Question

1. Harley's employer gave him $5,000 to cover expenses for an upcoming sales trip. He is not required to provide any receipts for his expenses, and if his actual expenses are less than $5,000, he does not have to return any money to his employer. His actual expenses for the trip were as follows:

Airfare and rental car $2,000

Meals       $1,500

Hotel $1,000

Tickets to theater for a client and him $200

Total $4,700

What the income tax consequences to Harley and his employer?

a.		Harley: $4,700 of non-taxable reimbursed expenses, $300 of wage income, and pays half the FICA tax on the wage income Employer: Deductible expenses for airfare ($2,000), meals ($750), hotel ($1,000), wages ($500) , and pays half the FICA tax on the wage expense
b.		Harley: $5,000 of wage income and pays half the FICA tax Employer: $5,000 of wage expense and pays half the FICA tax
c.		Harley: $4,500 of non-taxable reimbursed expenses, $500 of wage income, and pays half the FICA tax on the wage income Employer: Deductible expenses for airfare ($2,000), meals ($1,500), hotel ($1,000), wage expense of $500 , and pays half the FICA tax on the wage expense
d.		Harley: $3,750 of non-taxable reimbursed expenses, $1,250 of wage income, and pays half the FICA tax on the wage income Employer: Deductible expenses for airfare ($2,000), meals ($750), hotel ($1,000), entertainment ($200) wage expense of $300, and pays half the FICA tax on the wage expense

2. Which of the following is a deductible business expense?

	a.	Bribes paid to the mayor that are illegal under state law that is generally enforced. Violation of this law could result in up to 12 months in jail.
	b.	Wages paid to employees by a drug dealer
	c.	Wages paid to employees of an illegal gambling establishment
	d.	A speeding ticket received by the company's top salesperson while visiting customers

3. Which of the following business expenses would not be deductible because it is not ordinary, necessary, or reasonable?

	a.	$1,200 for employee snacks and beverages purchased from an unrelated party.
	b.	$3,000 to rent a billboard for advertising from an unrelated party.
	c.	$10,000 of fees paid to an unrelated attorney to negotiate and draft a sales contract with the company's largest customer.
	d.	$300,000 of rent paid to the sole shareholder of the company for a warehouse that is owned personally and used to house the company's inventory. The market value to rent a similar warehouse in the same area is $175,000.

Answer 1

1 ANS :

Harley: $4,500 of non-taxable reimbursed expenses, $500 of wage income, and pays half the FICA tax on the wage income

Employer: Deductible expenses for airfare ($2,000), meals ($1,500), hotel ($1,000), wage expense of $500 , and pays half the FICA tax on the wage expense

2 ans :Bribes paid to the mayor that are illegal under state law that is generally enforced. Violation of this law could result in up to 12 months in jail.  

3 ANS : $300,000 of rent paid to the sole shareholder of the company for a warehouse that is owned personally and used to house the company's inventory. The market value to rent a similar warehouse in the same area is $175,000.