Midterm ACCT 308 Completed

Data, Inc., purchased and placed in service a $5,000 computer on August 24, year 3. This is the only asset purchase during the year. Section 179 expensing was not elected. Using the excerpt of the MACRS half-year convention table below, what is the MACRS depreciation in year 3 for the computer?

$1,000 (20% x $5,000)

On March 25, 2018, Parscale Company purchases the rights to a mineral interest for $8,000,000. At that time, the remaining recoverable units in the mineral interest are estimated to be 500,000 tons. If required, round any division to two decimal places and use in subsequent computations. Round your final answer to the nearest dollar. If 80,000 tons are mined and 75,000 tons are sold this year, the cost depletion is $___

$1,200,000

Euclid acquires a 7-year class asset on May 9, 2018, for $80,000. Euclid does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. Euclid's cost recovery deduction is $___ for 2018 and $___ for 2019.

$11,432, $19,592 2018: $80,000 x .1429 (Exhibit 8.3) = $11,432 2019: $80,000 x .2449 (Exhibit 8.3) = $19,592

On January 15, 2018, Dillon purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2018.

$175,000 Cost depletion: $3,500,000 ÷ 500,000 = $7 per unit 25,000 units sold × $7 per unit = $175,000 Percentage depletion: $800,000 × 22% =$176,000 Limit: ($800,000 - $500,000) × 50% =$150,000 Greater of cost or percentage depletion = $175,000

Three years ago, Marshall purchased an automobile for personal purposes for $38,000. In 2018, he contributes the automobile to his business. At the time of the contribution the automobile was appraised for $22,000. The basis for cost recovery of the automobile is $___.

$22,000

Tan Company acquires a new machine (ten-year property) on January 15, 2018, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2018, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2018.

$25,716 10-year property MACRS cost recovery ($200,000 × .10) $20,000 7-year property MACRS cost recovery ($40,000 × .1429) 5,716 Total cost recovery $25,716

Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

$27,145 5-year MACRS $100,000 × .2000 = $20,000 7-year MACRS $50,000 × .1429 = 7,145 Total = $27,145

Andre acquired a computer on March 3, 2018, for $2,800. He elects the straight-line method for cost recovery. Andre does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. His cost recovery deduction for the computer is $___ for 2018 and $___ for 2019.

$280, $560 For 2018: $2,800 x 10% (Exhibit 8.5) = $280. For 2019: $2,800 x 20% (Exhibit 8.5) = $560.

Oleander Corporation, a calendar year entity, begins business on March 1, 2018. The corporation incurs startup expenditures of $64,000. In your calculations, round any division to 2 decimal places. Round your final answer to the nearest dollar. If Oleander elects § 195 treatment, the total amount of startup expenditures that it may deduct in 2018 is $___.

$3,556 [(64,000/180) * 10 months]

Hamlet acquires a 7-year class asset on November 23, 2018, for $100,000. Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. Hamlet's cost recovery deduction is $___ for 2018 and $___ for 2019.

$3,570, $27,550 2018: $100,000 x .0357 (Exhibit 8.4) = $3,570 2019: $100,000 x .2755 (Exhibit 8.4) = $27,550

Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Jebali's depletion allowance is $___

$47,600 Gross income $340,000 Less: other expenses (229,000) Taxable income before depletion $111,000 Depletion allowance = $47,600* *[The lesser of $47,600 (14% x $340,000) or $55,500 (50% x $111,000)]

On April 5, 2018, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and 30% for personal use in each tax year. Kinsey chooses the MACRS 200% declining-balance method of cost recovery (the auto is a 5-year asset). Click here to access the depreciation table to use for this problem. Assume the following luxury automobile limitations: year 1: $10,000; year 2: $16,000. Compute the total depreciation allowed for: 2018: 2019:

$5,040 = the lesser of ($36,000 x 20% x 70% = 5,040) or (10,000 x 70% = 7,000) $8,064 = the lesser of ($36,000 x 32% x 70% = 8,064) or (16,000 x 70%)

Diana acquires, for $65,000, and places in service a 5-year class asset on December 19, 2018. It is the only asset that Diana acquires during 2018. Diana does not elect immediate expensing under § 179. She elects additional first-year deprecation. Click here to access the depreciation table to use for this problem. Diana's total cost recovery deduction for the asset is $___ for 2018.

$65,000

On September 30, 2018, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your intermediate values to nearest dollar and use in subsequent computations. The 2018 § 197 amortization deduction is $___

$7,250 Patent: $60,000 /15 years = $4,000 x 3/12* = $1,000 Goodwill: $375,000 /15 years = $25,000 x 3/12* = $6,250.

On October 1, 2018, Priscilla purchased a business. Of the purchase price, $60,000 is allocated to a patent and $375,000 to goodwill. If required, round your answer to the nearest dollar. The 2018 § 197 amortization deduction is $___

$7,250 [(60,000/15 * 3/12) + (375,000/15 * 3/12)]

Data, Inc., purchased and placed in service $5,000 of office furniture on August 24, year 3. This is the only asset purchase during the year. Section 179 expensing was not elected. Using the excerpt of the MACRS half-year convention table below, what is the MACRS depreciation in year 3 for the office furniture?

$715 (14.29% x $5,000)

Maple Company purchases new equipment (7-year MACRS property) on January 10, 2018, at a cost of $430,000. Maple also purchases new machines (5-year MACRS property) on July 19, 2018 at a cost of $290,000. Maple wants to maximize its MACRS deductions; assume no taxable income limitations apply. What is Maple's total MACRS deduction for 2018?

$720,000 In 2018, the maximum § 179 deduction is $1,000,000. Additional first-year (bonus) depreciation could also be claimed. As a result, the maximum MACRS deduction for 2018 is $720,000 ($430,000 + $290,000).

17) Andrea entered into a 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed $15,000 to the fund. The fund balance had accumulated to $25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, books, supplies and room and board. Therefore, Andrea withdrew the funds from the 529 plan and bought Joanna a new car. a.What are the tax consequences to Andrea of withdrawing the funds? b.Assume instead that Joanna's scholarship did not cover her room and board, which cost $7,500 per academic year. During the current year, $7,500 of the fund balance was used to pay for Joanna's room and board. The remaining amount was left in the 529 fund to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the $7,500 to pay for the room and board?

(LO 2) a.Andrea must include $10,000 ($25,000 − $15,000) in her gross income (i.e., the fund earnings). b.Both Andrea and Joanna can exclude the $7,500 from their gross income because this amount was used to pay for higher education expenses.

5)Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at the time of the customer's death. In 2015, Lime wrote off as uncollectable a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2016, the life insurance policy was still in force and Lime received $3,500. Is the $3,500 of life insurance proceeds received by lime included in gross income? Explain.

(LO 2) Assuming that Lime had taxable income in 2015 of at least $5,000, it received a tax benefit from writing off the receivable. So Lime would include $3,500 in gross income in 2016 under the tax benefit rule. The insurance proceeds could not be excluded from gross income because the insurance contract proceeds were in consideration of the loan and not payable merely as the result of Wally's death.

4)Carey is a waiter at a restaurant that pays a small hourly amount plus tips. Customers are not required to tip the waiter. Carey is especially attentive and friendly, and her tips average 25% of the restaurant charges. Is Carey required to include any of her tips in gross income when the customer has no legal obligation to make the payment? Explain the basis for your conclusion.

(LO 2) Carey must include all of her tips in gross income. Although the customers have no legal obligation to pay her, in fact, the payments are for her services to the customer. Therefore, the payments are compensation for services.

3)Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly abided with the customer's request. The customer's bill was $8, but the customer left a $100 bill. Dolly concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Dolly's prompt service. Dolly thinks that a $2 tip would be sufficient and that the other $98 is like "found money". How much should Dolly include in her gross income?

(LO 2) Dolly should include $92 in her gross income. Even if the funds were received as the result of a mistake, she has the free and unrestricted use of the funds, with no apparent claims against the funds. In addition, because she received the amount from a customer in her employment capacity, it is unlikely that she received a $90 gift.

23)Alfred owned a term life insurance policy at the time he was diagnosed with a terminal illness. After paying $18,300 in premiums, he sold the policy to a company that is authorized by the state of South Carolina to purchase such policies. The company paid Alfred $125,000. When Alfred died 18 months later, the company collected the face amount of the policy, $150,000. As a result on the sale of the policy, how much is Alfred required to include in his gross income?

(LO 2) Generally, if the owner of a life insurance policy cancels the policy and receives the cash surrender value, the taxpayer must recognize gain equal to the excess of the amount received over premiums paid on the policy (a loss is not deductible). The gain is recognized because the general exclusion provision for life insurance proceeds applies only to life insurance proceeds paid upon the death of the insured. If the taxpayer cancels the policy and receives the cash surrender value, the life insurance policy is treated as an investment by the insured. In a limited circumstance, however, the insured is permitted to receive the benefits of the life insurance contract without having to include the gain in gross income. Under the accelerated death benefits provisions, exclusion treatment is available for insured taxpayers who are either terminally ill or chronically ill. A terminally ill taxpayer can collect the cash surrender value of the policy from the insurance company or assign the policy proceeds to a qualified third party. The resultant gain, if any, is excluded from the insured's gross income. A terminally ill individual is a person whom a medical doctor certifies as having an illness that is reasonably expected to cause death within 24 months. Therefore, Alfred is not required to include the $106,700 gain ($125,000 − $18,300) on the sale of the policy in his gross income.

20)Valentino is a patient in a nursing home for 45 days of 2016. While in the nursing home, he incurs total costs of $13,500. Medicare pays $8,000 of the costs. Valentino receives $15,000 from his long-term care insurance policy, which pays while he is in the facility. Assume that the daily federal statutory amount for Valentino is $340. Of the $15,000, what amount may Valentino exclude from his gross income?

(LO 2) Generally, long-term care insurance, which covers expenses such as the cost of care in a nursing home, is treated the same as accident and health insurance benefits. Thus, the employee does not recognize income when the employer pays the premiums. Also, the individual who purchases his or her own policy can exclude the benefits from gross income. However, statutory limitations (indexed for inflation) exist for the following amounts: •Premiums paid by the employer. •Benefits collected under the employer's plan. •Benefits collected from the individual's policy. The employer or insurance company generally provides the employee with information on the amount of his or her taxable benefits. The maximum amount excluded must be reduced by any amount received from third parties (e.g., Medicare, Medicaid). The amount Valentino may exclude is calculated as follows: Greater of: Daily statutory amount in 2016 ($340 × 45 days) $15,300 Actual cost of the care $13,500 $15,300 Less: Amount received from Medicare ($ 8,000) Equals: Amount of exclusion $ 7,300 Therefore, Valentino must include $7,700 ($15,000 − $7,300) of the long-term care benefits received in his gross income.

