Federal Income Taxation, Chapters 1 + 2
Identify three primary sources of tax law
1. Legislative - The Internal Revenue Code of 1986 2. Administrative - The income tax regulations and other IRS documents 3. Judicial - Trial and appellate court decisions
Andrew and Barbara each receive a salary of $80,000. Neither Andrew nor Barbara has any other source of income. During the current year, Barbara paid $800 more in tax than Andrew. What might explain why Barbara paid more tax than Andrew when they both have the same income?
1. Marital Status 2. Deductions 3. Dependents 4. Tax Credits
What are the three basic tests that an expense must satisfy to be deductible?
1. The expense must be ordinary 2. The expense must be necessary 3. The expense must be reasonable in amount
Aretha is an executive vice president of Franklin, Inc. On December 18, 2017, the Franklin, Inc., board of directors awards her a $20,000 bonus. Aretha asks Franklin's controller to delay processing the bonus check until January. The controller agrees to her request, and she receives the $20,000 bonus check on January 10, 2018
A cash basis taxpayer is in constructive receipt of income when it is credited to their account or otherwise made unconditionally available to them the bonus is made available to her in 2017 and she must include the $20,000 in her 2017 gross income
How is a deferral different from an exclusion?
A deferral is income that is not taxed in the current period but will be taxed in a future period An exclusion is income that is never subject to tax
How is a tax credit different from a tax deduction?
A tax deduction results in a reduction of taxable income (savings = marginal tax rate * deduction amount) tax credit is a direct dollar for dollar reduction in the tax liability ($1 of a credit is worth more than $1 of deduction)
What is the difference between a taxable entity and a conduit entity?
A taxable entity is an entity that must pay tax on its income (individuals and corporations) A conduit entity is a tax reporting entity that reports its results to the government but does not pay tax on its income
Marla had $2,100 in state income taxes withheld from her 2017 salary. When she files her 2017 state income tax return, her actual state tax liability is $2,300
Because she has prepaid $2,100 through withholding, she only pays $200 ($2,100 - $2,300) with her 2017 tax return
What is capital gain income? How is it different from ordinary income?
Capital gain income (loss) results from the sale or other disposition of a capital asset (for individuals = stocks, bonds, etc) Corporations are only allowed to deduct capital losses against capital gains
What are the two basic methods of accounting that may be used by taxpayers? How do the two basic methods differ?
Cash and accrual The cash method recognizes income when cash or its equivalent is received The accrual method recognizes income when it is earned
How are federal, state, and local income taxes collected by the government?
Employers are required to withhold income taxes on the wages and salaries of their employees Employers are then responsible for depositing the taxes withheld to the appropriate governmental unit Self-employed taxpayers are required to estimate their taxes and make quarterly payments to the appropriate governmental unit
Junior bought some stock several years ago for $8,000. He is thinking of selling and has 2 offers. His broker told him he could sell the stock for $8,300 and would have to pay a $600 commission, for a net realization of $7,700. His sister Bonnie offered to pay Junior $7,700 with no commissions paid on the transaction
Even though Junior would be selling the stock to Bonnie at fair market value net of commissions (what he would have received from an unrelated party), the tax law disallows the deduction of any loss on a sale between related parties
What is the basis for valuing assets transferred by gift and at death?
Gift and estate taxes are based on: the fair market value of the property at the date of the gift OR at the date of death of the taxpayer
How does gross income differ from income?
Income (broadly defined) includes both taxable and tax-exempt income Gross income is income (broadly defined) less income not subject to tax (exclusions)
If you were in the 28% marginal tax bracket and you could choose either a $1,000 tax credit or a $3,000 tax deduction, which would give you the most tax savings? Why?
Tax Credit credit = $1,000 reduction ~ equivalent to $3,571 tax deduction deduction = taxable income reduced by $3,000; $3,000 * 28% = $840; $1,000-$840 = $160 tax advantage
The gift tax is supposed to tax the transfer of wealth from one taxpayer to another. However, the payment of gift tax on a transfer of property is relatively rare. Why is gift tax not paid on most gifts?
The basic exclusion is $14,000 per donee per year Gifts in excess of the annual exclusion can be tax-free if the donor elects to use part of the unified gift and estate tax credit Under this credit, the equivalent of $5,490,000 of property transfers may be excluded from gift taxes
Who is responsible for reporting and paying gift taxes? Estate taxes?
