Enrolled Agent > EA - Part 2: Businesses > Unit 4: Business Expenses > Flashcards

Unit 4: Business Expenses Flashcards

Learn what business expenses are deductible and their limitations. (64 cards)

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1
Q

What are business expenses?

A

Expenditures involved in operating a business that are typically tax-deductible if the business is attempting to make a profit.

Some costs must be capitalized and depreciated or amortized instead of being immediately deducted.

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2
Q

What is the difference between immediately deductible expenses and capitalized expenses?

A
  • Immediately deductible expenses can be written off entirely in the year they were paid or incurred.
  • Capitalized expenses cannot be deducted all at once and are spread over several years through depreciation, amortization, or depletion.
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3
Q

What qualifies as a deductible business expense?

A

It must be both ordinary and necessary.

An ordinary expense is common and accepted in the taxpayer’s industry, while a necessary expense is helpful and appropriate for the particular trade or business.

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4
Q

Can personal and living expenses be claimed as business expenses?

A

No

If an expense has both business and personal purposes, only the portion used for business purposes can be deducted.

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5
Q

Under the accrual method, when can a taxpayer generally deduct business expenses?

A

When all events have occurred to fix the liability, the amount can be determined with reasonable accuracy, and economic performance has occurred.

Economic performance occurs when the property or services are provided or used.

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6
Q

What is the exception for recurring items under the accrual method?

A

Expenses for certain recurring items may be treated as incurred during the tax year even though economic performance has not occurred if certain requirements are met.

Requirements include meeting the all-events test, economic performance occurring by certain dates, and the item being recurring and consistently treated as incurred.

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7
Q

What are business start-up costs?

A

Costs paid or incurred to create an active trade or business, or to investigate the creation or acquisition of one. This includes expenses such as surveying markets, analyzing products or labor supply, and training new employees before the business begins.

Up to $5,000 of start-up costs may be deductible as current expenses without the need for amortization.

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8
Q

What is the treatment for start-up costs exceeding $50,000?

A

There is a dollar-for-dollar reduction in the available immediate deduction until the deduction is eliminated.

Costs that are not currently deductible may be amortized over 180 months.

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9
Q

What are qualifying organizational costs?

A

Costs directly related to a business’s formation, including costs to create and file articles of incorporation or organization, and legal costs to create contracts.

Up to $5,000 of organizational costs can be deducted immediately, with the remainder amortized over 180 months.

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10
Q

What happens to unamortized start-up costs when a business terminates?

A

Any remaining unamortized start-up costs are deductible in full as a business expense on the final return for the year the business closes.

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11
Q

How are costs incurred in expanding an existing business treated for tax purposes?

A

They are deductible as ordinary and necessary business expenses.

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12
Q

Are hobby losses deductible as business expenses or capital losses?

A

No

Hobby losses are never deductible as business expenses or capital losses.

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13
Q

Can corporations deduct costs related to an unsuccessful attempt to acquire a new business?

A

Yes, corporations can deduct all investigatory costs as a business loss.

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14
Q

How are real estate taxes allocated between a buyer and seller when a property is sold?

A
  • Seller: Treated as paying taxes up to the date of sale
  • Buyer: Treated as paying taxes from the date of sale
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15
Q

Can businesses deduct taxes for local benefits that increase property value?

A

No

These costs must be added to the property’s basis instead of being deducted.

A business can deduct taxes that are actually for local benefis such as maintenance, repairs or interest charges related to capital improvments.

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16
Q

How are state and local income taxes treated for self-employed individuals on Schedule C?

A

They can only be deducted as an itemized deduction on Schedule A, subject to the SALT deduction limitation.

Federal income taxes are never deductible.

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17
Q

What are federal excise taxes and how are they reported?

A

They are imposed on the sale, use, or manufacture of specific goods, services, or activities.

Examples: fuel, air travel, certain manufacturing

Most are reported quarterly using Form 720, Quarterly Federal Excise Tax Return.

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18
Q

When is a business bad debt considered worthless?

A

When there is no longer any chance the amount owed will be paid.

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19
Q

What is required for a taxpayer to claim a business bad debt deduction?

A
  • The debt must be closely related to the taxpayer’s trade or business.
  • The amount owed must have been previously included in the taxpayer’s gross income.

A cash-basis business cannot claim a business bad debt deduction for credit sales, as income is reported only when payment is received.

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20
Q

What happens if a business recovers a debt that was previously written off as a bad debt deduction?

A

The recovered portion must be reported as income on the entity’s current-year tax return.

There is no need to amend the prior-year tax return where the bad debt deduction was claimed.

