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tax 8-38 - 8-38 8-39 Solutions to Problem Materials 8-19...

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Unformatted text preview: 8-38 8-39 Solutions to Problem Materials 8-19 The entertainment expenses are not deductible because neither the “directly—related—to” nor the “associated—with” tests are met. There was no business discussion before, during, or after the performance. l-lad R taken the potential customer and his wife to dinner prior to the night club and discussed business, 50 percent of both the dinner and the night club expenses would have been deductible. (See pp. 8—38 and 8—39.) R is entitled to deduct $16 for A.G.I. but also must include the $16 as income. R is entitled to a deduction for the entertainment expenses because they were “associated with” the taxpayer’s earlier business meeting; that is, the entertainment followed a substantial business discussion. The 50 percent limitation does not apply to R but does apply to the reimbursing party. The deduction is for A.G.l. because it is reimbursed under an accountable plan. The 50 percent limitation does apply to R’s employer, however. As a practical matter, R would report nothing on his return regarding the income or expense because the amounts are paid under an accountable plan. (See Example 40 and p. 8—36.) R may not deduct the $70 because no business was discussed. Beginning in 1987, the rule for allowing the deduction for quiet business meals, even if business was not discussed, was eliminated. Now, the taxpayer must discuss business, and, of course, note the nature of the discussion in his records. The total cost of $70 could be deducted if business were discussed before or after lunch, because this would qualify as “associated-with” entertainment. (See p. 8—37.) X Corporation may deduct the expenses related to the entertainment facility because it is used primarily by employees. (See p. 8—40.) The 50 percent limitation does not apply in this instance. (See p. 8-40.) $0. Beginning in 1994, no deductions are allowed for club dues and fees. This generally applies to all clubs, whether they are organized primarily for business, pleasure, or recreation. However, the rule does not apply to dues paid to civic organizations such as the Kiwanis. (See p. 8—37.) R's deduction for the wine purchase is limited to $25 because business gifts are limited to $25 per donee. (See p. 841.) However, the $25 would be a miscellaneous itemized deduction subject to the 2 percent floor. X Corporation may deduct $1,000. The limitation imposed on gifts does not apply because of the exception for promotional items (i.e., items that cost $4 or less and are imprinted with the taxpayer’s name). (See p. 841.) The 50 percent limitation does not apply to promotional items. (See p. 8—41.) Section 274(h) provides that no deduction is allowed under § 212 for expenses related to attending a convention, seminar, or similar meeting. As a result, costs of attending investment and tax seminars normally are not deductible since the authorization for their deduction derives from § 212. However, the costs of attending seminars related to business are still deductible. (See Examples 32 and 33 and pp. 8—30 through 831.) a. All of the costs would be deductible since these expenses are business expenses (education expenses) deductible under § 162. Note that the deduction for meals would be limited to 50 percent of their cost. lf Dr. F is attending this seminar in his capacity as an employee, any unreimbursed deduction would be treated as a miscellaneous itemized deduction subject to the 2 percent floor. Otherwise, these expenses are fully deductible by a self-employed doctor. At first glance, the expenses of Dr. F’s spouse are not deductible since it appears that their deductibility derives from § 212, and § 274(h) prohibits the deduction in such case. However, if Dr. F’s spouse is an employee of Dr. F’s business (e.g., the bookkeeper, trustee of the corporate pension plan if F were incorporated, an officer, or on the board of directors), such expenses may arguably be deductible as business expenses under § 162 and the limitation of § 274(h) would not apply. From the title of the seminar, it would appear that this is a seminar related to operating Dr. F’s private practice. In such case, the expenses would be deductible under § 162 and the limitation of § 274(h) would not apply. If taxes and investments are discussed in this seminar, it would appear that the expenses would still be deductible assuming they can be properly related to Dr. F’s trade or business. This problem illustrates the difficulty in distinguishing whether the expenses of attending the seminar are deductible under § 162 or § 212. ...
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