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DONAT Company reported taxable income of $500,000 in 2020. This amount does not include a $5,000...

DONAT Company reported taxable income of $500,000 in 2020. This amount does not include a $5,000 nondeductible (for tax purposes) entertainment expense. If you start with taxable income of $500,000 what adjustment will be necessary for the $5,000 entertainment expense for purposes of calculating E&P? a.

a $5,000 addition.

b. a $5,000 deduction.

c. no adjustment.

d. none of the above.

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Answer #1

The correct answer for the question is Option C - No adjustment. Per the Tax Cuts & Jobs act of 2018, IRS removed the provision the deduct Entertainment expenses and restricted the deduction to only Meals and Beverages. As such, the entertainment expenses cannot be deducted in arriving at the Earnings and profit for the DONAT Company. Hence, this option is the correct answer.

Option A is incorrect as $5,000 cannot be added because it is an expense.

Option B is incorrect as $5,000 cannot be deducted because it is not a longer a valid deduction per IRS.

Option D is incorrect as we have the answer at Option C.

Please let me know if you have any questions via comments and all the best :) !

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