Certified Financial Management Specialist Practice Exam

Which expenses are considered tax-deductible?

1. All personal expenses

2. Necessary and ordinary business expenses

3. Luxury items purchased by the business

4. Expenses unrelated to business operations

The correct answer is: Necessary and ordinary business expenses

Tax-deductible expenses primarily include necessary and ordinary business expenses. These are costs that are common and accepted in the business industry, as well as those that are helpful and appropriate for the business's operation. Examples of such expenses include salaries, rent, utilities, and supplies needed for the production of goods or services. This categorization helps distinguish between what a business legitimately incurs in the course of its operations versus personal or unrelated costs. While personal expenses and luxury items do not serve the business's primary interests and therefore are not deductible, the essential purpose of tax deductions is to allow businesses to reduce their taxable income based on these pertinent and justifiable costs. Expenses that are unrelated to business operations do not qualify for deductions as they fail to contribute toward the earning of revenue or operation of the business.