Question

Indicate the amount (if any) that Josh can deduct as an ordinary and necessary business deduction in each of the following situations. This year Josh paid 23,400 to employ the mayor's son in the business. Josh would typically pay an employee with these responsibilities about 19,200 but the mayor assured Josh that after his son was hired, some city business would be coming his way. How much can Josh deduct as an ordinary and necessary business deduction?

1) 23,400
2) 19,200
3) Cannot be deducted
4) Other amount

Answer 1

Josh can deduct $19,200 as an ordinary and necessary business expense, which is the fair market value for the employee's services. The extra $4,200 paid over this amount may not qualify as a deductible expense if it is seen as a payment for future business rather than for services rendered. Thus, the option 2 is the correct answer.

Step-by-step explanation:

The amount that Josh can deduct as an ordinary and necessary business deduction for the salary paid to the mayor's son should be the fair market value for the services provided, which is $19,200. The additional amount paid over this value seems to be for the purpose of securing city business, which could be viewed as a form of influence payment rather than a reasonable business expense. Thus, the correct amount Josh can deduct as a business expense is $19,200, as it represents the typical payment for an employee with similar responsibilities.

If the IRS determines that the extra payment is indeed for securing future business rather than for the services rendered, the additional $4,200 ($23,400 - $19,200) may not qualify as a deductible business expense.