You’re a self-employed widget manufacturer. Over the years you’ve developed a good relationship with Liddy Lawyer and now use her for all of your lawyerly needs in connection with your business. You and Liddy have an arrangement whereby you simply pay her a flat $5,000 a month retainer and she does not bill you for her actual time, regardless of how much (or little) time she spends on your work. Liddy’s usual hourly rate is $250. For your own recordkeeping she does report to you how many hours she spends on your work even though it doesn’t change what you pay her. During 2020 Liddy handled the following three matters (only) for you – Negotiated the terms of a new five-year lease of a widget-making machine (50 hours). Defended and negotiated the settlement of a lawsuit filed against you by a customer who claimed that the widgets you had sold were defective (180 hours). Handled and settled your IRS audit in which all issues related to claimed “ordinary and necessary business expense” deductions (90 hours). How will you treat the $60,000 total that you paid Liddy during 2020 on your 2020 tax return? Now, for the sake of discussion, cut the hours in half that Liddy actually spent on each of the three matters she handled. Would that change your answer to 1? If so, why and how? If not, why not?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

You’re a self-employed widget manufacturer. Over the years you’ve developed a good relationship with Liddy Lawyer and now use her for all of your lawyerly needs in connection with your business. You and Liddy have an arrangement whereby you simply pay her a flat $5,000 a month retainer and she does not bill you for her actual time, regardless of how much (or little) time she spends on your work. Liddy’s usual hourly rate is $250. For your own recordkeeping she does report to you how many hours she spends on your work even though it doesn’t change what you pay her.

During 2020 Liddy handled the following three matters (only) for you –

Negotiated the terms of a new five-year lease of a widget-making machine (50 hours).
Defended and negotiated the settlement of a lawsuit filed against you by a customer who claimed that the widgets you had sold were defective (180 hours).
Handled and settled your IRS audit in which all issues related to claimed “ordinary and necessary business expense” deductions (90 hours).

How will you treat the $60,000 total that you paid Liddy during 2020 on your 2020 tax return?
Now, for the sake of discussion, cut the hours in half that Liddy actually spent on each of the three matters she handled. Would that change your answer to 1? If so, why and how? If not, why not?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions