Chapter 8 SM - Test Bank Solution Manual Cafe Test …：8章SM测试银行解决手动咖啡测试….docx

Chapter 8
Solutions Manual
Discussion Questions
1. [LO 1] What is an “ordinary and necessary” business expenditure?
“Ordinary” and “necessary” imply that an expense must be customary and helpful, respectively. Because these terms are subjective, the tests are ambiguous. However, ordinary is interpreted by the courts as including expenses which may be unusual for a specific taxpayer (but not for that type of business) and necessary is not interpreted as only essential expenses. These limits can be contrasted with the reasonable limit on amounts and the bona fide requirement for profit motivation.
2. [LO 1] Is cost of goods sold deductible as a business expense for a business selling inventory? Explain.
No. Under the return of capital principal, cost of goods sold represents a reduction in gross e rather than a business expense. For example, if a taxpayer sells inventory for $100,000 and reports a cost of goods sold of $40,000, the business’s gross e is $60,000 ($100,000 – 40,000) not $100,000.
3. [LO 1] Tom is an attorney who often represents individuals injured while working (worker liability claims). This year -Tom spent $50 on a book entitled Plumbing For Dummies and paid $500 to take a course on plumbing residences and rental housing. Can you imagine circumstances in which these expenditures would be deductible as “ordinary and necessary” for an attorney. Explain.
“Ordinary” and “necessary” imply that an expense must be customary and helpful, respectively. Because these terms are subjective, the tests are ambiguous. However, ordinary is interpreted by the courts as including expenses which may be unusual for a specific taxpayer (but not for that type of business) and necessary is not interpreted as only essential expenses. Tom may represent a plumber and incurred this expenditure so he can better understand and explain how his client was injured on the job. In this case, the expenses would be both ordinary and necessary to Tom’s practice as an att