Case1 - Grade: A PDF

Preview

Summary

Case 1 For Concept of Federal Taxation...

Description

May 30th, 2018 TAX FILE MEMORANDUM From: Subject: Discount Gross Income Summary of Facts: Sue is an FAU accounting student, who work part time as a waitress at Busy Burger in Boca Raton. Busy Burger allows employees to receive a 40% discount for any food that they buy and consumer on the premises. During the year of 2016, the value of the 40% discount for Sue amounted $2500 for days on which she was work at Busy Burger (she ate during mealtime at work), and $1500 for days on which she did not work but still stopped after class during meal times. Research Issue: How much gross income must Sue recognize in 2016 from receiving discounts at Busy Burger. Rules & Analysis: Section 61 of the Internal Revenue Code defines gross income as all income from whatever source is derived. Within the IRC, there are exclusions of gross income. Section 132 contains exclusions of gross income such as fringe benefits and discounts. According to the IRC, if an employee benefit is not specifically excluded from gross income, its value must be included within gross income under section 61. Section 132(a)(2): Qualified Employee Discounts. Employees have been allowed to exclude courtesy discounts from gross income on items purchased from his employer for use by the employee. The amount of the exclusion may not exceed 20% of the price at which the services are offered by the employer to the customer. The maximum discount for property is the employer’s gross profit percentage on good in the employee’s line of business. Section 132 also states that if another code section provides an exclusion for a type of benefit, Section 132 is generally not applicable to that specific benefit. The Treasury Regulation (26 CFR) 1.11901(a) has two conditions that are required to exclude the value of meals given to employees from gross income. First, the meals are given on the business premises of the employers, and second, the meals are furnished for convenience of the employer. Section 1.119-1(a) 3 goes into further details and explains that if the employee has the ultimate choice in accepting or rejecting a meal, the meal is not regarded as being furnished for the convenience of the employer. According to Section 1.119, meals furnished before or after work hours, including days off are not given out for the convenience of the employer Conclusion: According to Section 132, the entire $4000 discount that Sue uses are excluded from gross income. But, Sue had a choice to eat at Busy Burger and did not have to come there on her days off, therefore according to Section 119, the $1500 is not excluded from gross income. Only the $2500 according to Section 119 is excluded. With regard to section 119 and the rules stated above, $1500 should be taxable and $2500 is nontaxable....