Maria has a 70% ownership interest in a business entity.She is in the 28% tax bracket.The entity incurs $18,000 of meals and lodging expense for Maria,which she believes qualify for exclusion under § 119.Which of the following statements is correct?
A)If the entity is a partnership,the effect of the $18,000 expenditure by the partnership on Maria's tax liability is an increase of $5,040.
B)If the entity is a sole proprietorship,the effect of the $18,000 expenditure by the sole proprietorship on Maria's tax liability is $0.
C)If the entity is a C corporation,the effect of the $18,000 expenditure by the corporation on Maria's tax liability is $0.
D)Only a.and c.are correct.
E)a. ,b. ,and c.are correct.

Question

Quizplus · Accepted Answer

If the entity is a partnership or a C corporation, the $18,000 expenditure is not deductible by the entity and is included in Maria's income. Since Maria is in the 28% tax bracket, the effect on her tax liability is an increase of $5,040 (28% x $18,000). If the entity is a sole proprietorship, the $18,000 expenditure is deductible by the sole proprietorship and is not included in Maria's income. Therefore, the effect on her tax liability is $0.

Maria Has a 70% Ownership Interest in a Business Entity