Audry has an ownership interest in a business entity. She is in the 28% tax bracket. The entity incurs $30,000 of meals and lodging expense for Audry, which she believes qualify for exclusion treatment under § 119 . Which of the following statements are correct?
a. If the entity is a partnership and Audry has a 60% interest, the effect of the $30,000 expenditure by the partnership on Audry's tax liability is an increase of $5,040.
b. If the entity is a sole proprietorship, the effect of the $30,000 expenditure by the sole proprietorship on Audry's tax liability is $8,400.
c. If the entity is a C corporation, the effect of the $30,000 expenditure by the corporation on Audry's tax liability is $0.
d. Only b. and c. are correct.
e. a., b., and c. are correct.
d
RATIONALE: To qualify for exclusion treatment under § 119, Audry must be an employee. Thus, the exclusion is not available if the business entity is a partnership or a sole proprietorship. The full $30,000 is income under choice a.—tax of $8,400 results. Under choice b., no deduction is allowed the entity so the net effect is to make the $30,000 taxable to Audry.
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