The donor of the gift For estate: executor of the estate
Who is responsible for collecting sales and excise taxes? Who actually pays the tax?
The seller Sales taxes are paid directly by the purchaser The purchaser also pays excise taxes, but they generally are included in the price of the goods
Based on the facts of problem 29, calculate the taxable income and the tax liability for a married couple
The taxable income for a married couple is $92,700 in 2017: Total Income $118,000 Excluded Income (2,000) Gross Income $116,000 Deductions for Adjusted Gross Income (2,500) Adjusted Gross Income $113,500 the Greater of: Itemized Deductions $ 8,000 or Standard Deduction $12,700 (12,700) Personal Exemption (2 x $ 4,050) (8,100) Taxable Income $ 92,700 The tax on $92,700 in 2017 for a married couple is $14,652.50: Taxable Income $ 92,700 Tax on (75,900) $ 10,452.50 Tax on excess $ 16,800 x 25% = 4,200.00 Total tax $ 14,652.50
29. Based on the following information, what are the taxable income and the tax liability for a single individual? Total income $118,000 Excludable income 2,000 Deductions for adjusted gross income 2,500 Deductions from adjusted gross income 8,000
The taxable income for a single individual is $101,450 in 2017: Total Income $118,000 Excluded Income (2,000) Gross Income $116,000 Deductions for Adjusted Gross Income (2,500) Adjusted Gross Income $113,500 Deductions from Adjusted Gross Income: the Greater of: Itemized Deductions $ 8,000 or Standard Deduction $ 6,350 (8,000) Personal Exemption (4,050) Taxable Income $101,450 The tax on $101,450 in 2017 for a single individual is $21,387.75: Taxable Income $101,450 Tax on (91,900) $ 18,713.75 Tax on excess $ 9,550 x 28% = 2,674.00 Total tax $ 21,387.75
Jerry and his wife, Joanie, own a successful concrete company that is organized as a corporation. Jerry spends all his time running the company, whereas Joanie has a full-time job as a legal secretary. The corporation pays Joanie a salary of $45,000 a year as vice president
To be deductible, the expenditure must have a business purpose; because Joanie has a full-time job, the salary paid to her is likely to be excessive in light of her duties to the corporation and, therefore, unreasonable; the substance over form doctrine would characterize the excess payment as a dividend payment (which is not deductible by the corporation) rather than as a deductible salary expense
16. Shannon signs a $100,000 contract to develop a plan for integrating the computer operations of State University in December. Under the contract, she receives a $30,000 advance against future payments on the contract upon signing the contract. The contract stipulates that if Shannon does not produce an acceptable plan, she must repay any portion of the advance not earned to date. Does Shannon have any income from the receipt of the advance? Explain in terms of the income tax concepts presented in the chapter
Under the claim of right doctrine, income is realized when the taxpayer has complete dominion and control over the income; If Shannon is required to make a repayment in the future, she would be allowed a deduction at that time under the annual accounting period concept
Aiko, Lani, and Charlie own the 3-Star Partnership, sharing profits and losses 20:50:30. During the current year, 3-Star has total gross income of $500,000 and total allowable deductions of $300,000. How should each of the following taxpayers account for 3-Star's results? Explain a. 3-Star Partnership b. Aiko c. Lani d. Charlie
a. 3-Star will report the $200,000 ($500,000 - $300,000) of income to the partners; it will not pay any tax on the $200,000 b. Aiko must include $40,000 ($200,000 x 20%) of income from the partnership on her personal income tax return c. Lani must include $100,000 ($200,000 x 50%) of income from the partnership on her personal income tax return d. Charlie must include $60,000 ($200,000 x 30%) of income from the partnership on his personal income tax return
Determine whether the taxpayer in each of the following situations has realized income. Explain why there has or has not been a realization, and determine the amount of income to be reported a. Ramrod Development Company purchases land costing $230,000. Ramrod subdivides the land into 100 lots, incurring legal fees of $20,000. It also spends $50,000 to install utility and sewer connections to each lot. The lots are priced to sell at $50,000 each, but none sold during the year b. Eugene is a computer consultant. Rashid is an accounting professor. Rashid needs help installing some new software on his home computer. Eugene offers to install the software if Rashid will help him set up the books for a new company he is forming. Eugene installs the software in December. Rashid sets up the books in February c. Sasha is an employee of Chasteen Hair Products. Chasteen provides all employees with free medical coverage. During the current year, the cost of Sasha's coverage is $1,900 d. In November, Ira wins an all-expense-paid trip for two to the Super Bowl in January. He plans to take his best friend to the game. The estimated value of the trip is $4,300
