Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.This year he hired his son as an apprentice cook.Jones agreed to pay his son $40,000 per year.Which of the following is a true statement about this transaction?

Question

Quizplus · Accepted Answer

The question is asking about the deductibility of the $40,000 paid to Jones' son as an apprentice cook. The fact that he is an apprentice cook and not an experienced cook like the others who are paid $35,000 per year may indicate that $40,000 is not a reasonable amount of compensation for him. The IRS requires that compensation be reasonable in amount in order for it to be deductible. Therefore, Jones may only be able to deduct some portion of the $40,000 as compensation. Additionally, employee gifts are not deductible, so option C is incorrect. Option A is incorrect because the development of Jones' son into an expert cook is not relevant to the deductibility of the compensation paid to him. Option B is incorrect because the form of payment (cash or otherwise) does not affect the deductibility of the compensation. Option D is incorrect because the value of an apprentice cook relative to an experienced cook is not necessarily 50%.

Jones Operates an Upscale Restaurant and He Pays Experienced Cooks