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.coms marginal tax rate is 35%, what salary will make the firm indifferent between reimbursement to you of $8,000 and salary?

$8,000 t_c(50% x $8,000) = $8,000 .35(50% x $8,000) =$

Toys4u is indifferent between this amount and a salary supplement of

$_______/(1-t_c) =

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%?

$_______ - 28% ($_______ - 50% x $8,000 + 2% x $_______) =

c. Will your answer to part (b) change if your marginal tax rate is 39.6%?

D. Based on the above calculation compare the result of c to b. So is reimbursement tax favored when the tax rate is 39.6%?