a. Income is not realized until the taxpayer's wealth is increased through an Arm's-Length Transaction with another party; Income will be realized when Ramrod sells one or more of the lots b. Income can be realized in any form c. All-Inclusive Income Concept, any increase in wealth is taxable unless specifically excluded by the tax law; Therefore, although Sasha realizes income from the provision of medical coverage by her employee, the income is not recognized due to the specific exclusion d. All-Inclusive Income Concept, all income is taxable unless specifically excluded by the tax law
Return to the facts of problem 23. Assume that each month, Joe Bob has $2,800 in federal income tax and $900 of state income tax withheld from his salary. What is Joe Bob's take-home pay in a. March b. November
a. Joe Bob's gross salary will be reduced by amounts withheld for federal, state, and local taxes. His March take home pay will be $9,229 ($14,000 - $2,800 - $900 - $1,071) b. Joe Bob's take home pay is $10,097 ($14,000 - $2,800 - $900 - $203) and reflects the lower amount of Social Security withheld due to exceeding the OASDI base amount
22. Explain why the loss resulting from the sale of a computer in the following three situations is treated differently for income tax purposes a. Monica sells her personal computer at a loss of $1,300. None of the loss is deductible b. Omar sells a computer used in his carpeting business at a loss of $4,300. The loss is fully deductible
a. Losses on personal use assets are not deductible b. All losses incurred in a trade or business are deductible
25. Classify the following items as ordinary income, a gain, or an exclusion a. The gross revenues of $160,000 and deductible expenses of $65,000 of an individual's consulting business b. Interest received on a checking account c. Sale for $8,000 of Kummel Corporation stock that cost $3,000 d. Receipt of $1,000 as a graduation present from grandfather e. Royalty income from an interest in a gold mine
a. Ordinary b. Ordinary c. $5,000 gain d. Gift, excluded e. Ordinary
Classify the following items as ordinary income, a gain, or an exclusion a. The salary received by an employee b. Dividends of $400 received on 100 shares of corporate stock c. Sale for $10,000 of an antique chair that cost $3,500 d. Rental income from an apartment building e. Receipt of an automobile worth $20,000 as an inheritance from Aunt Ruby's estate
a. Ordinary b. Ordinary c. $6,500 gain d. Ordinary e. excluded
For each of the following tax treatments, determine the concept, construct, or doctrine that provides the rationale for the treatment: a. During the current year, Trafalger Corporation pays $475,000 in estimated tax payments. Trafalger determines that its actual tax liability for is $490,000, so it pays only $15,000 with its tax return b. The Parsnip Partnership is an accrual basis taxpayer. During 2016, Parsnip deducted as a bad debt expense a $5,000 account receivable that it determined it could not collect. In 2017, Parsnip receives a $1,000 payment on the account. Parsnip must include the $1,000 in its 2017 gross income c. Kuri sells land for $30,000; its cost was $20,000. Under the sales agreement, the buyer is to pay Kuri's son $10,000 of the sales price. Kuri must recognize a gain of $10,000 on the sale
a. Pay-As-You-Go Concept requires corporations to make estimated tax payments throughout the tax year b. Tax Benefit Rule, any deduction that is recovered in a subsequent tax year must be included in income to the extent that a tax benefit was received from the deduction in the prior tax year c. Assignment of Income Doctrine requires the person or entity that produces income or the owner of property producing income to be taxed on the income from the property regardless of who actually receives the income
Rory earns $70,000 per year as a college professor. Latesia is a marketing executive with a salary of $140,000. With respect to the Social Security tax, what are Rory and Latesia's a. Total taxes b. Marginal tax rates c. Average tax rates d. Effective tax rates
