Question
Harlow is a sole proprietor. He operates a sporting goods store. His gross revenue is $99,000 for Tax Year 2023. Harlow would like to fully deduct the expenses listed. Which of the following expenses would NOT meet the definition of "ordinary and necessary expense"?
$180 per month for a mobile phone used exclusively for the business.
$1,700 for advertising costs.
$2,500 for gifts given to five customers. Each gift is valued at $500.
$40,000 in wage expenses paid to three part-time employees.
$180 per month for a mobile phone used exclusively for the business.
$1,700 for advertising costs.
$2,500 for gifts given to five customers. Each gift is valued at $500.
$40,000 in wage expenses paid to three part-time employees.
Answers
GPT-4o mini
To determine which expense would NOT meet the definition of "ordinary and necessary expense" for Harlow's sporting goods store, let's analyze each item:
1. **$180 per month for a mobile phone used exclusively for the business**: This expense is ordinary and necessary, as having a mobile phone for business purposes is typical and required for conducting business.
2. **$1,700 for advertising costs**: This expense is also ordinary and necessary, as businesses routinely incur advertising expenses to promote their products.
3. **$2,500 for gifts given to five customers. Each gift is valued at $500**: Under IRS rules, the maximum deductible amount for business gifts to a single recipient is $25. Since each of Harlow's gifts is valued at $500, this expense exceeds the deductible limit and thus may not be fully deductible.
4. **$40,000 in wage expenses paid to three part-time employees**: This expense is ordinary and necessary, as paying employees is a common and essential cost of running a business.
Based on this analysis, the expense that would NOT meet the definition of "ordinary and necessary expense" is:
**$2,500 for gifts given to five customers. Each gift is valued at $500.**
1. **$180 per month for a mobile phone used exclusively for the business**: This expense is ordinary and necessary, as having a mobile phone for business purposes is typical and required for conducting business.
2. **$1,700 for advertising costs**: This expense is also ordinary and necessary, as businesses routinely incur advertising expenses to promote their products.
3. **$2,500 for gifts given to five customers. Each gift is valued at $500**: Under IRS rules, the maximum deductible amount for business gifts to a single recipient is $25. Since each of Harlow's gifts is valued at $500, this expense exceeds the deductible limit and thus may not be fully deductible.
4. **$40,000 in wage expenses paid to three part-time employees**: This expense is ordinary and necessary, as paying employees is a common and essential cost of running a business.
Based on this analysis, the expense that would NOT meet the definition of "ordinary and necessary expense" is:
**$2,500 for gifts given to five customers. Each gift is valued at $500.**