Question

Which of the following characteristics are required for a business expense to be deductible?

1) The expense must be ordinary and necessary for the business
2) The expense must be directly related to the business
3) The expense must be reasonable in amount
4) The expense must be properly documented

Answer 1

A business expense must be ordinary, necessary, directly related to the business, reasonable in amount, and properly documented to be deductible. Effective budgeting is paramount for covering these expenses.

Step-by-step explanation:

The characteristics required for a business expense to be deductible are as follows:

1. The expense must be ordinary and necessary for the business operation. This means it should be a common and accepted expense in the respective industry.
2. The expense must be directly related to the business activities. It should be relevant to the business’s aim of generating income.
3. The expense must be reasonable in amount considering the circumstances. Excessive amounts may not qualify for deduction.
4. The expense must be properly documented. Receipts, invoices, and other paper trails are necessary to substantiate the expense.

Since businesses are subject to various taxes like income tax, employment tax, unemployment compensation, social security insurance, and excise tax, it's imperative to ensure the budgeting includes these expenses while maintaining profitability. State governments may also impose payroll taxes. Effective budgeting is essential to manage funds and ensure that expenses can be covered while running the business.