a. Rory under OASDI -- 7.65% on full salary $70,000 x 7.65% = $5,355 Latesia over OASDI -- max 6.2%, 1.45% on all OASDI Tax $127,200 x 6.20% =$ 7,886 MHI Tax $140,000 x 1.45% = 2,030 Total Tax $ 9,916 b. Rory: any subsequent income earned up to the $127,200 OASDI base amount is subject to tax at 7.65% Latesia: any additional salary is subject to the MHI portion of the Social Security tax (1.45%) c. Rory: 7.65% ($5,355 tax / $70,000 tax base) Latesia: 6.20% ($7,886 tax / $127,200 tax base), 1.45% ($2,030 tax / $140,000 tax base), ~~ 7.65% (6.20% + 1.45%). d. Rory- 7.65% ($5,355 tax/ $ 70,000 salary) Latesia- 7.08% ($9,916 tax / $140,000 salary
For each of the following, explain whether the rate structure is progressive, proportional, or regressive a. Plymouth County imposes a 5% tax on all retail sales in the county. Taxpayers with incomes less than $12,000 receive a refund of the tax they pay b. The country of Zambonia imposes a 10% tax on the taxable income of all individuals c. Regan County imposes a property tax using the following schedule: d. The city of Thomasville bases its dog licensing fee on the weight of the dog per the following schedule
a. Sales taxes are proportional b. income tax is proportional c. progressive d. regressive - marginal tax rates are increasing as the tax base increases
A taxpayer has $95,000 of taxable income for the current year. Determine the total tax, the marginal tax rate, and the average tax rate if the taxpayer is a a. Single individual b. Married couple c. Corporation
a. Taxable Income $ 95,000 Tax on 91,900 $ 18,713.75 Excess $ 3,100 Taxed at Marginal tax rate x 28% = 868.00 Total Tax $ 19,581.75 average tax rate = 20.61% = $19,581.75 tax / $95,000 taxable income b. Taxable Income $ 95,000 Tax on 75,900 $ 10,452.50 Excess $ 19,100 Taxed at Marginal tax rate x 25% = 4,775.00 Total Tax $ 15,227.50 average tax rate = 16.03% = $15,227.50 tax / $95,000 taxable income c. Taxable Income $ 95,000 Tax on 75,000 $13,750 Excess $ 20,000 Taxed at Marginal tax rate x 34% = 6,800 Total Tax $20,550 average tax rate = 21.63% = $20,550 tax / $95,000 taxable income
Susan is single with a gross income of $120,000 and a taxable income of $98,000. In calculating taxable income, she properly excluded $10,000 of tax-exempt interest income. Using the tax rate schedules in the chapter, calculate Susan's a. Total tax b. Marginal tax rate c. Average tax rate d. Effective tax rate
a. Taxable Income $ 98,000 Tax on 91,900 $18,713.75 Excess $ 6,100 Taxed at Marginal Rate x 28% = 1,708.00 Total Tax $20,421.75 b. The marginal tax rate is the rate of tax that would be paid on an additional dollar of income~ 28% c. The average tax rate is the rate of tax paid on the total tax base; the total tax divided by taxable income 20.84% = ($20,421.75 tax * $98,000 taxable income) d. The effective tax rate is the rate of tax paid on all income 18.91% = ($20,421.75 tax * $108,000 economic income)
Determine the proper treatment of each of the following expenditures a. Zoe purchases land costing $8,000. During the current year, she pays $2,000 to have utilities and sewer lines installed on the property. Zoe also pays $600 in interest on the loan used to obtain the land and $300 in property taxes on the land b. On August 2, Carruth Corporation pays $11,000 for a 2-year fire insurance policy on its manufacturing facility c. The Freeborn Partnership purchases a rental property costing $125,000. Before it rents out the building, Freeborn repaints it at a cost of $2,000 and spends $1,200 on minor repairs. After the property is rented, a pipe bursts, requiring $2,000 in repairs d. Aqua Robotics, Inc., purchases and pays for supplies costing $1,400 on December 26. As of December 31, the company has not used $1,200 worth of the supplies
a. The land has a life that extends beyond the end of the tax year and its $8,000 cost must be capitalized; $2,000 cost of utility and sewer lines must also be capitalized as part of the cost of the land because they provide benefits that extend beyond the end of the current year; The property taxes relate only to the current year and are deductible expenses regardless of the use of the land b. capital expenditure because its usefulness extends beyond the end of the current year c. must capitalize the $125,000 purchase price of the property, the $2,000 painting cost, and the $1,200 repair cost as the cost of getting the rental property ready for its intended use d. Although not all the supplies have been used by year-end, the supplies are not deemed to have a life that extends beyond the end of the current year and may be deducted when purchased (accrual basis) or paid for (cash basis), regardless of when they are actually used
