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Scenario Well, things are progressing between you and Eric, but you're dreading this next visit with his son and daughter-in-law.

Well, things are progressing between you and Eric, but you're dreading this next visit with his son and
daughter-in-law. The more time you've spent with Eric, the more you've learned that he is rather
misinformed about tax law. What makes things more challenging is his tendency to share his
misinformation with Jackson and Kara. You realize that your accounting services are why Eric's Elmhurst
Motorcycle has both stayed afloat and even prospered through the years.
Your Role
You take a deep breath because Jackson and Kara are about to walk through the door. While Jackson
and Kara were very pleased with the refund they received after they filed last year's taxes, you have the
feeling they're going to be looking for more.
Then again, who isn't!?!?
Peggy Sue: Hi Jackson and Kara, nice to see you again!
Kara: Nice to see you too. Jackson has some questions.
Peggy Sue: Go ahead!
Jackson: My dad says that the only small deduction left is for a small business. He says that I can charge
all Kara and my bills to the business and get a higher refund.
Kara: (interrupting) Diapers and formula are expensive.
Peggy Sue: Well, you can’t write off diapers and formula but I’m happy to talk about what constitutes a
business expense. What kind of business are you thinking about?
Jackson: Well last year I re-built the engine on a ’65 Mustang and it is sweet! I want to put all the parts
and my time on our tax return and get more of a refund.
Peggy Sue: (says carefully) Ok…well…let me start by clarifying what your dad was saying about
business expenses…

Prepare a two- to three-page paper (approximately 350 words per page) explaining the following to the Erbs:

What constitutes a business expense?
The difference between a business and a hobby.
The difference between the cash and accrual methods.

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Top Answer

Dear Student,... View the full answer


Business Expense
It is the cost incurred by the self-employed to run the business operations. It is the cost associated
with the business and its operations. Example cost of renting a building,...

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