Question
Jermaine is a sole proprietor. He operates a sporting goods store. His gross revenue is $103,000 for Tax Year 2024. Jermaine would like to fully deduct the expenses listed. Which of the following expenses would NOT meet the definition of "ordinary and necessary expense"?
$175 per month for a mobile phone used exclusively for the business.
$1,900 for advertising costs.
$3,500 for gifts given to five customers. Each gift is valued at $500.
$37,000 in wage expenses paid to three part-time employees.
$175 per month for a mobile phone used exclusively for the business.
$1,900 for advertising costs.
$3,500 for gifts given to five customers. Each gift is valued at $500.
$37,000 in wage expenses paid to three part-time employees.
Answers
GPT-4o mini
In the context of business expenses, "ordinary and necessary" refers to expenses that are common and accepted in the business's industry and helpful in carrying on the business.
Let's evaluate the listed expenses:
1. **$175 per month for a mobile phone used exclusively for the business** – This expense is ordinary and necessary since communication is essential for operating a business.
2. **$1,900 for advertising costs** – Advertising is a common expense for businesses to attract customers, so this is also considered ordinary and necessary.
3. **$3,500 for gifts given to five customers. Each gift is valued at $500** – While providing gifts to clients can be a part of building relationships, there are limitations on the deductibility of business gifts according to IRS rules. The IRS generally limits the deduction for gifts to $25 per recipient per year. In this case, if each gift is valued at $500, Jermaine would only be able to deduct $25 per customer, totaling $125 for all five. The remaining expense is not deductible and would therefore not meet the definition of an ordinary and necessary expense.
4. **$37,000 in wage expenses paid to three part-time employees** – Wages paid to employees are typical and necessary expenses for operating a business.
Based on this analysis, the expense that would NOT meet the definition of "ordinary and necessary expense" is the **$3,500 for gifts given to five customers** due to the limits set by IRS regulations on the deductibility of business gifts.
Let's evaluate the listed expenses:
1. **$175 per month for a mobile phone used exclusively for the business** – This expense is ordinary and necessary since communication is essential for operating a business.
2. **$1,900 for advertising costs** – Advertising is a common expense for businesses to attract customers, so this is also considered ordinary and necessary.
3. **$3,500 for gifts given to five customers. Each gift is valued at $500** – While providing gifts to clients can be a part of building relationships, there are limitations on the deductibility of business gifts according to IRS rules. The IRS generally limits the deduction for gifts to $25 per recipient per year. In this case, if each gift is valued at $500, Jermaine would only be able to deduct $25 per customer, totaling $125 for all five. The remaining expense is not deductible and would therefore not meet the definition of an ordinary and necessary expense.
4. **$37,000 in wage expenses paid to three part-time employees** – Wages paid to employees are typical and necessary expenses for operating a business.
Based on this analysis, the expense that would NOT meet the definition of "ordinary and necessary expense" is the **$3,500 for gifts given to five customers** due to the limits set by IRS regulations on the deductibility of business gifts.