Question

Angel owns a gourmet Mexican restaurant. His head chef, Carmen, is arrested for a parole violation. Because Angel needs Carmen back to work as soon as possible, Angel pays her bail of $250, attorney's fees of $300, and a court fine of $200.

I. A business purpose exists for the payments.
II. If Carmen were required to repay the expenditures, it would constitute a loan and not be deductible for Angel.
III. If Angel does not require Carmen to repay the amounts paid on Carmen's behalf, the payments constitute compensation and Angel gets a deduction for the expenses paid.
a. Only statement I is correct.
b. Statements I and III are correct.
c. Statements I and II are correct.
d. Statements I, II and III are correct.

Answer 1

All three statements concerning the deductibility of expenses paid by the business owner for the head chef are correct. The payments have a business purpose, would be considered a loan if repayment was required, and would constitute additional compensation if repayment is not required.

Step-by-step explanation:

The scenario given concerns the deductibility of expenses paid by a business owner for one of their employees. To evaluate the correctness of the statements provided, it's important to understand how the Internal Revenue Service (IRS) treats such expenses.

I. A business purpose exists for the payments: Angel is paying these expenses to get his head chef back to work, which is critical for his restaurant's operation. Therefore, a business purpose is present, making statement I correct.

II. If Carmen were required to repay the expenditures, it would become a loan to Carmen and would not be immediately deductible as a business expense for Angel. Instead, Angel might be able to take deductions on any eventual loss if the loan becomes worthless, making statement II correct.

III. If Angel does not require Carmen to repay the amounts, they may be considered additional compensation to Carmen, and these amounts would generally be deductible as wages or salary expenses by Angel's business, subject to payroll taxes and reporting requirements, making statement III correct.

Thus, the correct answer would be d. Statements I, II and III are correct.