Determine the taxpayer's adjusted basis in each of the following situations. If any changes are made in the original basis of the asset, explain why they are necessary a. Simone purchases 300 shares of Wilguess Inc., stock in 2015 for $6,300. In 2015 and 2016, Wilguess pays cash dividends of $2 per share. In 2017, Wilguess pays a 40% stock dividend (nontaxable), and Simone receives an additional 120 shares of stock b. Symbol Corporation purchases a building in 2014 at a cost of $240,000. Annual maintenance costs on the building are $80,000. In 2016, Symbol adds a wing to the building at a cost of $60,000. In 2017, the building is painted at a cost of $25,000. Symbol deducts $4,800 in depreciation in 2014, $7,300 in 2015, and $8,100 in 2016 and 2017
a. The receipt of the cash dividend is taxable income and does not affect the amount of investment in the stock; The stock dividend is nontaxable b. Adjustments are made to the basis for any expenditure that cannot be currently deducted and for any capital recoveries of the building investment; The annual maintenance costs and the painting costs are current period expenses that are not capitalized; The addition of the wing to the building is a capital expenditure (its usefulness extends substantially beyond the end of the year of expenditure) and is added to basis
Explain why each of the following expenditures is or is not deductible a. Lumbar, Inc., pays $12,000 as its share of its employees' Social Security tax. The $12,000 is deductible b. Leroy pays a cleaning service $250 per month to clean his real estate office. The $250 is deductible c. Janice pays a cleaning service $75 per month to clean her personal residence. The $75 is not deductible d. Leyh Corporation purchases land to use as a parking lot for $35,000. The $35,000 is not deductible e. Martin spends $50 per month on gasoline for the car he uses to drive to his job as a disc jockey. The $50 is not deductible
a. The salaries are related to Lumbar's business and are therefore deductible b. The cleaning costs relate to Leroy's business and are deductible c. The cleaning costs related to a personal use asset are not deductible d. Capital expenditures cannot be deducted in the year of purchase e. the cost of commuting does not relate to a business or investment activity and cannot be deducted
Using the income concepts presented in this chapter, discuss whether the taxpayer has realized income in each of the following situations a. Adco Corporation pays the health insurance premiums for all its employees. Adrian is an employee of Adco. Health insurance premiums Adco pays for Adrian cost $1,150 for the current year b. The Sung Partnership buys a parcel of unimproved land for $32,000. Sung spends an additional $22,000 to put in roads and sewerage, and to grade the property for subdividing. The property is subdivided into 15 lots and offered for sale at $10,000 per lot c. Doctors and nurses at Valley View Hospital are allowed to eat free of charge in the hospital cafeteria during their shifts. Sue, a doctor, eats meals valued at $1,900 during the current year d. Wayman wins the golf championship at his country club. In addition to a handsome trophy, he receives merchandise worth $500 for winning the tournament. e. Rock signs a contract to play football for the Rangers. In addition to a salary of $1,000,000 per year for 5 years, he is to receive a signing bonus of $5,000,000 to be paid 10 years from the date the contract was signed
a. all-inclusive income concept, Adrian is in receipt of income of $1,150 from Adco's payment of her personal expenses b. not realized the expected increase in wealth by purchasing and subdividing the property for sale c. Sue is in receipt of income based on the all-inclusive income and realization concepts discussed in the chapter. However, Sue is able to exclude the value of the meals d. the all-inclusive income concept, Wayman is in receipt of $500 of Income from winning the merchandise e. only has to recognize the salary he actually receives during the current year as income; The signing bonus is not made available to him in the current year and therefore, he is not in constructive receipt of the income
