For Each of the Following Situations Explain Why the Expenditure

question 86

Essay

For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction.
a.Akira is self-employed as a personal financial planner. He went out-of-town for two days to visit three of his best clients and incurs the following expenses:
$\begin{array} { l r } \text { Airfare } & \$ 350 \\\text { Rental car } & 160 \\\text { Lodging } & 240 \\\text { Incidentals } & 90 \\\text { Meals } & 220 \\\text { Entertainment } & 130\end{array}$

b.Woodrow is President and CEO of ISPEP, a closely held corporation with assets of $20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin daughters who have just completed their freshman year at Aztec State to work in the promotions department of the company. His daughters will be paid $5,000 each for the summer. Other college students who are hired for the summer to perform similar tasks will be paid $4,000.
c.Felix is a Realtor. To show his appreciation, he gives each client who buys a home from him a $75 wall clock. During the year Felix gives 64 clocks to his clients.
d.Sandy sues Harrison for divorce. Originally, Sandy asks for one-half of all their assets, including 50% of Harrison's car dealership. Harrison's lawyer has worked out a compromise with Sandy and her attorney that allows Harrison to retain 100% ownership of the dealership. Harrison pays his lawyer $10,000 in legal fees.

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Definitions:

Fixed Costs

Expenses that do not change in proportion to the level of production or sales, such as rent, salaries, and insurance.

Competition-Based Method

Pricing strategy where the price of goods or services is determined by considering the prices of competitors’ products.

Total Cost Method

An accounting method that involves recording all production costs to inventory until the goods are sold, at which point they are expensed.

Markup

The amount added to the cost of a product to determine its selling price, usually expressed as a percentage of the cost.