Ch 6 HW Solutions[1] - Chapter 6 Homework Solutions 26 A.J...

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Chapter 6 Homework Solutions 26. A.J. is the vice president for Keane Products, a marketing consulting firm. On a business trip to New York City, he meets with three executives from Keane’s top account. After the meeting, A.J. takes them to dinner and then to the theater. The theater tickets cost $350. The cost of the meal is $190, including sales tax of $17 and a tip of $34. Throughout the evening, A.J. pays $42 in cab fares. How much can A. J. deduct as an entertainment expense? A.J. can deduct $175 (50% x $350) for the theater tickets and $95 (50% x $190) for the meal. The entertainment qualifies as an expense associated with the conduct of the taxpayer's trade or business because it follows a substantial business discussion. The $42 cab fare is fully deductible as transportation and is not subject to the 50% rule because it is not considered to be an entertainment expense. Thus, A.J’s total deduction for the evening is $312 ($175 + $95 + $42). Instructor’s Note: Even if A.J. and the clients did not have a business meeting before the theater, the entertainment is deductible if they had a business discussion at dinner. 29. For each of the following situations, explain whether a deduction should be allowed for entertainment expenses: a. Neil owns a real estate agency and has an annual Christmas party at his house. The party is only for employees of his firm and costs $2,600. The cost of the Christmas party is fully deductible. Employee recreational expenses, such as a Christmas party, are not subject to the 50% limitation on meals and entertainment. b. Carol is a personal financial planner. Over the years, she has made it a practice to invite her best clients to lunch on the client’s birthday. At the lunch, she always makes it a point to ask about any major changes in the client's financial status that she should be aware of. However, most of the conversation relates to personal matters. During the year, Carol spent $850 on these lunches. The key test that Carol must meet for the meal to be deductible under the directly related test is that the principal reason for providing the meal must be to conduct business. For the meal to be deductible
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under the associated with test, there must be a clear business purpose, other than goodwill, for the meal and it either precedes or follows a substantial business discussion. Because Carol entertains the client on their birthday and the majority of the conversion is not business related, it appears that she does not meet either of these tests. Therefore, the $850 spent for the lunches is not deductible. c. Vijay is a doctor at a local hospital. Every month, he buys lunch at the hospital for the six residents and interns who assist him in surgery and caring for his patients. The lunches cost $420 for the year. Vijay may not deduct the $420. Because Vijay is not required as part of his job to pay for these lunches and the lunches are not directly related to or associated with his job as a doctor, the lunches are not considered ordinary and necessary expenses of his job. The
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