8)Holly was injured while working in a factory and received $12,000 as workers' compensation while she was unable to work because of the injury. Jill, who was self-employed, was also injured and unable to work. Jill collected $12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work. How much are Holly and Jill each required to include in their gross income?

(LO 2) Holly can exclude the $12,000 of workers' compensation benefits she received from her gross income. Jill can exclude the $12,000 she received for lost income because it was received from an insurance policy that she had purchased.

2)Leonard's home was damaged by a fire. He also had to be absent from work for several days to make his home habitable. Leonard's employer paid Leonard his regular salary, $2,500, while he was absent from work. In Leonard's pay envelope was the following note from the employer: To help you in your time of need. Leonard's fellow employee's also took up a collection and gave him $900. Leonard spent over $4,000 repairing the fire damage. Based on the above information, how much is Leonard required to include in his gross income?

(LO 2) Leonard must include $2,500 in his gross income. Because $2,500 was received from his employer, it cannot qualify as a nontaxable gift, and no other exclusion provision would apply. However, the amount received from his fellow employees was made out of detached generosity and, therefore, is a nontaxable gift. The amount Leonard spent to repair the damage is not relevant to determining his gross income, although the cost may be partially deductible as a personal casualty loss.

22)Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000. As a result, how much gross income does Jason report?

(LO 2) Life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax. Congress chose to exempt life insurance proceeds for the following reasons: •For family members, life insurance proceeds serve much the same purpose as a nontaxable inheritance. •In a business context (as well as in a family situation), life insurance proceeds replace an economic loss suffered by the beneficiary. The $500,000 Jason receives is exempt from Federal income tax.

6)Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and $50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain.

(LO 2) No. Billy's award of $150,000 can be excluded from gross income because it arose out of a physical personal injury, even though $50,000 was to replace income he would have earned and would have been subject to tax. The $15,000 he received from the income replacement policy he purchased is excluded from Billy's gross income as a recovery of his cost of the policy (but is not taxable even though the total benefit received may exceed the premiums paid). Amber is taxed on the $30,000 she received under the income replacement insurance policy because the premiums were paid by her employer (and would not have been included in her gross income).

7)Wes was a major league baseball pitcher who earned $10 million for his 20 wins this year. Sam was also a major league baseball pitcher before a career ending injury caused by a negligent driver. Sam sued the driver and collected $6 million as compensation for lost estimated future income as a pitcher and $4 million as punitive damages. Do the amounts that Wes and Sam receive have the same effect on their gross income? Explain.

(LO 2) No. The $10 million amount that Wes received is included in his gross income. However, Sam is required to include only the $4 million in punitive damages in his gross income. His compensatory damages are excluded from his gross income, even though the amount replaces a loss of income, because the amount was received as a result of physical personal injury.

25)Jarrod receives a scholarship of $18,500 from Riggers University to be used to pursue a bachelor's degree. He spends $12,000 on tuition, $1,500 on books and supplies, $4,000 for room and board, and $1,000 for personal expenses. How much may Jarrod exclude from his gross income?

(LO 2) Payments or benefits received by a student at an educational institution may be (1) compensation for services, (2) a gift, or (3) a scholarship. If the payments or benefits are received as compensation for services (past or present), the fact that the recipient is a student generally does not render the amounts received nontaxable. The scholarship rules are intended to provide exclusion treatment for education-related benefits that cannot qualify as gifts but are not compensation for services. According to the Regulations, "a scholarship is an amount paid or allowed to, or for the benefit of, an individual to aid such individual in the pursuit of study or research." The recipient must be a candidate for a degree at an educational institution. A scholarship recipient may exclude from gross income the amount used for tuition and related expenses (fees, books, supplies, and equipment required for courses), provided the conditions of the grant do not require that the funds be used for other purposes. Jarrod may exclude $13,500 ($12,000 tuition + $1,500 books and supplies) from his gross income. The $4,000 spent for room and board and $1,000 spent for personal expenses are includible in Jarrod's gross income.

1)Fred specified in his will that his nephew John should serve as executer of Fred's estate. John received $10,000 for serving as executer. Can John exclude the $10,000 from his gross income? Explain.

(LO 2) The $10,000 that John received is compensation for services and, therefore, must be included in his gross income.

11)Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company's cost plus 2%. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for $29,580 ($29,000+$580). The company's cost was $29,000. The price for a nonemployee would have been $33,900 ($33,600+$300 preparation fee). What is Ted's gross income from the purchase of the automobile?

(LO 2) The discount on the price of the automobile of $4,600 ($33,600 − $29,000) is a qualified employee discount. The discount can be excluded from Ted's gross income because the price he paid was above the employer's cost. However, Ted must include in gross income 80% of the dealer preparation fee, a service, of $300, which is $240 ($300 × 80%). The maximum qualified employee discount that can be excluded for a service is 20%.

15)The sage company has the opportunity to purchase a building located next to its office. Sage would use the building as a day care center for the children of its employees and an exercise facility for the employees. Occasionally, portions of the building could be used for employees' family events such as reunions, birthday parties, and anniversaries. The company would like to know if the planned uses of the building would fit into the beneficially taxed employee compensation plan.

(LO 2) The facility provides an opportunity to provide the employees with nontaxable income. The child day care services and exercise facility provided to the employees are specifically excluded from their gross income. The use of the facility for family events could be provided in a manner that qualifies as a no-additional-cost employee fringe.

14)Several of Egret Company's employees have asked that the company to create a hiking trail that employees could use during their lunch hours. The company owns vacant land that is being held for future expansion but would have to spend approximately $50,000 if it were to make a trail. Nonemployee's would be allowed to use the facility as part of the company's effort to build strong community support. What are the relevant tax issues for the employees?

(LO 2) The issues all relate to whether the employees would realize gross income from the employer providing the facilities. If the employee does have gross income, the next question is whether the benefit qualifies under one of the exclusions provided in the Code. •Does the employee experience an economic benefit from using the facility? •Does the walking trail qualify as an excludible "athletic facility"? •Is the benefit de minimis? •Is the benefit a no-additional-cost service? Valuation of the benefit could also be an issue.

24)Leland pays premiums of $5,000 for an insurance policy in the face amount of $25,000 upon the life of Caleb and subsequently transfers the policy to Tyler for $7,500. Over the years, Tyler pays subsequent premiums of $1,500 on the policy. Upon Caleb's death, Tyler receives the proceeds of $25,000. As a result, what amount is Tyler required to include in his gross income?

(LO 2) There are exceptions to the general rule that life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax. A life insurance policy (other than one associated with accelerated death benefits) may be transferred after it is issued by the insurance company. If the policy is transferred for valuable consideration, the insurance proceeds are includible in the gross income of the transferee to the extent the proceeds received exceed the amount paid for the policy by the transferee plus any subsequent premiums paid. Therefore, Tyler must include $16,000 [$25,000 proceeds − ($7,500 paid for policy + $1,500 in subsequent premiums)] in his gross income.

21)Mio was transferred from New York to Germany. He lived and worked in Germany for 340 days in 2016. Mio's salary for 2016 is $190,000. In your computation, round any division to four decimal places before converting to a percentage. For example, .473938 would be rounded to 47.39%. What is Mio's foreign earned income exclusion?

(LO 2) Under this global system, a U.S. citizen who earns income in another country could experience double taxation: the same income would be taxed in the United States and in the foreign country. Out of a sense of fairness and to encourage U.S. citizens to work abroad (so that exports might be increased), Congress has provided alternative forms of relief from taxes on foreign earned income. The taxpayer can elect either (1) to include the foreign income in his or her taxable income and then claim a credit for foreign taxes paid or (2) to exclude the foreign earnings from his or her U.S. gross income (the foreign earned income exclusion). Foreign earned income consists of the earnings from the individual's personal services rendered in a foreign country (other than as an employee of the U.S. government). To qualify for the exclusion, the taxpayer must be either of the following: •A bona fide resident of the foreign country (or countries). •Present in a foreign country (or countries) for at least 330 days during any 12 consecutive months. The amount of the foreign earned income exclusion changes each year. Persons who qualify are eligible to exclude up to $101,300 in foreign earned income for 2016. Mio's exclusion is limited to $94,104, computed as follows: $101,300 (2016 limit) × (340 days in Germany/366 in the year) = $94,103.83, rounded to $94,104.

10)What is the difference between a cafeteria plan and an employee flexible spending plan?

(LO 2) With a cafeteria plan, the employee receives a salary and is provided by the employer with a fixed amount that he or she can allocate among a range of possible nontaxable fringe benefits and taxable benefits. With a flexible spending plan, a portion of the employee's salary is set aside for specific uses that would have been excludible from gross income had the employer paid these expenses. The employee's gross income is reduced by the amount that goes into the flexible spending account, and the withdrawals are excluded from gross income. However, any unused funds are forfeited by the employee.

Herbert was employed for the first 6 months of 2015 and earned 90,000 in salary, During the next six months, he collected 8800 of unemployment compensations, borrowed 12,000 (using his personal residence as collateral and withdrew 2000 from his savings including 60$ of interest He received dividend of 550 His luck was not all bad, for in December, he won't 1500 in the lottery on a 5$ ticket Calculate Herbert's gross income

(LO 2, 4) Salary $ 90,000 Unemployment compensation 8,800 Interest income 60 Dividend income 550 Lottery winnings 1,500* Gross income $100,910 *The $5 cost of the lottery ticket is deductible as a miscellaneous itemized deduction, not subject to the 2%-of-AGI reduction. Note: Neither the $12,000 loan nor the $2,000 savings account withdrawal are included in gross income.

13)Eagle life insurance company pays its employee's $.30 per mile for driving their personal automobiles to and from work. The company reimburses each employee who rides the bus $100 a month for the cost of a pass. Tom collected $100 for his automobile mileage, and Mason received $100 as a reimbursement for the cost of a bus pass. a.What are the effects of the above on Tom's and Mason's gross income? b.Assume that Tom and Mason are in the 28% marginal tax bracket and the actual before-tax cost for Tom to drive to and from work is $.30 per mile. What are Tom's and Mason's after-tax costs of commuting to and from work?

