Question

In order to be deductible, business expenses must be (1) and (2) for the business activity. (Enter only one word per blank.)

What characteristics should business expenses possess to be considered deductible for the business activity?

a) Essential; Profitable
b) Necessary; Reasonable
c) Voluntary; Costly
d) Exceptional; Excessive

Answer 1

Business expenses must be necessary and reasonable to be deductible. Explicit costs are actual payments like wages, while implicit costs are opportunity costs like using home space for business.

Step-by-step explanation:

For a business expense to be deductible, it must have two characteristics; it needs to be necessary and reasonable. The correct answer to fill in the blanks would be: 'In order to be deductible, business expenses must be necessary and reasonable for the business activity.' This means that the expense must be appropriate and helpful for the business and it should not be extravagant or excessive in nature.

Additionally, it's important to understand that there are two types of costs in business: explicit costs, which are actual out-of-pocket expenses like wages and rent, and implicit costs, which represent the opportunity cost of using resources the firm owns, such as using a part of the home as a business space or the depreciation of goods and equipment.