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The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure
is "ordinary and necessary".
Business activities are distinguished from other activities in that business activities are motivated by the
pursuit of profits.
The phase "ordinary and necessary" has been defined to mean that an expense must be essential and
indispensable to the conduct of a business.
Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by
The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's
Illegal bribes and kickbacks are not deductible as business expenses, but this prohibition does not include
fines incurred in the ordinary course of business.
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.
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.
Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.
10. Only half the cost of a business meal is deductible even if the meal is associated with the active conduct
11. Taxpayers must maintain written contemporaneous records of business purpose when entertaining
12. The domestic manufacturing deduction is a deduction for the incremental cost of manufacturing tangible
assets in the United States.
13. Qualified production activity income for calculating the domestic manufacturing deduction is limited to
taxable income for a business or modified AGI for an individual.
14. The domestic manufacturing deduction cannot exceed 50 percent of the wages paid to employees
engaged in domestic manufacturing activities during the year.
15. A loss deduction from a casualty of a business asset is only available if the asset is completely
16. All taxpayers must account for taxable income using a calendar year.
17. A short year can end on any day of any month other than December.
18. A fiscal tax year can end on the last day of any month other than December.
19. A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the
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