Question

During 2022, José, a self-employed technology consultant, made gifts in the following amounts:

To Haley (José's personal assistant) at Christmas: $36

To Darryl (a key client)—$3 was for gift wrapping: $53

To Darryl's wife (a homemaker) on her birthday: $20

To Veronica (José's office manager) at Christmas: $30

In addition, on professional assistants' day, José takes Haley to lunch at a local restaurant at a cost of $82. Presuming that José has adequate substantiation, how much can he deduct? (Do not round intermediate computations. If required, round your final answer to the nearest cent.)

Answer 1

José can deduct a total of $136 for gifts and entertainment expenses, following the IRS regulations that limit business gift deductions to $25 per person and entertainment expenses to 50% of the cost.

Step-by-step explanation:

The question relates to the calculation of the amount a self-employed professional, José, can deduct for gifts and certain entertainment expenses for tax purposes. There are specific tax regulations regarding the deduction of business gifts and client entertainment expenses.

The annual deduction for business gifts to any one individual is limited to $25. Therefore, the gift amounts that exceed this limit cannot be included in the deduction:

• Haley's Christmas gift: $25 is deductible out of the $36 given, as it is within the limit.
• Darryl's gift: $25 is deductible from the $50 ($53 total minus $3 for gift wrapping), as gift wrapping is not included in the gift cost limit.
• Gift to Darryl's wife: $20 is fully deductible, as it is within the limit.
• Veronica's Christmas gift: $25 is deductible out of $30 given, as it is within the limit.

For entertainment expenses, such as taking Haley to lunch, only 50% of the meal cost is deductible for tax purposes:

Lunch with Haley: $41 (50% of $82) is deductible.

Adding these amounts:

$25 (Haley's gift) + $25 (Darryl's gift) + $20 (Darryl's wife's gift) + $25 (Veronica's gift) + $41 (lunch with Haley) = $136 deductible amount.