For each tax treatment described, determine the applicable income tax concept(s), and explain how it forms the basis for the treatment a. Jackson owned coupon bonds with detachable interest coupons. He detached coupons worth $5,000 and gave them to his son to buy a car. Jackson is taxed on the $5,000 of interest, even though he never actually received the interest b. Joan's barn on her ranch was destroyed by a tornado. The barn had an adjusted basis of $24,000. Joan received insurance proceeds of $35,000 and built a new barn costing $40,000. Joan does not have to recognize the gain realized on the barn in the current period c. Elvis borrowed $30,000 from University Credit Union to purchase a new X car. He is not taxed on the receipt of the $30,000 d. Kelley lost the diamond ring she received from her husband, Ian. The ring had a basis of $2,000, and she received $3,000 from her insurance company. Kelley used the money to pay off medical bills. Kelley must recognize a $1,000 gain on the loss of her ring
a. assignment of income doctrine; Because Jackson still owns the bonds, he is taxable on the interest, regardless of who actually receives the interest b. wherewithal-to-pay concept; Joan does not have to recognize any gain currently because she has reinvested the entire $35,000 of insurance proceeds and has nothing remaining to pay tax on the gain c. The realization concept requires that an increase in wealth occur before income is present; because of the obligation to repay the loan, Elvis does not have a claim of right to the $30,000 d. all-inclusive income concept requires that all income received be included in gross income, unless a specific provision exempts the income from taxation; Kelley could not appeal to the wherewithal-to-pay concept in this situation, because she did not replace the diamond ring
Joe Bob is an employee of Rollo Corporation who receives a salary of $14,000 per month. How much Social Security tax will be withheld from Joe Bob's salary in a. March b. November
a. he will pay $1,071 ($14,000 x 7.65%) of Social Security tax in March Joe Bob's salary is under the OASDI Social Security base amount and his entire salary in March will be subject to the 7.65% Social Security tax b. he will only pay the 1.45% MHI component in November, resulting in a tax of $203 ($14,000 x 1.45%). By November, Joe Bob will have earned $140,000 ($14,000 x 10 months) and will have paid in the maximum OASDI tax
Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? a. Cash received from repair services, $28,000 b. Interest paid on his home mortgage, $7,300 c. Power jack hoist purchased at a cost of $12,000 d. Electricity bills, $3,600. (Ed does not have separate electricity service to the garage.) e. Checks received from customers that were returned by his bank, $1,600. The bank charged Ed's account $35 for processing the bad checks f. Telephone bill for phone in the garage, $420. (Ed has a separately listed phone in his house.) g. Advertising in the local newspaper, $800 h. Interest paid on home furniture loan, $600
a. income from his business and is included in gross income from the auto repair business b. Ed will have to allocate a portion of the interest paid to the garage for deduction as a business expense The allocation can be made on any reasonable basis; however, the use of square footage is probably the best allocation basis for household expenses c. business capital expenditure and must be capitalized and depreciated over its tax life d. Ed will have to make an allocation of the electrical cost attributable to the garage e. cash basis taxpayer and the checks all relate to the current year, he would not have to report the $1,600 of bad checks as income because he does not have control over the income f. Fully deductible as a business expense g. deductible as a business expense h. Personal interest, other than that on a home mortgage (or a home equity loan), is not deductible
28. Classify each of the following transactions as a deductible expense, a nondeductible expense, or a loss: a. Nira sells for $4,300 stock that cost $6,000. b. Chiro Medical, Inc., pays $2,200 for subscriptions to popular magazines that it places in its waiting room. c. Lawrence pays $200 for subscriptions to fly-fishing magazines. d. The Mendota Partnership pays $200,000 to install an elevator in one of its rental properties. e. Sterling Corporation pays $6,000 for lawn maintenance at its headquarters
a. loss of $1,700 ($4,300 - $6,000) b. the subscriptions have a business purpose and are a deductible expense c. the use of the magazines is personal and therefore, nondeductible d. because the usefulness of the elevator extends substantially beyond the end of the current year, it cannot be deducted in total as a business expense in the year of the expenditure. The $200,000 cost must be capitalized and deducted through depreciation over its tax life e. it is a deductible business expense.
