Three requirements must be met in order to deduct a trade or business expense. Also, deductible trade or business expenses may not be which of the following:
I.a capital expenditure.
II.reasonable in amount.
III.a payment that frustrates public policy.
IV.an expense related to tax-exempt income.

A)Only statement I is correct.
B)Only statement II is correct.
C)Statements III and IV are correct.
D)Statements I, II, and III are correct.
E)Statements I, III, and IV are correct.

Question

Three requirements must be met in order to deduct a trade or business expense. Also, deductible trade or business expenses may not be which of the following:
I.a capital expenditure.
II.reasonable in amount.
III.a payment that frustrates public policy.
IV.an expense related to tax-exempt income.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements III and IV are correct.
D)Statements I, II, and III are correct.
E)Statements I, III, and IV are correct.

Quizplus · Accepted Answer

The three requirements to deduct a trade or business expense are that it must be ordinary and necessary, directly related to the business or trade, and reasonable in amount. Therefore, statement II is correct. Additionally, deductible trade or business expenses cannot be payments that frustrate public policy (statement III) or expenses related to tax-exempt income (statement IV). Finally, statement I is incorrect because capital expenditures may be deductible under certain circumstances, such as when they are considered ordinary and necessary expenses for the business.

Three Requirements Must Be Met in Order to Deduct a Trade