Final answer:
Deductible business expenses under Internal Revenue Code §162 must be 'ordinary and necessary'. Business owners like Bill pay corporate income tax, individual income tax, and payroll tax on their salaries, and calculate taxable income by subtracting deductions and exemptions from adjusted gross income. The correct option is B.
Step-by-step explanation:
According to Internal Revenue Code §162, deductible trade or business expenses must be 'ordinary and necessary'. An expense is considered ordinary if it is common and accepted in your trade or business, whereas it is necessary if it is helpful and appropriate for your business.
A business owner, such as Bill, who operates a proprietorship, is required to pay various taxes on his business income. This includes corporate income tax on profits, individual income tax on his salary, and payroll tax taken out of the wages he pays himself. In addition to these taxes, he must account for his taxable income, which is calculated by taking adjusted gross income and subtracting deductions and exemptions.
Tax principles stipulate that taxes should be equitable, simple, and efficient. There are different tax rates for different income levels, various tax credits, and the alternative minimum tax, all of which can affect a taxpayer's final tax liability. Given the complexity of tax laws, business owners often need a good understanding of these principles to fulfill their tax obligations effectively.