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21
Q

Which types of insurance premiums are deductible for businesses?

A
  • Business property insurance, malpractice insurance, and casualty insurance
  • Business interruption insurance
  • Credit insurance covering business bad debts
  • Payments to a state unemployment insurance fund
  • Vehicle insurance for business vehicles
  • Group-term life insurance for employees
  • Group accident, health, long-term care, and workers’ compensation insurance for employees

Vehicle insurance is not deductible if the standard mileage rate is used for vehicle expenses.

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22
Q

Who is eligible for the self-employed health insurance deduction?

A
  • A self-employed individual with a net profit on Schedule C
  • A partner with net earnings from self-employment
  • A more-than-2% shareholder in an S corporation with premiums reported as taxable wages

The deduction cannot be taken if the individual was eligible for an employer-subsidized health plan, and it is only available if the business has net profits.

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23
Q

What are the conditions for deducting business interest expenses?

A
  • Cash Method: Deduct interest paid during the tax year.
  • Accrual Method: Deduct interest accrued during the tax year.
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24
Q

What is the interest expense limitation for large businesses?

A

For most large businesses, the deduction for business interest expense is limited to the sum of:

  • 30% of the business’ adjusted taxable income
  • Business interest income
  • Floor plan interest expense

The limitation applies to businesses with average annual gross receipts exceeding $31 million. Any disallowed interest can generally be carried forward to future years

