Question

Ester is a sales representative for a pharmaceutical company. She receives a monthly travel allowance from the company to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Ester is not required to account to the company for the use of the travel advance

I. Ester will only have gross income to the extent her travel allowance exceeds her actual costs.
II. Ester must include the travel allowance in her gross income. Her actual costs are deductible from AGI, subject to all applicable limits on such deductions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.

Answer 1

The correct option is 'b) Only statement II is correct.' Ester must include the travel allowance in her gross income.

Step-by-step explanation:

The correct option for the statement is b) Only statement II is correct.

Statement II is correct because according to the US federal tax code governing income taxes, any travel allowance received by Ester must be included in her gross income. Therefore, Ester must report the travel allowance as part of her income for tax purposes.

Statement I is incorrect because Ester will have gross income to the extent her travel allowance, as well as her actual costs, are included. The actual costs incurred by Ester are deductible from her AGI (Adjusted Gross Income), subject to applicable limits on such deductions.