Steven is a representative for a textbook publishing company. Steven attends a convention which will also be attended by many potential customers. During the week of the convention, Steven incurs the following costs in entertaining potential customers. $\begin{array}{|l|r|}
\hline \text { Meal costs } & \$ 1,500 \
\hline \text { Entertainment of customers } & 3,500 \
\hline
\end{array}$ Having recently been to a company seminar on tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven's AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven's deduction after any limitations?
A) $500 from AGI
B) $500 for AGI
C) $2,000 from AGI
D) $2,000 for AGI

Question

Quizplus · Accepted Answer

Steven's expenses are subject to the 50% limitation on entertainment expenses. Therefore, only 50% of the $3,500 entertainment expenses are deductible. The total deductible expenses are $1,500 (meal costs) + $1,750 (50% of entertainment expenses) = $3,250. Since Steven was reimbursed $2,000, his deductible expenses are reduced by that amount, leaving a deduction of $3,250 - $2,000 = $1,250. However, since Steven's AGI is $50,000 and he has no other miscellaneous itemized deductions, his deduction is limited to 2% of his AGI, or $1,000. Therefore, Steven's deduction is $1,000 from AGI.