Question

Doug incurred and paid the following expenses during the year:Classify the following expenses as "Deductible" or "Not deductible".a. $50 for a ticket for running a red light while he was commuting to work.b. $100 for a ticket for parking in a handicapped parking space.c. $200 to an attorney to represent him in traffic court as to the two tickets.d. $500 to an attorney to draft an agreement with a tenant for a one-year lease on an apartment that Doug owns.e. $1,000 to an attorney to negotiate a reduction in his child support payments.f. $2,500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse.

Answer 1

Answer:

a. "Not deductible"

b. "Not deductible"

c. "Not deductible"

d. "Deductible"

e. "Not deductible"

f. "Not deductible"

Explanation:

Expenses to be deductible ( especially for tax purposes) must pass the WREN test where;

W stands for wholly

R stands for reasonably

E stands for exclusively

N stands for necessarily

Looking at the expenses incurred and paid for by Doug during the year, the $50 ticket for running a red light is not a necessary expense as an adherence to traffic signs would have prevented such an expense. it can also be said that the expense was not reasonably incurred. This also applies to options b and c. Parking at the handicapped space is completely avoidable (necessity test) and as such the $100 would not have been incurred. While the $200 paid to the attorney for representation in court is an offshoot of options a and b. This would not have been incurred if the first two incidences were avoided.

Option c is deductible as the $500 paid is wholly for the business, reasonable,  exclusive and necessary. As such, the expense is deductible or allowable. Options e and f are not related to business and are incurred on personal grounds which are avoidable hence, these expenses would not pass the WREN test.