Which of the following statements regarding the business purpose concept is true? a.The only test for...

Which of the following statements regarding the business purpose concept is true?

a.The only test for deductibility vis-a-vis the business purpose concept is that an expenditure must directly create profit.

b.The dominant motive for incurring a business expense need not be to earn a profit independent of any tax savings.

c.If the secondary purpose of a transaction is tax savings, it will not be allowed as a deduction.

d.To be deductible, the business purpose concept requires an expenditure to have a bona fide business reason other than tax avoidance. If the sole purpose of a transaction is tax savings, it will not be allowed as a deduction.

Solutions

Expert Solution

a. The only test for deductibility vis-a-vis the business purpose concept is that an expenditure must directly create profit.- False, it doesn’t necessarily needs to create direct profit . it can also indirectly help in earning profit.

b. The dominant motive for incurring a business expense need not be to earn a profit independent of any tax savings.- false, for a transaction to be deductible, it should have a economic profit independent of tax savings.

c. If the secondary purpose of a transaction is tax savings, it will not be allowed as a deduction.- False , as the secondary purpose doesn’t affect the deductions

d. To be deductible, the business purpose concept requires expenditure to have a bona fide business reason other than tax avoidance. If the sole purpose of a transaction is tax savings, it will not be allowed as a deduction.- True , the transaction must have a business impact and help in earning profit

So the answer is D.

jeff jeffy answered 4 weeks ago

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