413sol6-04 - Chapter 6: Business Expenses 6-1 _ CHAPTER 6...

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Chapter 6: Business Expenses 6-1 __________________________________________________________________ CHAPTER 6 BUSINESS EXPENSES ___________________________________________________________________ DISCUSSION QUESTIONS 1. Most expenditures that have a business purpose and meet the ordinary, necessary, and reasonable requirements are deductible. However, specific rules must be adhered to in determining the deductibility of many expenses that meet this test. Why are these specific rules necessary? There are many business expenses that have a personal element to them. As such, they are subject to abuse by taxpayers. For example, meals and entertainment can be valid business expenses. However, due to the potential for taxpayers to attempt to deduct personal meal and entertainment expenses, specific rules on the deductibility of such expenses have been created. In addition to the qualifying requirements, most expenses that are usually considered to be personal in nature (e.g., car expenses) must be adequately substantiated. 2. What requirements must be met for meal and entertainment expenses to be deductible? To qualify as deductible business expenses, meal and entertainment expenses must: 1. Have a business purpose, 2. Qualify as an ordinary and necessary expense of the business and not be lavish or extravagant (i.e., reasonable in amount), 3. Be directly related to or associated with the active conduct of the taxpayer's business activity, and 4. Be adequately documented. 3. How does an entertainment expense directly related to business differ from an entertainment expense associated with business? The two entertainment expense classifications are similar in that both: 1. Require that the expense be incurred for a business purpose that is related to the active conduct of the taxpayer's business. 2. Both must qualify as an ordinary and necessary expense of the business and not be lavish or extravagant (i.e., reasonable in amount). 3. Both must satisfy substantiation requirements. The two entertainment expense classifications are different in that: 1. A bona fide business activity must take place to qualify as a directly related entertainment expense. To qualify as an associated with expense, the entertainment must directly precede or follow substantial business discussions. 2. Directly related expenses are amounts spent to provide entertainment for the taxpayer and the person(s) involved in the conduct of the business activity. Associated with expenses may include expenses related to persons whose presence is appropriate for business reasons but not necessary for the actual
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Chapter 6: Business Expenses 6-2 conduct of business. The tax law refers to this requirement as expenses of persons closely connected with the individual who conducted business with the taxpayer. For example, the costs related to the presence of a business associate's spouse at a dinner following a substantial business meeting would qualify as an associated with expense.
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This note was uploaded on 02/08/2012 for the course MGMT BA 413 taught by Professor Lindamittermaier during the Spring '04 term at Capital University.

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413sol6-04 - Chapter 6: Business Expenses 6-1 _ CHAPTER 6...

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