18. Determine whether the taxpayer in each of the following situations is in constructive receipt of income. If not, explain when the income will be constructively received a. Norman is president of Wright Company. On December 14, 2017, the board of directors' votes to give him a $25,000 bonus. Norman receives the bonus on January 4, 2018 b. Regan is an employee of BIF Manufacturing, earning $3,000 per month. She purchases merchandise from BIF costing $2,000 in January of the current year. To pay for the merchandise, BIF agrees to deduct $75 per month from her pay, reducing it to $2,925 per month before other withholdings c. Marnie owns $50,000 par value of 6% coupon bonds. The interest coupons may be clipped and redeemed on May 30 and November 30 each year. Marnie does not redeem the November 30, 2017, coupon interest until January 8, 2018
a. no b. yes c. yes
Explain why each of the following payments does or does not meet the IRS definition of a tax a. Jack is a licensed beautician. He pays the state $45 each year to renew his license to practice as a beautician b. Polly Corporation pays state income taxes of $40,000 on its $500,000 of taxable income c. Winona pays $15 annually for a safety inspection of her automobile that is required by the state d. The Judd Partnership owns land that is valued by the county assessor at $30,000. Based on this valuation, the partnership pays county property taxes of $800 e. Andrea fails to file her income tax return on time. She files the return late, and the IRS assesses her $25 for the late filing and $5 for interest on the tax due from the due date of the return until the filing date
a. not a tax; direct benefit b. tax; state income taxes c. not a tax; specific benefit d. tax; ad valorem property tax e. not a tax; penalties
State whether each of the following payments is a tax a. To incorporate his business, Alex pays the state of Texas a $2,000 incorporation fee b. The city paves a road and assesses each property owner on the road $4,000 for his or her share of the cost c. The city of Asheville charges each residence in the city $10 per month to pick up the trash d. Rory pays $450 of income tax to the state of California e. Lanny is fined $45 for exceeding the speed limit
a. not a tax; receives a direct benefit b. not a tax; property improvement c. not a tax; provides a benefit d. tax; required by law, revenues e. not a tax; discourages behavior
For each of the following situations determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: a. Tindle Corporation purchases office supplies costing $600 on December 21, 2017. Tindle pays for the office supplies on January 18, 2018 b. Raashan pays his employee, Sara, $22,450 in salary up to December 23, 2017. As of December 31, 2017. Raashan owes Sara $560 for the period of December 23 through December 31. The $560 is to be paid on the next pay date, which is January 5, 2018 c. Jerri paints Roland's house in December 2017. Roland pays Jerri's bill in January 2018 d. Devi sells Aaron a car on August 1, 2017, for $36,000. The terms of the sale call for Aaron to pay Devi $18,000 on August 1, 2017, and $9,000 on August 1 of 2018 and 2019 e. Barnie's Paint Barn purchases new spray painters on January 15, 2017, at a cost of $3,000. The spray painters have an estimated useful life of 10 years, but the tax life is 5 years
a. not deductible by a cash basis taxpayer until they are paid for in 2018; accrual basis taxpayer can deduct supplies purchased but not yet paid for in 2017 b. cash basis taxpayer is only allowed to deduct the actual $22,450 paid in 2017; An accrual basis taxpayer is allowed to deduct the $22,450 paid plus the $560 that has been incurred through December 31, 2017 but not yet paid c. cash basis taxpayer will not recognize the income from painting the house until it is received in 2018; accrual basis taxpayer recognizes the painting income in 2017 when it is earned d. cash basis taxpayer will recognize the income from the sale of the car as the cash is received - one-half of the gain will be recognized in 2017 and one-fourth of the gain in 2018 and 2019; accrual basis taxpayer will recognize all income from the sale when it is earned in 2017 e. the $3,000 is a capital expenditure that must be capitalized and deducted through depreciation over its tax life (5 years), regardless of the taxpayer's accounting method
For each of the following tax treatments, determine the concept, construct, or doctrine that provides the rationale for the treatment a. Lester purchases some stock for a total cost of $2,500. On December 31, 2016, the stock is worth $2,800. In August 2017, he sells the stock to his brother Rufus for $2,000. Lester has no income from the stock in 2016, and he is not allowed to deduct the $500 loss on the sale of the stock to Rufus in 2017 b.Kerry is an employee of Ross Company. During the year, Ross withholds federal income taxes of $3,500 from her salary. Her tax liability for the year is only $3,200, so she receives a refund of $300 c. Catherine is a city government employee. She often uses the city's photocopier to make personal photocopies and has her secretary type an occasional personal letter. The value of these services for the current year is approximately $55 but is not included in Catherine's gross income d. Dante's allowable personal deductions are only $2,800 this year, so he deducts the standard deduction in computing his taxable income
a. realization concept is responsible for not recognizing the gain in market value in 2016; Because Rufus is a related party, losses on any sales to him would be disallowed; related parties are assumed not to transact at arm's-length when losses are involved b. pay-as-you-go concept; amounts withheld from an employee as tax are credited against the tax liability on the tax return c. administrative convenience; Although the personal use of the photocopier would constitute income under the all-inclusive income concept, the cost of collecting the tax on such benefits would likely exceed the tax collected on such income d. administrative convenience; somewhat based on ability-to-pay in that it provides relief to those taxpayers who do not incur large amounts of itemized deductions
Determine whether the taxpayer in each of the following situations has a claim of right to the income received a. Trigger, Inc., receives a $5,000 stud fee for services rendered by one of its prized horses. Under its standard contract, Trigger will return the fee if a live foal is not born b. Orville works as a salesman for Brewster Company. He receives a travel allowance of $1,000 at the beginning of each quarter. At the end of each quarter, he must make a full accounting of his travel expenses and reimburse Brewster for any of the $1,000 not spent on approved travel c. Assume that in part b, Orville is not required to account for his actual travel expenses for Brewster and is not required to return unused portions of the travel advance d. Arco Architecture, Inc., receives $10,000 from a client for work done by a subcontractor on the client's project. Arco, in turn, paid $10,000 to the subcontractor
a. yes b. no c. yes d. yes
Which of the following are related parties? a. Harvey and his sister Janice? b. Harvey and the Madison Partnership? Harvey owns a 60% interest in the partnership. Three of Harvey's friends own the remaining partnership interest. c. Harvey and his grandfather Maurice? d. Harvey and Noti Corporation? Harvey owns 40% of Noti Corporation. Three unrelated parties own 20% each e.Harvey and his uncle Elmer?