(LO 2, 5) a.Tom must include the $100 in gross income. Mason is allowed to exclude the $100 as a qualified transportation fringe. b.Tom paid $100 for transportation cost and was reimbursed for that amount. Therefore, Tom's before-tax cost was $0. However, Tom is required to include the $100 in gross income and thus must pay an additional $28 ($100 × .28) tax on the reimbursement, which is his after-tax cost of commuting. Mason's after-tax cost of commuting is $0 because he is reimbursed for the out-of-pocket cost and is not required to include the reimbursement in income.

9)Casey is the `15% marginal tax bracket, and Jean is the 35% marginal tax bracket. Their employer is experiencing financial difficulties and cannot continue to pay for the company's health insurance plan. The annual premiums are approximately $8,000 per employee. The employer has proposed to either (1) require the employee to pay the premiums or (2) reduce each employee's pay by $10,000 per year with the employer paying the premium. Which option is less objectionable to Casey, and which is less objectionable to Jean?

(LO 2, 5) Both Casey and Jean will experience a decrease in income net of health insurance premiums. It is merely a question of which is the "least bad" option. As will be seen, both fare better under option (2) although Jean is much better off with that option. Under option (1), Casey would be required to pay $8,000 in premiums each year. Assuming that he cannot deduct the insurance as a medical expense because of the adjusted gross income floor, his cash flow after-tax and health insurance premiums will decrease by $8,000. Under option (2), Casey's cash flow after-tax and health insurance premiums would decrease by $8,500 [(1 − .15) × $10,000]. Therefore, Casey would be better off with option (1). Jean would fare much better under the second option. As in Casey's case, with option (1), she is $8,000 poorer than without any change. But under option (2), her after-tax cash flow would decrease by $6,500 [(1 − .35) × $10,000]. Therefore, Jean would be better off with option (2).

16)Tammy, a resident of Virginia, is considering purchasing a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that the State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct any state taxes paid on her Federal income tax return.

(LO 2, 5) The Virginia bond yields the greatest after-tax income. Virginia North Carolina Bond Bond Before-tax interest (on $100,000) $4,500 $4,600 Virginia tax @ .05 -0- (230) Federal tax benefit from Virginia tax @ .35 -0- 81 Federal tax -0- -0- After-tax income $4,500 $4,451

12)Wilbur has been offered a job at a salary that would put him in the 25% marginal tax bracket. In addition to his salary, he would receive health insurance coverage. Another potential employer does not offer health insurance but has agreed to match the first offer on an after-tax and insurance basis. The cost of health insurance comparable to that provided by the other potential employer is $9,000 per year. How much more in salary must the second potential employer pay so that Wilbur's financial status will be the same under both offers?

(LO 2, 5) The additional before-tax salary that is required to purchase the health insurance for $9,000, when the marginal tax rate is 25%, is $12,000 [$9,000/(1 − .25)].

18)Dolly is a cash basis taxpayer. In 2016, she filed her 2015 South Carolina income tax return and received a $2,200 refund. Dolly took the standard deduction on her 2015 Federal income tax return, but will itemize her deductions in 2016. Molly, a cash basis taxpayer, also filed her 2016 South Carolina income tax return in 2016 and received a $600 refund. Molly has $12,000 in itemized deductions on her 2015 federal income tax return, but will take the standard deduction in 2016. How does the tax benefit apply to Dolly's and Molly's situations? Explain.

(LO 3) Dolly is not required to recognize income from the receipt of the state income tax refund of $2,200. The refund merely corrects for her overpayment, and the original payment did not affect her taxable income. On the other hand, Molly received a tax benefit in the form of a deduction on her 2015 Federal income tax return. Therefore, the $600 refund is the recovery of a tax benefit. Whether Dolly and Molly itemize deductions in the year of recovery (2016) is not relevant to whether they realized gross income from the recovery of 2015 state income taxes.

26)Myrna and Geoffrey filed a joint tax return in 2015. Their AGI was $85,000, and itemized deductions were $13,700, which included $4,000 in state income tax. In 2016, they received a $1,800 refund of the state income taxes they paid in 2015. The standard deduction for married filing jointly in 2015 was $12,600. Under the tax benefit rule, what amount of these state income tax refund is included in gross income in 2016?

(LO 3) Generally, if a taxpayer obtains a deduction for an item in one year and in a later year recovers all or a portion of the prior deduction, the recovery is included in gross income in the year received. However, the § 111 tax benefit rule provides that no income is recognized upon the recovery of a deduction, or the portion of a deduction, that did not yield a tax benefit in the year it was taken. For example, if a taxpayer had no tax liability in the year of the deduction (e.g., itemized deductions and personal exemptions exceeded adjusted gross income), the recovery would be partially or totally excluded from gross income in the year of the recovery. Because the standard deduction in 2015 was $12,600, the $4,000 of state income taxes the taxpayers paid in 2015 yielded a tax benefit of only $1,100 ($13,700 itemized deductions − $12,600 standard deduction) in 2015. Under the tax benefit rule, only $1,100 of the state income tax refund is included in gross income in 2016.

19)Ralph has experienced financial difficulties as a result of his struggling business. He has been behind on his mortgage payments for the last six months. The mortgage holder, who is a friend of Ralph's, has offered to accept $80,000 in full payment of the $100,000 owed on the mortgage and payable over the next 10 years. The interest rate of the mortgage is 7% and the market rate is now 8%. What tax issues are raised by the creditor's offer?

(LO 4) Is the friend forgiving the debt as a gift to Ralph? •Did the mortgage holder sell the property to Ralph? •Is Ralph insolvent or undergoing bankruptcy proceedings? •If Ralph must recognize income from the debt cancellation, does he have losses to offset? •May Ralph reduce the basis of the asset rather than recognize income?

Foreign earned Income

...

Ellie purchases an insurance policy on her life and names her brother, Jason, as the beneficiary. Ellie pays $32,000 in premiums for the policy during her life. When she dies, Jason collects the insurance proceeds of $500,000. What is Jasons gross income?

0

Identify the three factors reflected in the MACRS tables when the amount of cost recovery is determined. The three factors which the MACRS tables take into account are:

1) recovery period 2) method 3) convention

Myrna and Geoffrey filed a joint tax return in 2014. Their AGI was $85,000 and itemized deductions were $13,700 which included $4,000 in state income tax. In 2015, they received a $1,800 refund of the state income taxes that they paid in 2014. The standard deduction for MFJ. in 2014 was $12,400. Under the tax benefit rule _____ of the state income tax refund is included in gross income in 2015

1300

Jarrod receives a scholarship of $18,500 from Riggers University to be used to pursue a bachelor's degree. He spends $12,000 on tuition, $1,500 on books and supplies, $4,000 for room and board, and $500 for personal expenses. How much can Jarrod exclude fro his gross income

13500

Recovery period under MARCS Land improvements Water utilities. Single-purpose agricultural or horticultural structures. Office furniture, fixtures, and equipment. Computers and peripheral equipment. Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.

15 20 10 7 5 3

The amortization period for a § 197 intangible is ________________________, beginning __________________________ .

15 years regardless of the actual useful life in the month aquired

Complete the statement below regarding the amortization period of a § 197 intangible the actual useful life is less than 15 years. The amortization period for a § 197 intangible is ___, beginning ___.

15 years regardless of the actual useful life, in the month acquired

Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year: Rent: $24,000 Bribes:$40,000 Travel expenses: $4,000 Utilities: $18,000 Wages: $230,000 Payroll taxes: $13,800 Property insurance: $1,600 Illegal kickbacks: $22,000 Vella's total deductible expenses for tax purposes are

291400

Statute of Limitation: Claims for refund

3 years from date filed or 2 years from date tax paid

Statute of Limitation: Tax deficiencies

3 years from the later of tax due date or date to file. >25% omission of income 6 years Indefinite if fraudulent or no return

Under the general rule, the IRS may assess an additional tax liability against a taxpayer within

3 years of the filing of the income tax return. If the return is filed early, the three-year period begins to run from the due date of the return (usually April 15 for a calendar-year individual taxpayer). If the taxpayer files the return late (i.e., beyond the due date), the three-year period begins to run on the date filed.

Don't forget the interest and penalties (no interest is allowed if the overpayment is refunded to the taxpayer within

45 days of the date the return is filed

Stanford owns and operates two dry cleaning business. He travels Boston to discuss acquiring a restaurant. Later in the month he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2014. Round your answer to the nearest dollar. Stanford incurred the following expenses: Total investigation costs related to the restaurant: $28,000 Total investigation costs related to the bakery: $51,000 What is the max amount Stanford can deduct in 2014 for investigation expenses?

4522

Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the bakery on November 1, 2018. Stanford incurred the following expenses: Total investigation costs related to the restaurant: $28,000 Total investigation costs related to the bakery: 51,000

5000-( 51000-50000)= 4000 + (51000-4000)*2/180 =$4522

Falcon, Inc., paid salaries of $666,400 to its employees during its first year of operations. At the end of the year, Falcon had additional unpaid salaries of $66,640. Calculate the salary deduction if Falcon is a cash basis taxpayer. Now Acural

666,400 733,040

Glenda, a calendar year and cash basis taxpayer, rents property from Janice. As part of the rental agreement, Glenda pays $8,400 rent on April 1, 2014 for the 12 months ending March 31, 2015. Glendas Deduction for rent exp in 2014 is ______. Assume the same fact except the $8,400 is for 24 months rent ending March 31, 2016. Glenda's deduction for rent expense in 2014 is

8400 3150

Glenda, a calendar year and cash basis taxpayer, rents property from Janice. As part of the rental agreement, Glenda pays $8,400 rent on April 1, 2018 for the 12 months ending March 31, 2019. Deduction for rent expense If it was over 24 months what is the rent expense deduction

8400 3150

On January 15, 2015, Dillon purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon incurred expenses during 2015 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2015. a. $175,000 b. $200,000 c. $250,000 d. $150,000 e. $176,000

A $3,500,000/500,000 = $7 per unit 25,000 units sold × $7 = $175,000 cost depletion 22% × $800,000 = $176,000 percentage depletion Percentage limit ($800,000 - $500,000) × 50% = $150,000 Thus, the deduction is $175,000.

