in interest on a loan he used to purchase 1,000 shares of Pickled Pepper stock. The interest is related to an investment. Investment interest expense is deductible as an itemized deduction. It is limited to the amount of the taxpayer's net investment income (see Chapter 8). c. Portia paid $500 in interest on a loan she used to purchase her personal automobile. The interest is related to a personal asset and is not deductible. d. Jordan's primary source of income is from his wholesale warehousing business. During the current year, he paid $8,000 in state income taxes. State income taxes are a personal expense that is allowed as an itemized deduction.
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ssq5 - Chapter 5 Self-Study Questions 3. What is the...

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