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Professor Aprill by 4bnW938

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									Professor Aprill                                            Income Tax I

                                 Limits on Deductibility


During the tax year, Leslie incurs $1000 of business meal and entertainment expenses.
Assume that, of the total $200 is deemed lavish and extravagant.




What is the tax impact of these expenses on Leslie in each of the following situations:

   a. Leslie is an employee whose employer does not reimburse any of these expenses.
      Leslie has AGI of $50,000 for the year and $500 of other “miscellaneous itemized
      deductions” under section 67.
   b. Leslie’s employer’s reimburses the full $1000.
   c. Leslie is a sole proprietor.
a.

Total Business Meal and Entertainment Expense                              $1000
Less amount deemed lavish                                                   (200)
                                                                             800

Less 50% reduction                                                           (400)
                                                                              400

Plus other misc. itemized deductions                                          500

                                                                              900


Less 2% of AGI                                                              (1000)

Deductible amount                                                               0


Thus, Leslie has spent $1000 out of pocket, but none of that expense will reduce taxable
income.

b.

If the employer reimburses Leslie, Leslie’s will have no out of pocket costs and will not
have any increase or decrease in taxable income. The employer will bear the 50%
reduction of deductions for meals and entertainment as well as the reduction for
lavishness The 2% floor for misc. itemized deductions will not affect the employer.

c.

If Leslie is a sole proprietor, Leslie will be able to reduce gross income by $400 in
calculating AGI. The 50% reduction and the reduction for lavishness will apply, but the
2% floor for misc. itemized deductions will not.

								
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