In 2014, Gail had a § 179 deduction carryover of $10,000. In 2015, she elected § 179 for an asset acquired at a cost of $21,000. Gail's § 179 business income limitation for 2015 is $50,000. Determine Gail's § 179 deduction for 2015. a. $25,000 b. $50,000 c. $31,000 d. $21,000 e. None of these choices are correct.

A $31,000 ($10,000 + $21,000), limited to $25,000

Walnut purchased a factory building on November 15, 1996, for $5,000,000. She sells the factory building on February 2, 2015. Determine the cost recovery deduction for the year of the sale. a. $16,025 b. $26,458 c. $158,750 d. $19,844 e. None of these choices are correct.

A .02564 × $5,000,000 × 1.5/12 = $16,025

Sienna Company acquires a new machine (ten-year property) on January 15, 2015, at a cost of $200,000. Sienna also acquires another new machine (seven-year property) on November 5, 2015, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election. Sienna does not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2015. a. $25,716 b. $132,858 c. $102,000 d. $24,000 e. None of these choices are correct.

A 10 year property MACRS cost recovery ($200,000 x .10) = $20,000 7 year property MACRS cost recovery ($40,000 x .1429) = $5,716 __________ Total cost recovery = $25,716

Economy

A good tax system involves only nominal collection costs by the government and minimal compliance costs on the part of the taxpayer.

Mark and Del were residents of TX. in 2013, Del left Mark, and he has been unable to find her even though he hired a private investigator to do so. Mark and Del are still married at year-end. Both Del and Mark were employed. Mark is aware of the fact that Del inherited dividend-paying stocks in early 2013. They did not have any children. How will Del's absence complicate Mark's 2013 income tax return?

A joint return cannot be filed by Mark and Del, unless Del can be located and she consents to filing a joint return. Mark cannot qualify as an abandoned spouse because he has no dependent children. Because they lived together for part of the year and are still married in 2013, Mark and Del each must include one-half of the community's income. This results because they lived together for part of the year. Thus, Mark must include in his gross income his share of Del's earnings for the year, including a share of Del's post-separation earnings. Because Mark is a resident of Texas, he is also required to include in his gross income onehalf of Del's income from the inherited property.

Discuss when bad debt deduction can be taken for a nonbusiness debt.

A loss is deductible only in the year of total worthlessness for a nonbusiness bad debt and is classified as a short-term capital loss.

If the residence is rented for fewer than 15 days a year, it is treated as _____. The rent income is _____ gross income, and mortgage interest and real estate taxes are allowed as _______.

A personal residence, excluded from, itemized deductions

Ad Valorem

A tax imposed on the value of property. The most familiar ad valorem tax is that imposed by states, counties, and cities on real estate. Ad valorem taxes can, however, be imposed upon personal property

Excise tax

A tax on the manufacture, sale, or use of goods or on the carrying on of an occupation or activity. Also, a tax on the transfer of property. Thus, the Federal estate and gift taxes are, theoretically, excise taxes.

Certainty

A tax structure is good if the taxpayer can readily predict when, where, and how a tax will be levied. probably generates the greatest controversy.

Sales tax

A transaction tax imposed upon the sale of goods

Classify each of the following expenditures paid in 2018 as a deduction "For AGI", "From AGI", or "Not deductible": a. Roberto gives cash to his father as a birthday gift. b. Sandra gives cash to her church. c. Albert pays Dr. Dafashy for medical services rendered. d. Mia pays alimony to Bill in accordance with their separation agreement which was signed in 2018. e. Rex, who is self-employed, contributes to his pension plan. f. Bonita pays expenses associated with her rental property. g. Lu, who operates a sole proprietorship, takes a client to the theater after dinner, where they discussed new business.

A. not deductible b. from agi c. from agi d. for agi e. for agi f. for agi g. not deductible

According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes? Explain.

According to the Supreme Court in Thor Power Tool Co. v. Comm. "The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major goal of the accountant is to protect these parties from being misled. The primary goal of the tax system, in contrast, is the equitable collection of revenue."

What is the purpose of the constructive receipt doctrine?

According to the constructive receipt doctrine, the taxpayer cannot avoid tax on his or her income by refusing to accept the income at the time it is set aside or made available. The constructive receipt doctrine prevents cash basis taxpayers from deferring their income by intentionally avoiding the receipt of the income in the current tax year.

Convenience

Administrative simplicity has long been valued in formulating tax policy. exists due to a heavy reliance on pay-as-you-go procedures.

Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. he commented to you, "At least I didn't have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000." What are the relevant tax issues for Allen?

Allen received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Allen could argue that the income should be matched with his $25,000 in gambling losses on the trip, and when the income and losses are combined, the net effect is an economic loss. As will be discussed later in the text, the next loss is not deductible, but at least the gambling losses can be used to offset the income from his gambling activities.

A "no change" RAR results

An RAR (or Revenue Agent's report) that results in a "no change" means that the audit resulted in no additional taxes being due.

Explain how an account receivable can give rise to a bad debt deduction.

An account receivable can give rise to a bad debt deduction if income arising from the creation of the account receivable was previously included in gross income.

The business bad debt is treated as -----_____________ , hence, the long-term capital gains are _______________________________________________________ .

An ordinary Loss no relevant in determining the net loss

Andy recently completed medical school and is beginning his medical practice. Most of his patients are covered by health insurance with a co-pay requirement. It takes approximately 2 months to collect from the health ins plan. What advice can you provide Andy regarding the selection of a tax accounting method?

Andy should use the cash method of accounting so that the income from services billed to the insurance company can be deferred until the income is collected. Under the cash method, the amounts billed to the insurance companies will be continuously deferred until the year following his final year of practice. That is, with the cash method of accounting as compared to the accrual method, Andy will enjoy a deferral of two months of billings to insurance companies. Andy's marginal tax rate may be lower in the first year of practice than in subsequent years. Thus, accelerating income through the use of the accrual method would have some benefit. But the benefit of the lower rates probably would not equal the benefit of deferral.

Anita, a cash basis taxpayer, sued her former employer for wage discrimination. Her attorney agreed to pursue the case on a contingent fee basis-the attorney would receive 1/3 of any settlement or court award. The parties reached a settlement, and the attorney for Anita's former employer wrote a check payable to Anita for $320,000 and a check payable to her attorney for $160,000. Anita reasons that she and the attorney were partners in the lawsuit who shared profits 2/3 and 1/3 respectively. Therefore, she includes $320,000 in her gross income. Is Anita's analysis correct? Explain.

Anita is not correct in her analysis. Anita and the attorney are not partners. Therefore, her gross income is the full amount of the settlement of $480,000. Anita is entitled to a deduction for $160,000. Since the settlement is associated with a discrimination suit, the deduction is a deduction for AGI.

Marvin is the executor and sole heir of his aunt's estate. The estate includes her furnished home, which Marvin is considering converting to rental property to generate additional cash flow.

Any rent Marvin receives from the property is taxed as income. Besides the real estate taxes, personal property taxes could be imposed on the furnishings. Marvin can expect an increase in the ad valorem property taxes levied by the local taxing authorities due to the commercial use of the property.

On June 1, 2015, Mako Corporation purchased an existing business. With respect to the acquired assets of the business, Mako allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Mako may amortize for 2015 for the patent. a. $0 b. $11,667 c. $35,000 d. $1,667 e. None of these choices are correct.

B $300,000 × (7 months/180 months) = $11,667. The statutory amortization period for § 197 intangibles is 15 years.

Jack purchased a new factory building on September 2, 2015, for $2,000,000. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2016. a. $18,000 b. $50,000 c. $22,000 d. $15,000 e. None of these choices are correct.

B .025 × $2,000,000 = $50,000

On May 2, 2015, Pearl placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the cost recovery for 2015. Pearl wants to maximize her deductions. a. $3,060 b. $27,200 c. $25,000 d. $2,200 e. None of these choices are correct

B Cost for business use: $36,000 (60% x $60,000) §179 expense = $25,000 MACRS cost recovery [($36,000 - $25,000) x .20)] = $2,200 __________ Total = $27,200

Maria purchased a hotel building on May 17, 2015, for $3,000,000. Determine the cost recovery deduction for 2016. a. $59,520 b. $76,920 c. $69,000 d. $48,150 e. None of these choices are correct.

B The hotel building is nonresidential realty. .02564 × $3,000,000 = $76,920.

Marian purchased one new asset during the year (five-year property) on November 10, 2015, at a cost of $100,000. She made the § 179 election. The income from the business before the cost recovery deduction and the § 179 deduction was $50,000. She does not take additional first-year depreciation. Determine the total cost recovery deduction with respect to the asset for 2015. a. $20,000 b. $28,750 c. $25,000 d. $5,000 e. $40,000

B §179 expense = $25,000 MACRS cost recovery [($100,000 - $25,000) x .05)] = $3,750 __________ Total = $28,750

Maple Company acquires a new machine (seven-year property) on January 10, 2015, at a cost of $125,000. Maple makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. Maple does not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2015 assuming Maple has taxable income of $800,000. a. $14,290 b. $39,290 c. $125,000 d. $17,863 e. None of these choices are correct.

B §179 expense = $25,000 MACRS cost recovery ($100,000 x .1429) = $14,290 __________ Total = $39,290

Howard buys wrecked cars and stores them on his property. Recently, he purchased a 1990 ford Taurus for $400. If he can sell all of the usable parts, his total proceeds from the Taurus will be over $2,500. As of the end of the year, he has sold only the radio for $75 and he does not know how many, if any, of the remaining parts will ever be sold. What are Howard's income recognition issues?

Because Howard does not know how much he will receive from the sale of automobile parts, and it is impractical to determine the cost of individual automobile parts, he could reason that all sales proceeds are a recovery of capital until he has received his cost of $400, and all subsequent proceeds are included in gross income. The IRS may argue that Howard should allocate his cost of the car among the various parts, which may be impractical.

Ben lost his job when his employer moved its plant During the year, he collected unemployment benefits for three months a total of 1800 while he was waiting to hear from prospective employers, he painted his house. If Ben has paid someone else to paint his house, the cost would have been 3,000 the Cost of the paint Ben used was 800 what is ben's gross income for tax purposes form the above events

Ben must recognize $1,800 of income from the unemployment benefits. His savings from painting his house are not included in gross income—it was not income realized because the savings were not an amount received from another.

