Suppose you are an employee of Toys4u.com and incurred $8,000 of company-related meals and entertainment (M&E) during the year. The company is evaluating whether to reimburse you directly or to pay additional salary and have you claim your M&E expenditures on your personal tax return.
a. Assuming Toys4u.com’s marginal tax rate is 35%, what salary will make the firm indifferent between reimbursement to you of $8,000 and salary?
b. Assuming Toys4u.com is willing to offer you $8,000 reimbursement and salary of $X, solved in (a), which will you choose if your marginal tax rate is 28%?
c. Will your answer to part (b) change if your marginal tax rate is 39.6%?