Answer:
E. None of these - Jones can only deduct reasonable compensation.
Explanation:
Jones would be allowed to deduct less than $ 35,000 (this is the reasonable compensation) under the conditions established by tax legislation. Let us see why none of the other options is correct.
A. Jones will be allowed to deduct $ 40,000 only if his son eventually develops into an expert cook
When a company pays an employee an exaggeratedly high salary considering the services performed (as an apprentice cook, this person is earning more than an experienced cook), the excessively high part of the salary is not subject to deduction. Even if Jones' son became an experienced cook, he would be unreasonably earning more than the others. Therefore, Jones would not be allowed to fully deduct $ 40,000. On the other hand, only the services actually provided during the current period are taken into account, not the eventualities.
B. Jones will be allowed to accrue $40,000 only if he pays his son in cash.
In no case Jones can accrue $ 40,000, as it is an excessively high amount, for the same conditions we saw in the previous point.
C. Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift.
Awards must meet the following requirements in order to be deducted: they must be personal tangible property of the employer, they must be given to an employee for years of service or safety achievement, they must be delivered in recognition of a significant achievement, and they must be given under strict conditions, in order to completely eliminate the possibility that it is really a disguised payment.
In this case, it seems that it is a disguised pay, therefore, no deduction can be made.
D. Jones can only deduct $20,000 because an apprentice cook is only worth half as much as an experienced cook
That is not a valid reason to apply for a tax deduction. Recall that the payments to the worker are considered tax-deductible expenses if they meet the following characteristics: they are ordinary and necessary expenses, reasonable in quantity, paid for services actually provided, and paid during the current year.