On July 1, 2000, when Betty was 65 years old, she purchased an annuity contract for $108,000. The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty died on Aug 31, 2013. what are the effects of the annuity on Betty's gross income and taxable income for 2013.

Betty's tax return for 2013 will reflect a loss on the annuity contract in 2013 because she collected on the policy for only 13 years when she was expected to collect for 20 years. The deductible loss is computed as follows: Cost of the policy $108,000 Annual payment $ 9,000 Expected number of payments (Table 4.1) × 20 Total expected return $180,000 Cost/Expected return ($108,000/$180,000) = Exclusion ratio percentage 60% Total payments received (13 × $9,000) $117,000 Basis recovery (Exclusion ratio × 13 payments received) (70,200) Unrecovered cost = loss allowed

Losses Related parties include the following:

Brothers and sisters (whether whole, half, or adopted), spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer; A corporation owned more than 50% (directly or indirectly) by the taxpayer; Two corporations that are members of a controlled group; and, A series of other complex relationships between trusts, corporations, and individual taxpayers.

On June 1, 2014, Sierra places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2015. a. $3,160 b. $6,720 c. $3,570 d. $2,212 e. None of these choices are correct.

C $21,000 × 32% = $6,720 (limited to $5,100*). $5,100 × 70% = $3,570. *These depreciation limits are indexed annually.

Vince purchased a used five-year class asset on March 15, 2015, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2015 for earnings and profits purposes. a. $3,000 b. $12,000 c. $6,000 d. $2,000 e. None of these choices are correct.

C .10 × $60,000 = $6,000

Shane purchases used seven-year class property at a cost of $200,000 on April 20, 2015. Determine Shane's cost recovery deduction for 2015 for alternative minimum tax purposes, assuming Shane does not elect § 179. a. $2,500 b. $14,280 c. $21,420 d. $10,000 e. None of these choices are correct.

C .1071 × $200,000 = $21,420

Indigo Corporation begins business on April 2, 2015. The corporation has startup expenditures of $54,000. If Indigo Corporation elects § 195, determine the total amount that Indigo may deduct in 2015. a. $2,650 b. $5,000 c. $3,650 d. $1,000 e. None of these choices are correct.

C Deductible amount [$5,000 - ($54,000 - $50,000)] = $1,000 Amortizable amount [($54,000 - $1,000) / 180 x 9 months] = $2,650 __________ Total deduction = $3,650

A taxpayer _______ elect to expense all of the research and experimental expenditures incurred in the current year and all subsequent years. The consent of the IRS ___________ required if the method is adopted for the first taxable year in which such expenditures were paid or incurred.

Can Is not

The value of Mary's personal residence has declined significantly because of a recent forest fire in the area where she lives. Mary's house suffered no actual damage during the fire, but because much of the surrounding area was destroyed, the value of all of the homes in the area declined substantially. Discuss whether Mary can take a casualty loss for the decline in value of her residence caused by the fire.

Casualty losses are not allowed for a decline in the value of the property. Losses are allowed only for actual damage.

If business property or property held for the production of income is _______________________ destroyed, the loss is equal to the adjusted basis of the property at the time of destruction. The ____________________ destruction of business property and income-producing property and for _____________________ destruction of personal use property, the loss is the _________________ of the __________________ of the property or the difference between the ____________________ of the property before the event and the _______________________ immediately after the event.

Competely Partially completely or partially lesser adjusted basis fair market value fair market value

On June 1, 2014, Eddie places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) Eddie does not take additional first-year depreciation. Determine the cost recovery deduction for 2014. a. $1,776 b. $6,696 c. $8,000 d. $1,896 e. None of these choices are correct.

D MACRS cost recovery ($40,000 x .20) = $8,000 Limited to ($3,160 x .60) = $1,896

Yancy purchased a new business asset (three-year personalty) on July 23, 2015, at a cost of $40,000. Yancy does not take additional first-year depreciation Determine the cost recovery deduction for 2015. a. $8,000 b. $30,000 c. $40,000 d. $13,332 e. None of these choices are correct.

D MACRS cost recovery ($40,000 x .3333) = $13,332

The only asset Chadwick purchased during 2015 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Chadwick always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Chadwick's maximum deduction with respect to the property for 2015. a. $1,428 b. $28,573 c. $50,000 d. $2,499 e. None of these choices are correct.

D The listed property does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. In addition, only straight-line cost recovery can be used. Maximum deduction ($50,000 x .0714 x 70%) = $2,499

Lulu is a calendar year taxpayer. She owned stock in Kasper Corporation (a publicly held company). Lulu acquired the stock as an investment on November 1, 2017, at a cost of $23,000. On June 30, 2018, the stock became worthless when the company declared bankruptcy. Because the stock is deemed to have become worthless as of

December 31 2018 and long term capital loss

Lulu is a calendar year taxpayer. She owned stock in Kasper Corporation (a publicly held company). Lulu acquired the stock as an investment on November 1, 2017, at a cost of $23,000. On June 30, 2018, the stock became worthless when the company declared bankruptcy. Because the stock is deemed to have become worthless as of _____ (June 30, 2017/November 1, 2018/December 31, 2018), Lulu has ___ (an ordinary loss, a short-term capital loss, a long-term capital loss).

December 31, a long-term capital loss

FOR or FROM? The deduction for certain retirement savings allowed by § 219 (e.g., traditional IRAs).

Deduction FOR AGI

FOR or FROM? The deduction for payment of alimony.

Deduction FOR AGI

FOR or FROM? The deductions attributable to property held for the production of rents and royalties.

Deduction FOR AGI

The deduction for certain retirement savings allowed by § 219 (e.g., traditional IRAs).

Deduction FOR AGI

FOR or FROM? The deduction for contributions to qualified charitable organizations.

Deduction FROM AGI

FOR or FROM? The deduction for personal casualty losses.

Deduction FROM AGI

The deduction for contributions to qualified charitable organizations.

Deduction FROM Agi

The deduction for part of the self-employment tax paid by a self-employed taxpayer.

Deduction For AGI

The deduction for payment of alimony.

Deduction For Agi

The deductions attributable to property held for the production of rents and royalties.

Deduction for AGI

The deduction for personal casualty losses.

Deduction from AGI

It is important to classify deductible expenses as deductions for adjusted gross income (AGI) or deductions from adjusted gross income. _________ can be claimed whether or not the taxpayer itemizes. _________ result in a tax benefit only if they exceed the taxpayer's standard deduction

Deductions for AGI Deductions from AGI

It is important to classify deductible expenses as deductions for adjusted gross income (AGI) or deductions from adjusted gross income. ______ can be claimed whether or not the taxpayer itemizes. ________ results in a tax benefit only if they ______ the taxpayers standard deduction.

Deductions for AGI, Deductions From AGI, Exceeds

The internal revenue code specifically ______ as a deduction the expenses of producing tax-exempt income. Interest on any indebtedness used to purchase or hold tax-exempt obligations is_______.

Disallows, disallowed

DIF

Discriminant Index Formulas: It is the DIF score given to a particular return that may lead to its selection for audit

During the past two years, through extensive advertising and improved customer relations, Brick Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Brick Corporation may amortize. a. $26,667 b. $100,000 c. $33,333 d. $16,667 e. None of these choices are correct.

E Self-created goodwill is not a § 197 intangible and thus cannot be amortized.

Israel purchased a new passenger automobile on August 17, 2014, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2014. a. $500 b. $1,224 c. $1,500 d. $1,000 e. None of these choices are correct.

E The car, which is listed property, does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. $30,000 × .100 = $3,000 (not over $3,160 limit*). $3,000 × 40% = $1,200. *These depreciation limits are indexed annually.

Self employee have to pay

ER part and EE part

Equality

Each taxpayer enjoys fair or equitable treatment by paying taxes in proportion to his or her income level. Ability to pay a tax is one of the measures of how equitably a tax is distributed among taxpayers. is present as long as one accepts ability to pay as an ingredient of this component.

A tax credit is allowed for amounts spent to furnish care for minor children while the parent works

Economic/Social considerations

Deductions for interest on home mortgage and property taxes on a personal residence:

Economic/Social considerations

Employment Taxes

Employment taxes are those taxes that an employer must pay on account of its employees. Also known as FICA Under 18 exempt: only children under 18 employed in the family's/parent's unincorporated business are exempted from FICA tax. Additional 0.9% > $200,000 Net investment income Tax 3.8% Currently, the FICA tax has two components: Social Security tax (old age, survivors, and disability insurance) and Medicare tax (hospital insurance).

The income-splitting benefits of filing a joint return

Equity and Political considerations

Net operating losses of a current year can be carried back to profitable years:

Equity considerations

When the company wants to create a net operating loss carryover. When the company does not have sufficient income to offset the research and experimental expenses.

Expense Amoritization

Which governmental body administers the tax?

FICA is administered by the Federal government. FUTA, however, is handled by both the Federal and state governments

Upon whom is the tax imposed?

FICA is imposed on both the employer and employee, while FUTA is imposed only on the employer.

FOR or FROM AGI? Supplies purchased for use in her classroom of $225

FOR

FOR or FROM? The deduction for part of the self-employment tax paid by a self-employed taxpayer.

FOR

FOR, FROM, NOT deductible? Carrie paid a penalty imposed on premature withdrawal of funds from her certificate of deposit.

FOR

FOR, FROM, NOT deductible? Gabby, who teaches elementary school, paid for teacher supplies.

FOR

FOR, FROM, NOT deductible? Interest on student loans

FOR

FOR, FROM, NOT deductible? Jackson paid his wife alimony.

FOR

FOR, FROM, NOT deductible? Kenny, who is self-employed, made a payment to his profit-sharing plan.

FOR

FOR, FROM, NOT deductible? Madge made a payment to her traditional IRA account. She is not covered by any other retirement plan.

FOR

FOR, FROM, NOT deductible? Penalty imposed on premature withdrawal of funds from a certificate of deposit

FOR

FOR, FROM, NOT deductible? Samuel has deductions attributable to the rental of his office building.

FOR

FOR, FROM, NOT deductible? Teacher supplies

FOR

FOR, FROM, NOT deductible? The deduction for one-half of the self-employment tax paid by Gilbert.

FOR

FOR, FROM, NOT deductible? The deduction for qualified tuition and related expenses under § 222.