a. yes b. yes c. yes d. no e. no
Milton is an inventor who has also written several successful mystery novels. Because he didn't really need the income from the novels, Milton wrote them under an assumed name and had the royalties paid to Hammer Corporation. When Milton incorporated Hammer, he gave all the stock to his three sons. The sons are employed by the corporation, with salaries approximately equal to the royalties earned each year from the novels
assignment of income Because the income was earned by Milton, the assignment of income doctrine requires that he be taxed on the royalties. The royalties received by Hammer would not be income for the corporation The amounts paid to Milton's sons would not be deductible expenses because they lack a business purpose; As gifts, the sons would recognize no income and Milton (or the corporation) would not receive a deduction
Arnie is a self-employed handyman. During the current year, customers pay him $10,000 in cash for his services. Arnie gives the $10,000 to his daughter, Ariel, who uses it to pay college expenses. Is Arnie or Ariel taxed on the $10,000? Explain
assignment of income doctrine Arnie is in actual receipt of the cash that he earned and therefore, he is taxed on the cash income
What are the three types of IRS examinations?
correspondence examinations, office examinations, and field examinations
Why does the doctrine of constructive receipt apply only to cash basis taxpayers?
determine when a taxpayer has received income the constructive receipt doctrine does not affect income recognition by accrual basis taxpayers
What does the 90-day letter represent, and what are the choices the taxpayer has after receiving one?
formal statutory notice of deficiency that the IRS sends to taxpayers that are unable to reach agreement in the appeals division
For each of the following situations, determine the deduction concepts involved, and explain how they form the basis for the tax treatment described a. Individuals are allowed to deduct medical expenses
general rule is that no personal expenditures are deductible; Congress has allowed (i.e., legislative grace concept) certain personal expenditures, including medical expenses to be deducted
What is included in the 30-day letter, and what options does the taxpayer have after receiving one?
includes the revenue agent's report of the results of an IRS examination and a Form 870 options: sign or to meeting with IRS Appeals
What is the effect of the capital recovery concept on income recognition?
no income is recognized until all capital invested in an asset has been recovered when assets are sold, no income results unless the sales price is greater than the capital invested in the asset
Explain the pay-as-you-go system
paid on income as close to the time it is received by the taxpayer as possible This is accomplished through income tax withholding on wages and other types of income and through quarterly estimated tax payments on income that is not subject to withholding
What is the statute of limitations, and what role does it play in the filing of tax returns?
period of time that the IRS and/or the taxpayer has to correct an error on a return gives both the IRS and taxpayers time to correct errors on previously filed return
12. Tim has state income taxes of $4,500 withheld from his salary during 2016. On his 2016 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2016 state income tax return, he determines that his actual state income tax for 2016 is only $3,900, and the state sends him a $600 refund. What are the tax consequences of the refund? Explain in terms of the concepts presented in the chapter
tax benefit rule that taxes any amount deducted in a previous year as income in the year of recovery to the extent that a tax benefit was received from the recovered amount Note that the annual accounting period concept does not allow Tim to go back and amend his 2016 return for the refund, because the events of each tax year are deemed to stand apart from each other