Solution Manual For McGraw-Hill's Taxation of Business Entities 2020 Edition, 11th Edition

Solution Manual For McGraw-Hill's Taxation of Business Entities 2020 Edition, 11th Edition offers structured learning with chapter-wise explanations and key points.

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Solutions Manual–Taxationof Business Entities,by Spilker et al.Chapter1Business Income, Deductions, and Accounting MethodsSOLUTIONS MANUALDiscussion Questions1.[LO 1] What is an “ordinary and necessary” business expenditure?“Ordinary” and “necessary” imply that an expense must be customary andhelpful, respectively. Because these terms are subjective, the tests are ambiguous.However, ordinary is interpreted by the courts as including expenses which may beunusual for a specific taxpayer (but not for that type of business) and necessary isnot interpreted as only essential expenses. These limits can be contrasted with thereasonable limit on amounts and the bona fide requirement for profit motivation.2.[LO1]Explainhowcost of goods soldis treatedwhena business sellsinventory.Under the return of capital principle, cost of goods sold represents a reduction ingross income rather than a business expense. For example, if a taxpayer sellsinventory for $100,000 and reports a cost of goods sold of $40,000, the business’sgross income is $60,000 ($100,000–40,000) not$100,000.3.[LO 1]Whether a businessexpense is “reasonable in amount” is often a difficultquestion.Explain why determining reasonableness is difficult and describeacircumstance where reasonableness is likely to be questioned by the IRS.Reasonableness is an issue of factand circumstance,and extravagance is difficultto determinebecause of the subjectivity and multitude of factors involved indetermining price. Reasonableness is most likely to be an issue when a payment ismade to a related individual or the taxpayer enjoys some personal benefitincidental to the expenditure.4.[LO 1] Jake is a professional dog trainer who purchases and trains dogs for use bylaw enforcement agencies. Last year Jake purchased 500 bags of dog food from alarge pet food company at an average cost of $30 per bag. This year, however,Jake purchased500 bags of dog food from a local pet food company at an averagecost of $45 per bag. Under what circumstances would the IRS likely challenge thecost Jake’s dog food as unreasonable?Acommon test for reasonableness is whether the expenditure is comparabletoanarm's length amount–a price charged by objective (unrelated) individuals who donot receive any incidental personal benefits.Hence, the IRS is most likely tochallenge the cost of the dog foodif Jake’srelativescontrolor ownthe local petfood companyand was benefiting from the increased price.

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Solution Manual For McGraw-Hill's Taxation of Business Entities 2020 Edition, 11th Edition

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