FOR

FOR, FROM, NOT deductible? The deduction for the medical insurance premiums paid by Jeffrey, a self-employed taxpayer, for coverage of his family.

FOR

FOR, FROM, NOT deductible? Troy paid interest on qualified student loans.

FOR

FOR, FROM, or NOT deductible? April pays expenses associated with her rental property.

FOR

FOR, FROM, or NOT deductible? Mia pays alimony to Bill.

FOR

FOR, FROM, or NOT deductible? Rex, who is self-employed, contributes to his pension plan.

FOR

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Amos contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual).

FOR

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Judy pays professional dues that are reimbursed by her employer. Assume an accountable plan is in place and adequate reporting is made.

FOR

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Lynn pays a moving company for moving her household goods (a qualified moving expense) to Detroit, where she is starting a new job. She is not reimbursed by her employer.

FOR

FOR or FROM AGI? Charitable contributions of $800

FROM

FOR or FROM AGI? Personal property taxes on her car of $240

FROM

FOR, FROM, NOT deductible? Diana paid fees for the preparation of her income tax return.

FROM

FOR, FROM, NOT deductible? Katie paid for a safe deposit box rental in which she stores stock certificates.

FROM

FOR, FROM, NOT deductible? Medical expenses

FROM

FOR, FROM, NOT deductible? Medical expenses for Geoffrey

FROM

FOR, FROM, NOT deductible? Medical expenses for aunt

FROM

FOR, FROM, NOT deductible? Mortgage interest on residence

FROM

FOR, FROM, NOT deductible? Property tax on personal sailboat

FROM

FOR, FROM, NOT deductible? Property tax on residence

FROM

FOR, FROM, NOT deductible? Roberto has a personal casualty loss.

FROM

FOR, FROM, NOT deductible? State income tax

FROM

FOR, FROM, NOT deductible? The deduction for sales tax.

FROM

FOR, FROM, NOT deductible? The deduction for state income taxes paid.

FROM

FOR, FROM, or NOT deductible? Albert pays Dr. Dafashy for medical services rendered.

FROM

FOR, FROM, or NOT deductible? Sandra gives cash to her church

FROM

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Ralph pays property taxes on his personal residence.

FROM

Employment Taxes (Unemployment)

FUTA (to provide funds the states can use to administer unemployment benefits) - 5.4% SUTA - may vary

$15,000 is the basis for purposes of calculating MACRS depreciation

False

A bad debt deduction is allowed for a bad debt arising from the sale of a product or service when the taxpayer is on the cash basis.

False

A shareholder's cancellation of the corporation's indebtedness to him or her usually is considered a taxable transaction

False

A theft loss is permitted if a reimbursement claim with a reasonable prospect of full recovery exists.

False

Accrual basis taxpayers often have the ability to make early payments for their expenses at the end of the tax year. This may permit the payments to be deducted currently instead of in the following tax year.

False

An exception to the economic performance requirements allows certain recurring items to be deducted if the taxpayer receives IRS permission.

False

Casualty and theft losses incurred by an individual in a transaction entered into for profit are subject to the $100 per event and the 10 percent-of-AGI limitations.

False

For listed property to be considered as predominantly used in business, its business usage must exceed 80 percent.

False

Generally, a theft loss is deducted in the year the loss occurs.

False

IRS & some courts can override Congress regarding what qualifies as an exclusion from gross income

False

If amortization is permitted, it will be ratably amortized over the designated period, beginning in the middle of the quarter it was acquired.

False

If both spouses participate in a cafeteria plan, then one of the spouses will be required to include the value of the services in gross income.

False

If the costs are amortized, a deduction is not available until the research project is abandoned or is deemed worthless.

False

If the mid-quarter convention applies, no cost recovery deduction is allowed in the year of sale

False

If the mid-quarter convention applies, one-quarter of the annual cost recovery deduction is allowed in the year of sale.

False

In general, an NOL deduction is limited to 90 percent of taxable income, determined without regard to the NOL deduction itself

False

Most taxpayers may use only the reserve method in accounting for bad debts.

False

Related parties include a corporation owned more than 35 percent (directly or indirectly) by the taxpayer.

False

Research and experimental expenditures includes expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions.

False

Reserves for estimated expenses generally are allowed for tax purposes because the economic performance test has been satisfied.

False

Reserves for estimated expenses generally are allowed for tax purposes because the economic performance test is be satisfied.

False

Section 212 permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business.

False

T or F Accrual basis taxpayers often have the ability to make early payments for their expenses at the end of the tax year. This may permit the payments to be deducted currently instead of in the following tax year.

False

T or F An exception to the economic performance requirements allows certain recurring items to be deducted if the taxpayer receives IRS permission.

False

T or F Related parties include a corporation owned more than 35 percent (directly or indirectly) by the taxpayer.

False

T or F Reserves for estimated expenses generally are allowed for tax purposes because the economic performance test has been satisfied.

False

T or F The expenses of cash basis taxpayers are deductible only when they are actually paid with cash but not property.

False

T or F Two-thirds of the treble damage payments made to claimants resulting from violation of the antitrust law are deductible expenditures.

False

T/F A bad debt deduction is allowed for a bad debt arising from the sale of a product or service when the taxpayer is on the cash basis.

False

T/F An exception to the economic performance requirements allows certain recurring items to be deducted if the taxpayer receives IRS permission.

False

T/F Most taxpayers may use only the reserve method in accounting for bad debts.

False

T/F Reserves for estimated expenses generally are allowed for tax purposes because the economic performance test has been satisfied.

False

T/F Section 212 permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business.

False

T/F The Code refers to reasonableness solely with respect to interest and employee benefits.

False

T/F The Code specifically allows a deduction for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property."

False

T/F Two-thirds of the treble damage payments made to claimants resulting from violation of the antitrust law are deductible expenditures.

False

T/F related parties include a corporation owned more than 35% (directly or indirectly) by the taxpayer

False

TRANSFERS FROM AN EMPLOYER to an employee can be excluded as a gift

False

The Code refers to reasonableness solely with respect to interest and employee benefits

False

The Code refers to reasonableness solely with respect to interest and employee benefits.

False

The Code specifically allows a deduction for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

False

The Code specifically allows a deduction for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property."

False

The aggregate amount of taxable income includes net income from a trade or business as well as from the production of income activities.

False

The key date for the commencement of depreciation is the date an asset is purchased

False

The recipient of a gift of income-producing property is not taxed on the income subsequently earned from property

False

The taxable income computation for purposes of the § 179 limit excludes the deduction for additional first-year depreciation.

False

Under a cafeteria plan, the employee is permitted to choose between cash and nontaxable benefits. If the employee chooses the otherwise nontaxable benefits, the cafeteria plan rules require the benefits to be taxable.

False

c. The use of listed property for production of income does qualify as business use for purposes of the more-than-50 percent test

False

d. When a business is purchased, only goodwill is subject to a statutory amortization period of 15 years. Therefore, the purchaser should attempt to have part of the purchase price assigned to a covenant not to complete rather than to goodwill.

False

ersonal use property is only personalty property (personal property) that is held for personal use rather than for use in a trade or business or an income-producing activity

False

The cost of a covenant not to compete for 20 years incurred in connection with the acquisition of a business is amortized over 10 years. a. True b. False

False A covenant not to compete is amortized over a statutory 15 years.

Cost depletion is determined by multiplying the depletion cost per unit by the number of units produced. a. True b. False

False Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold (not produced).

Depletion reported by a sole proprietor is reported on Schedule D. a. True b. False

False Depletion reported by a sole proprietor is reported on Schedule C.

If a taxpayer has a new business with little income, the taxpayer should elect to use Section 179 to avoid bothering with depreciation. a. True b. False

False If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer should elect to use straight line depreciation to slow down the cost recovery.

If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Form 1040. a. True b. False

False If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Schedule C.

Intangible drilling costs must be capitalized and written off through depletion. a. True b. False

False Intangible drilling costs may be expensed rather than capitalized and written off through depletion.

All eligible real estate under ACRS is permitted one-half year of cost recovery in the year of disposition. a. True b. False

False One-half month of cost recovery is permitted in the month of disposition for realty under MACRS.

Cost depletion enables the taxpayer to recover more than the cost of an asset. a. True b. False

False Percentage depletion, not cost depletion, can be taken even though the basis in the asset has been reduced to zero by depletion deductions.

Taxpayers may not elect to use the straight-line method under ACRS for personalty. a. True b. False

False Straight line can be elected under ACRS.

The basis of cost recovery property must be reduced by the lesser of cost recovery allowed or allowable. a. True b. False

False The basis of cost recovery property must be reduced by the cost recovery allowed but not less than the cost recovery allowable.

The key date for calculating cost recovery is the date the asset is purchased. a. True b. False

False The key date for calculating cost recovery is the date the asset is placed in service, not the purchase date.

The cost recovery basis for property converted from personal use to business use is always the fair market value of the property at the time of the conversion. a. True b. False

False This only occurs if the fair market value is less than the adjusted basis of the property.

When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being allocated to goodwill and covenants not to compete, rather than equipment. a. True b. False

False When a business is being purchased, goodwill and covenants not to compete are both subject to a statutory amortization period of 15 years. The cost of equipment is depreciated over a 7 year recovery period.

Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.

False, all property sold is treated as being sold at the mid-point of the quarter in which it is sold.

Land improvements are generally not eligible for cost recovery.

False, land improvements are 15-year class property.

T or F Section 212 permits a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business.

False; Section 162

Other Taxes

Federal customs duties Franchise taxes: levied on the right to do business in the state. Occupational fees: A tax imposed on various trades or businesses.

Federal Excise Tax

Federal excise taxes had declined in relative importance until recently. Federal excise taxes on items such as tobacco products, fuel and gasoline sales, and air travel have increased. Some Federal excise taxes try to influence social behavior.

All income must be reported, and all deductions are allowed unless specifically disallowed in the Code.

Flase

Most taxpayers may use only the reserve method in accounting for bad debts.

Flase

Barak contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual). Keith pays child support to his former wife, Renee, for the support of their son, Chris. Judy pays professional dues that are not reimbursed by her employer. Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment. Oni, a private citizen, pays a moving company for moving her household goods (a qualified moving expense) to Detroit, where she is starting a new job. She is not reimbursed by her employer. Ralph pays $6,000 of property taxes on his personal residence and $5,000 of state income taxes.

