Question

1. What are the components of an ordinary and necessary business expense?

2. List 4 examples of ordinary and necessary business expenses a business can

generally take.

3. List 4 examples of business expenses that are not ordinary and necessary business

expenses.

4. Define depreciation.

5. On January 1, 2018, John Inc., purchased for $10,000, a copier to use in its

business. The copier is a 5-year property. John Inc. elects to use the straight-line

method of depreciation. What is the amount of John Inc.’s depreciation for 2018?

Answer 1

1) The components of ordinary expense are those which are common and accepted in the business. The components of necessary expense are those expenses which are appropriate and helpful in the business.

2) Examples of ordinary and necessary business expenses are:

--Employees Compensation: The salaries or wages for services rendered by the employees

-- Taxes: The local, state, federal and foreign taxes that business pays which are directly attributable to the trade

--Interest: The expenditure on interest expenses on borrowed money for covering the costs of business activities

-- Rental Expenses: A renting office space will be termed ordinary and necessary expenditure but the space should be actually used for the business otherwise the expense will not qualify.

3) Examples of business expenses that are not ordinary and necessary business expenses are:

--The expenditures on rent will not qualify if the owner of business receives equity in, or holds title to the property

-- The expenditures on family will not be ordinary and necessary business expenses

-- Cost of goods sold cannot be deducted

-- A high amount of expenditure over a long period of time will not qualify because a business expenditure is used up entirely within one year

4) Depreciation refers to an accounting method of reallocating the tangible asset's cost its useful life and is utilized to account for reduction in value

5) Depreciation amount for year 2018: 10,000/ 5 years = $2,000