Answer :
Final Answer:
Mel's gross income for the year is $3,600. This accounts for the excess reimbursement that was refunded to Easel, reducing the taxable amount, thus the correct option is b.
Explanation:
Let's break down the scenario step by step:
1. Reimbursement and Nonaccountable Plan:
- Mel receives $400 per month for business automobile expenses, totaling $4,800 for the year. This amount is considered a reimbursement.
- The plan is nonaccountable because Easel does not require employees to provide proof of expenses and allows them to keep any unspent amount.
2. Business Expense Incurred by Mel:
- Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, which is the IRS standard mileage rate at the time.
- Calculation: 12,000 miles * $0.30/mile = $3,600.
3. Excess Reimbursement:
- The excess reimbursement is the difference between what was reimbursed and the actual business expense incurred.
- Calculation: Total reimbursement - Business expense incurred = $4,800 - $3,600 = $1,200.
4. Refund to Easel:
- Mel returns the excess amount of $1,200 to Easel. This refund indicates that Mel is giving back the portion of the reimbursement that was not used for business expenses.
5. Tax Implications:
- Under a nonaccountable plan, the entire reimbursement is considered taxable income. However, any portion refunded back to the employer reduces the taxable income.
6. Gross Income Calculation:
- Initial reimbursement: $4,800
- Business expenses incurred: $3,600
- Excess reimbursement (to be refunded): $1,200
- Gross Income = Initial reimbursement - Excess reimbursement (to be refunded) = $4,800 - $1,200 = $3,600.
Mel's gross income for the year is $3,600 (option b). This is because the initial reimbursement was higher than the actual business expenses incurred, and the excess amount was refunded to Easel.
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