For None None From None Partially From

Failure to file (5%)

For failure to file a tax return by the due date (including extension), a penalty of 5 percent per month up to a maximum of 25 percent is imposed on the amount of tax shown as due on the return

If depreciation is claimed, it should be supported by completing ___

Form 4562

Discuss at what point in time a theft loss generally is recognized.

Generally, a theft loss is deducted in the year of discovery. However, no theft loss is permitted if a reimbursement claim with a reasonable prospect of full recovery exists. If the taxpayer has a partial claim of recovery, only part of the loss can be claimed in the year of discovery, and the remainder is deducted in the year the claim is settled.

1913 - 16th amendment

Government could impose taxes on people. The law allowed various deductions and personal exemptions of $3,000 for a single individual and $4,000 for married taxpayers.

Complete the following statements regarding the legislative process. Federal tax legislation generally originates in the ___, where it is first considered by the ___. Tax bills originate in the ___, when they are attached as riders to other legislative proposals.

House of Representatives, House Ways and Means Committee, Senate

Inheritance

If it taxes the right to receive property from a decedent, it is termed an inheritance tax. Unified transfer credit

Hazel sustained a loss on the theft of a painting. She had paid $20,000 for the painting, but it was worth $40,000 at the time of the theft. Evaluate the tax consequences of treating the painting as investment property or as personal use property.

If the painting is treated as personal use property, the amount of the loss is limited to $20,000 and is subject to the $100 and 10%-of-AGI floors. However, if the painting is treated as investment property, the loss is $20,000 and is treated as an other miscellaneous itemized deduction and is not subject to the 2%-of-AGI floor. Hence, all of the $20,000 could be taken as a deduction.

Primarily Rental Use

If the residence is rented for 15 days or more in a year and is not used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days rented, the residence is treated as rental property. The expenses must be allocated between personal and rental days if there are any personal use days during the year. The deduction of the expenses allocated to rental days can exceed rent income and result in a rental loss.

Personal/Rental Use

If the residence is rented for 15 days or more in a year and is used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days rented, it is treated as a personal/rental use residence. The expenses must be allocated between personal days and rental days. Expenses are allowed only to the extent of rent income.

Primarily Personal Use

If the residence is rented for fewer than 15 days in a year, it is treated as a personal residence. The rent income is excluded from gross income, and mortgage interest and real estate taxes are allowed as itemized deductions, as with any personal residence. No other expenses (e.g., depreciation, utilities, and maintenance) are deductible.

Transfer at death. Estate:

If the tax is imposed on the right to pass property at death, it is classified as an estate tax.

Flat tax:

In its pure form, it would replace the graduated income tax rates with a single rate

When can a bad debt deduction be taken for a nonbusiness deb

In the year of total worthlessness

Discuss whether deductions FOR AGI can be treated as nonbusiness deductions in computing an individual's NOL.

Individual Retirement Account deductions and alimony paid deductions are deductions for AGI. However, they are treated as nonbusiness deductions in computing an individual's NOL.

In 2013, the Rose Corporation made a $400,000 interest-free loan to John Rose, the corporation's controlling shareholder. Mr. Rose is also the corporation's chief executive officer and receives a salary of $300,000 a year. What are the tax consequences fo classifying the loan as a compensation-related loan rather than a corporation shareholder loan?

Interest income must be imputed on the loan made by Rose Corporation to John Rose. If the loan is characterized as being made to an employee (i.e., a compensation-related loan), the corporation must recognize imputed interest income, but the corporation will also be allowed to deduct imputed compensation for the same amount as the imputed income. Thus, the imputed interest income and the related imputed compensation expense for Rose Corporation will not affect the amount of the corporation's taxable income. On the other hand, imputed interest income on a loan to a shareholder (i.e., a corporation-shareholder loan) results in taxable interest income for the corporation and an imputed, non-deductible, dividend paid to the shareholder. John's deduction (if any) for the imputed interest paid is dependent upon how he used the borrowed funds. This is true whether the loan is characterized as an employee loan or a shareholder loan. For example, if the funds were used to buy a personal residence, the interest may be deductible as an itemized deduction. If the funds were invested, the interest may be deductible as investment interest. But if the funds were used for vacations or other personal expenditures, the interest would not be deductible by John.

Many years ago, Jack purchased 400 shares of Canary stock. During the current year, the stock became worthless. It was determined that the company "went under" because several corporate officers embezzled a large amount of company funds. Identify the relevant tax issues for Jack.

Jack should be concerned with the following issues: •Should this be treated as a worthless security? •Should this be treated as a theft loss? •Does the theft loss create an NOL? •Can the NOL be carried back three years? •Is it § 1244 stock?

For each of the following determine the amount the that should be included in gross income Jacob was awarded the Nobel Peace Prize. When he was presented the check for 1.4million. Jacob said, "I do not need the money. Give it to the United Nations to use toward the goal of world pease

Jacob can exclude from his gross income the $1.4 million Nobel Peace Prize received and then given to the United Nations, assuming that the United Nations is a qualified nonprofit organization

Kelly decided to invest in Lime, Inc. common stock after reviewing Lime's public disclosures, including recent financial statements and a number of press releases issued by Lime. On August 7, 2013, Kelly purchased 60,000 shares of Lime for $210,000. In May 2014, Lime entered into a joint venture with Cherry, Inc. In November 2014, the joint venture failed, and Lime's stock began to decline in value. In December 2014, Cherry filed a lawsuit against Lime for theft of corporate opportunity and breach of fiduciary responsibility. In February 2015, Lime filed a countersuit against Cherry for fraud and misappropriation of funds. At the end of December 2015, Kelly's stock in Lime was worth $15,000. Identify the relevant tax issues for Kelly.

Kelly should be concerned with the following issues: • Is this a theft loss? • What is the amount of the loss? • In which year can the loss be taken?

Which of the following assets would be subject to cost recovery?

Landscaping around the doctor's office.

Field Audit

Least common audit. Will come to the business. Will look at anything. Take long as it take. An audit by the IRS conducted on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.

Ltr.Rul. 8722175 Letter Ruling, Issue Week, Year

Letter Ruling = 175 Issue Week = 22 Year = 1987 Letter rulings are issued for a fee upon a taxpayer's request and describe how the IRS will treat a proposed transaction for tax purposes. Published digests of private letter rulings can be found in Private Letter Rulings (published by RIA), BNA's Daily Tax Reports, and Tax Analysts Tax Notes. In addition, computerized databases of letter rulings are available through several private publishers. Letter rulings are issued multidigit file numbers which indicate the year and week of issuance as well as the number of the ruling during that week. In this example, letter ruling 175 was issued in the twenty-second week of 1987.

Ltr.Rul. 9308086 Letter Ruling, Issue Week, Year

Letter Ruling = 86 Issue Week = 8 Year = 1993 Letter rulings are issued multidigit file numbers which indicate the year and week of issuance as well as the number of the ruling during that week. In this example, letter ruling 86 was issued in the eighth week of 1993.

Michael Sima, a sole proprietor craftsman, purchased an amount of equipment in the current year that exceeded the maximum allowable § 179 depreciation election limit by $20,000. Sima's total purchases of property placed in service in the current year did not exceed the limit imposed by § 179. All of the property (including the equipment) was purchased in November of the current year, and Sima elected to depreciate the maximum amount of equipment under § 179. Sima had bottom-line Schedule C income of $50,000 in the current year. Which method may Sima use to depreciate the remaining equipment in the current year?

MACRS mid-quarter convention for personal property.

How are returns selected for Audit?

Mathematical formulas Statistical sampling

An employer provides all of his employees with life insurance protection equal to twice the employee's annual salary. Melba age 42 has an annual salary of 70000 Is Melba required to recognize income even though she is still alive at the end of the year and thus nothing has been collected on the life insure policy

Melba's insurance coverage of $140,000 is twice her annual salary of $70,000. Because this exceeds $50,000, she is required to include in gross income the premiums on $90,000 of excess insurance coverage. The premiums amount is computed by using a table provided by the IRS. For Melba's age, 42 years, the premium amount is $.10 per month per $1,000 of insurance coverage for her annual insurance coverage in excess of $50,000 (see Exhibit 4.3), which is $108 [($.10)(12)(90)].

TAM 200114099 Memo Number, Issue Week, Year

Memo Number = 99 Issue Week = 14 Year = 2001 Technical Advice Memoranda (TAMs) are not officially published. However, they are assigned file numbers according to the same procedure used for letter rulings. TAMs are issued multidigit file numbers which indicate the year and week of issuance as well as the number of the ruling during that week. In this example, Technical Advice Memorandum number 99 was issued during the fourteenth week of 2001.

If ____________ 40% of the value of property, other than __________________________ is placed in service during _________ quarter of the year, the mid-quarter convention applies. first quarter is allowed: second quarter is allowed: third quarter is allowed: fourth quarter is allowed:

More than eligible real estate property the last 10.5 7.5 4.5 1.5

If the residence is rented for 15 days or ____ in a year and is NOT used for personal purposes than the greater of (1) ___ days or (2) __ percent of the total days rented, the residence is treated as _____. The deduction of the expenses allocated to rental days ______ exceed rent income and result in a rental loss

More, 14, 10, rental property, can

Correspondence audit

Most common audit. Resolved by mail. Covers minor issues

FOR, FROM, NOT deductible? Child support paid

NOT

FOR, FROM, NOT deductible? Credit card interest

NOT

FOR, FROM, NOT deductible? Federal income tax

NOT

FOR, FROM, NOT deductible? Grady has a loss on the sale of his personal vehicle.

NOT

FOR, FROM, NOT deductible? Harriet paid a fine for speeding.

NOT

FOR, FROM, NOT deductible? Walter paid for food and clothing for his two dependent children.

NOT

FOR, FROM, or NOT deductible? Sam gives cash to his father as a birthday gift.

NOT

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Keith pays child support to his former wife, Renee, for the support of their son, Chris.

NOT

What happens after audit

Negotiate through Appeals division The taxpayer can litigate the case in the Tax Court, a Federal District Court, or the Court of Federal Claims. The taxpayer may appeal to the Appeals Division of the IRS The taxpayer may attempt to negotiate a settlement with a higher level of the IRS

The Regulations stipulate that _______ factors should be considered in determining whether an activity is profit-seeking or is a hobby. The presence or absence of a factor ________ by itself determinative of whether the activity is profit-seeking or is a hobby. The Code provides a rebuttable presumption that an activity is profit-seeking if the activity shows a profit in at least _____ of the previous ______ tax years. If these profitability tests are met, the activity is presumed to be a _________ rather than a _________________ .

