Question

Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag. This year, however, Jake purchased 500 bags of dog food from a local pet food company at an average cost of $45 per bag. Under what circumstances would the IRS likely challenge the cost of Jake’s dog food as unreasonable?

Answer 1

Reasonableness would be an issue where payment is made to a related individual or the taxpayer enjoys some personal benefit from the expenditure, or where the expenditure is not comparable to an arm's length amount. In the given situation, the IRS is most likely to challenge the cost of the dog food if the local pet food company was controlled by Jake or his family, or if Jake or the local pet food company enjoys a personal benefit from the purchase of the merchandise.