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25
How is **rent expense** treated for tax purposes?
Rent payments can be deducted in the year they are paid or accrued, but advance payments must be deducted over the applicable period. ## Footnote If rented property is used for both business and personal purposes, only the portion used for business can be deducted.
26
Under what conditions can a self-employed taxpayer claim a **home office deduction**?
Used regularly and exclusively for business, and meets at least one of the following criteria: * It is the principal place of business * It is used to meet or deal with clients, customers, or patients in the normal course of business * It is a separate structure (not attached to the home) used exclusively for business purposes ## Footnote The percentage of the home used for business can be calculated using any reasonable method, such as square footage.
27
What is the exclusive use rule for **home office deductions**?
Business expenses cannot be deducted if the part of the home is also used for personal purposes. ## Footnote The home office must be a separate room or clearly separated from other living areas.
28
What are the two ways to compute the home office deduction, and what form is used?
**Simplified Method:** $5 per square foot of the home office, up to 300 square feet (maximum $1,500). **Regular Method:** Actual expenses based on the percentage of the home used for business. ## Footnote Self-employed taxpayers claim the deduction on **Form 8829, Expenses for Business Use of Your Home,** which is filed with Schedule C.
29
What is the maximum deduction allowed under the **simplified home office deduction method**?
$1,500 ## Footnote This is calculated as $5 per square foot, up to a maximum of 300 square feet.
30
# True or False: Under the simplified home office deduction method, home-related expenses need to be allocated between personal and business use.
False ## Footnote Home-related expenses do not need to be allocated between personal and business use under the simplified method.
31
Which **business entertainment-related expenses** remain deductible after the TCJA?
Fully deductible exceptions: * Recreational or social activities for employees (e.g., holiday parties, company picnics). * Entertainment expenses directly related to the taxpayer’s trade or business of providing entertainment (e.g., a theater owner hosting a free public event). ## Footnote The TCJA eliminated the deduction for most expenses related to entertainment, amusemnt or recreation.
32
# Fill in the blank: In 2025, businesses can deduct \_\_\_\_\_\_% of the cost of business meals.
50
33
Under what conditions are **travel expenses** deductible for tax purposes?
* Expenses must be incurred while carrying on a genuine business activity. * The travel must be away from home. * Adequate records must be retained to support these expenses.
34
What is the **IRS-prescribed safe harbor period** for filing an expense report with an employer?
60 days ## Footnote The expense report must include details on the purpose, dates, and location of the trip.
35
What is the requirement for a taxpayer to be considered '**traveling away from home**'?
The duties must require being away from home substantially longer than an ordinary day’s work, and the taxpayer must need to sleep or rest to meet the demands of their work.
36
What are **deductible transportation expenses** for business use of a vehicle?
* Traveling from one work location to another within the tax home area * Visiting customers * Attending a business meeting away from the regular workplace * Traveling from home to a temporary workplace
37
What are the options for **self-employed individuals** to deduct vehicle expenses?
* Standard mileage rate * Actual car expenses ## Footnote Corporations generally cannot use the standard mileage rate but may reimburse employees under an accountable plan using the standard mileage rate.
38
What must a business **keep** when using the standard mileage rate or claiming actual expenses?
Records that identify the vehicle and provide evidence of ownership.
39
What are considered '**actual expenses**' for vehicle use?
* Depreciation, lease payments, registration fees * Garage rent * Repairs and maintenance, gas, oil, and tires * Car insurance * Parking fees and tolls
40
Can a **self-employed taxpayer** deduct interest on a loan for a work vehicle?
Yes, if filing Schedule C or Schedule F.
41
What **conditions** prohibit the use of the standard mileage rate?
* Operating five or more cars at the same time * Claimed a depreciation deduction using any method other than straight-line * Claimed a section 179 deduction or bonus depreciation on the vehicle * Claimed actual car expenses for a leased car
42
What is the maximum deductible amount for **business gifts** to any one recipient per year?
$25 per person per year.
43
What are **exceptions** to the $25 gift limit for promotional items?
* An item with the business name clearly imprinted on it that costs $4 or less * Signs, display racks, or other promotional materials used on the recipient's premises
44
What types of **employee gifts** are not taxable?
Noncash gifts of nominal value distributed to promote goodwill.
45
Can **C corporations** deduct charitable contributions?
Yes, generally limited to 10% of taxable income.
46
What are examples of **nondeductible business expenses**?
* Political contributions * Lobbying expenses * Dues for clubs * Penalties and fines * Legal and professional fees for personal work
47
What is the required treatment of research and experimental expenses after **December 31, 2024**?
Businesses may immediately expense domestic research and experimental expenditures, while foreign research expenditures must still be capitalized and amortized over 15 years. ## Footnote Research and experimental expenses generally include all costs incident to the development or improvement of a product including software development costs.
48
Define **qualifying organizational costs**.
* Costs directly related to the creation or formation of the business. * Chargeable to a capital account. ## Footnote For partnerships, costs must be incurred by the due date of the tax return for the year in which the business begins. For corporations, costs must be incurred before the end of the first tax year of operations.
49
How are remaining unamortized **start-up or organizational costs** treated if a business closes?
They are deductible as a **business loss** on the final tax return.
50
How are costs from a **failed business purchase** treated for tax purposes?
* Costs before deciding to purchase are **personal** and nondeductible. * Costs in a bona fide attempt to purchase are **capital costs** and may be claimed as a capital loss on Schedule D, Form 1040.
51
Under what conditions can **real estate taxes** be deductible?
The tax must be based on the **assessed value** of the real estate.
52
Can **state and local income taxes** be deducted by corporations and partnerships?
Yes, they can deduct state and local income taxes and franchise taxes.
53
What is the **SALT deduction cap** for 2025?
$40,000 (or $20,000 for married filing separately) with a **phase-out** for higher incomes.
54
What is a **Pass-Through Entity Tax**? | (PTET)
A **state income tax** based on the entity's income, allowing owners a credit or deduction against personal state income taxes.
55
How are **gross receipts taxes** treated for tax purposes?
They are deductible as **ordinary and necessary** business expenses.
56
How are **sales and use taxes** treated when imposed on the seller?
* Reported as **gross income** by the seller. * Deducted as an **ordinary business expense** by the seller.
57
What conditions disqualify an individual from taking the **self-employed health insurance deduction**?
Eligibility to participate in an **employer-subsidized health plan**.
58
Are **entertainment expenses** generally deductible for businesses?
No ## Footnote There are limited exceptions where costs may be deductible if they are ordinary and necessary business expenses.
59
Under what condition is **entertainment** provided to the general public deductible?
When it is a **normal business expense**, such as a nightclub providing entertainment. ## Footnote Entertainment that is part of a business's service to customers is fully deductible.
60
What is the **standard mileage rate** for business use of a vehicle in 2025?
70 cents per **mile** ## Footnote This rate applies to business use of a vehicle and excludes actual expenses like gas and oil, but parking fees and tolls can be deducted in addition.
61
How can businesses use **per diem rates** for travel expenses?
As an **alternative** to tracking actual travel expenses for meals and lodging. ## Footnote Self-employed individuals can only use per diem rates for meal costs.
62
What is required for a taxpayer to claim the **section 179 deduction** on a vehicle?
The taxpayer must use the vehicle more than **50% for business**.
63
What is the maximum first-year **section 179 deduction** for vehicles weighing more than 6,000 pounds but less than 14,000 in 2025?
$31,300
64
# True or False: Gifts of **cash or gift cards** to employees are considered **taxable compensation**.
True ## Footnote Cash, cash equivalents, gift cards, and similar items are treated as taxable compensation and must be included in wages.
EA - Part 2: Businesses
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