Nine Is not 3 5 trade or business personal hobby

Answer the following question regarding personal use property. Is property that is classified as personal use property subject to cost recovery?

No

Can Gordon deduct any of the political contributions he made

No

Many years ago, Jack purchased 400 shares of Canary stock. During the current year, the stock became worthless. It was determined that the company "went under" because several corporate officers embezzled a large amount of company funds. Identify which of the following are relevant tax issues for Jack regarding the loss associated with his stock. Has Jack taken a loss related to worthless securities within the last three years Should this be treated as a worthless security? Is it § 1244 stock? Should this be treated as a theft loss? If an NOL is created, what are the NOL carryforward implications?

No Yes YEs Yes Yes

The value of Terrah's personal residence has declined significantly because of a recent forest fire in the area where she lives. The fire was a Federally declared disaster. Terrah's house suffered no actual damage during the fire, but because much of the surrounding area was destroyed, the value of all of the homes in the area declined substantially. Can Terrah take a casualty loss for the decline in value of her residence caused by the fire?

No, it does not meet sudden and expected and unusal progressive deterioation

A _________________ bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless. The use to which the borrowed funds are put by the debtor ___________________ A ____________ bad debt is deductible as an ordinary loss in the year incurred, whereas a _____________ bad debt is always treated as a short-term capital loss. Although no deduction is allowed when a ____________ bad debt is partially worthless, the taxpayer is entitled to deduct the net amount of the loss upon final settlement. The nonbusiness bad debt provisions ___________ applicable to corporations.

Non Business Is of no consequence Business non business non business are not

A _______ bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless. The use to which the borrowed funds are put by the debtor _______. A _______ bad debt is deductible as an ordinary loss in the year incurred, whereas a _________ bad debt is always treated as a short-term capital loss. Although no deduction is allowed when a _________ bad debt is partially worthless, the taxpayer is entitled to deduct the net amount of the loss upon final settlement. The nonbusiness bad debt provisions _____ applicable to corporations.

Nonbusiness, is of no consequence. Business, nonbusiness, are not

For/From/ None Roberto gives cash to his father as a birthday gift. Sandra gives cash to her church. Albert pays Dr. Dafashy for medical services rendered. Mia pays alimony to Bill in accordance with their separation agreement which was signed in 2018. Rex, who is self-employed, contributes to his pension plan. Bonita pays expenses associated with her rental property. Lu, who operates a sole proprietorship, takes a client to the theater after dinner, where they discussed new business

None From From For For For None

If Henry doesn't own the land, can he take depreciation on the business assets situated on the land?

Not a tax relevant issue

Which taxes are reduced based on a merit rating system?

Only FUTA

__________________ income recapture is required any time property, on which an expense has been taken under § 179, is no longer used predominantly _______________________ . __________________ is required when the expensed property is converted to personal use.

Ordinary in a trade or business Recapture

Complete the statements below regarding § 179 expense and expense recapture. ___ income recapture is required any time property, on which an expense has been taken under § 179, is no longer used predominantly ___. ___ is required when the expensed property is converted to personal use.

Ordinary, in a trade or business, Recapture

FOR, Partially FOR, FROM, Partially FROM, or NOT deductible? Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment.

Partially FROM

Patrick and Eva are planning to divorce. Patrick has offered to pay Eva $12,000 each year until their 11 yr old daughter reaches 21. Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000. What factors should Eva and Patrick consider in deciding between these 2 options?

Patrick and Eva should consider the tax implications of the agreement. The property can be transferred without recognition of gain by Patrick or Eva. However, Eva's cost basis in the stock will be the same as Patrick's. If his basis is less than the fair market value of the stock, Eva will recognize gain when the stock is sold, assuming the stock maintains its value. The cash payments, as presently structured, will not qualify as alimony, deductible by Patrick and income to Eva. The payments are not alimony because they are subject to a contingency related to the daughter, which suggests the payments are for child support. In addition, to qualify as alimony, the cash payments must cease with the death of the payee, the agreement must not specify that the payments are not alimony, and Patrick and Eva cannot live in the same household when the payments are made. Because the cash payments do not qualify as alimony, Patrick will not be allowed a deduction and Eva will not be required to recognize income.

If the residence is rented for fewer than 15 days in a year, it is treated as a ______. The rent income is ______ gross income and mortgage interest and real estate taxes are allowed as ______. If the residence is rented for 15 days or ____ in a year and is not used for personal purposes for more than the greater of (1) ___ days or (2) ___ percent of the total days rented, the residence is treated as ______. The deduction of the expenses allocated to rental days ____ exceed rent income and result in a rental loss. If the residence is rented for 15 days or _____ in a year and is used for personal purposes for more than the greater of (1) ___ days or __ percent of the total days rented, it is treated as a _____. Expenses _____ rent income

Personal Residence, Excluded from, Itemized Deductions. More, 14, 10, rental property, can More, 14, 10, personal/rental use residence, are allowed only to the extent of

For each of the following determine the amount the that should be included in gross income Peyton was selected the MVP in the Suprbowl. In recognition of this, he was awarded an automobile with the value of 60k. Peyton did not need the automobile so he asks that the title be put into his parent's name

Peyton is required to include $60,000 in gross income, the value of the automobile. The award does not satisfy the right type of achievement requirement to qualify for exclusion from gross income. In addition, the provision that requires the recipient to contribute the award to a qualified governmental unit or nonprofit organization is not satisfied.

The exclusion from Federal tax of certain interest income from state and local bonds

Political considerations

The three factors which the MACRS tables take into account are

Recovery Period, method, and convention

"How does the § 179 immediate expensing deduction affect the computation of MACRS cost recovery?" The basis of the property for cost recovery purposes is ________________ by the § 179 amount. The business income limitation ____________ affect basis.

Reduces does not

The audit is resolved by mail.

Referred to as a correspondence audit, this type of audit covers a minor issue

Discuss under what circumstances a company would elect to amortize research and experimental expenditures rather than use the expense method.

Research and experimental expenditures are usually amortized rather than expensed when a company does not have sufficient income to offset the expenses.

Rev.Proc. 2012-14, 2012-1 C.B. 988 Revenue Procedure Number, Page, Volume

Revenue Procedure Number = 14 Page = 988 Volume = 1 Revenue Procedures are issued in the same manner as Revenue Rulings but deal with the internal management practices and procedures of the IRS. Revenue Rulings and Revenue Procedures are published weekly by the U.S. Government in the Internal Revenue Bulletin (I.R.B.). Revenue Procedures are cited in the same manner, except that "Rev.Proc." is substituted for "Rev.Rul." In this example, the first number indicates the year the procedure is issued. Next is the number of the procedure issued, followed by the volume. "C.B." means Cumulative Bulletin, and the final number is the page number. This is Revenue Procedure number 14, and it appears on page 988 of Volume 1 of the Cumulative Bulletin issued in 2012.

Rev.Proc. 2002-29, 2002-1 C.B. 1366 Revenue Procedure Number, Page, Volume

Revenue Procedure Number = 29 Page = 1366 Volume = 1 In this example, the first number indicates the year the procedure is issued. Next is the number of the procedure issued, followed by the volume. "C.B." means Cumulative Bulletin, and the final number is the page number. This is Revenue Procedure number 29, and it appears on page 1366 of Volume 1 of the Cumulative Bulletin issued in 2002.

Rev.Proc. 2008-85, 2008-2 C.B. 2671 Revenue Procedure Number, Page, Volume

Revenue Procedure Number = 85 Page = 2671 Volume = 2 In this example, the first number indicates the year the procedure is issued. Next is the number of the procedure issued, followed by the volume. "C.B." means Cumulative Bulletin, and the final number is the page number. This is Revenue Procedure number 85, and it appears on page 2671 of Volume 2 of the Cumulative Bulletin issued in 2008.

Ron, a cash basis taxpayer, sells his business accounts receivable of $100,000 to Mike for $70,000 (70% of the actual accounts receivable). Discuss the amount and classification of Ron's bad debt deduction.

Ron has no bad debt deduction because he is a cash basis taxpayer. Rather, Ron has $70,000 of income.

Herbert was employed for the first six months of 2013 and earned $90,000 in salary. During the next 6 months, he collected $8,800 of unemployment compensation, borrowed $12,000 (using his personal residence as collateral), and withdrew $2,000 from his savings account (including $60 of interest). He received dividends of $550. His luck was not all bad, for in Dec, he won $1,500 in the lottery on a $5 ticket. Calculate Herbert's gross income.

Salary $ 90,000 Unemployment compensation 8,800 Interest income 60 Dividend income 550 Lottery winnings 1,500* Gross income $100,910 *The $5.00 cost of the lottery ticket is deductible as a miscellaneous itemized deduction, not subject to the 2%-of-AGI reduction. Note: Neither the $12,000 loan nor the $2,000 savings account withdrawal are included in gross income.

On what Form 1040 schedule or schedules are the income and expenses reported

Schedule E

Sean is in the business of buying and selling stocks and bonds. He has a bond of Green corporation for which he paid $200,000. The bond is currently worth only $50,000. Discuss whether Sean can take a $150,000 loss for a business bad debt or for a worthless security.

Sean cannot take the loss as a business bad debt because a bond is a security. Sean cannot take the loss as a worthless security because losses are allowed only when the security is completely worthless.

Office Audit

Second most common. Bring in information to IRS for them to look at. May be more broad. An audit by the IRS of a taxpayer's return that is conducted in the agent's office Restricted in Scope

How is a nonbusiness bad debt classified

Short Term Capital Loss

AICPA also states system should be:

Simple Neutral Clear and understandable Structured to minimize noncompliance Predictable amount and timing

Gambling losses in excess of gambling gains

Social considerations

Jim discovers that his residence has extensive termite damage. Discuss whether he may take a deduction for the damage to his residence.

Some courts have held that termite damage over periods of up to 15 months after infestation constituted a sudden event and was, therefore, deductible as a casualty loss. However, the current position of the IRS is that termite damage is not deductible (it is not considered a sudden event).

In general, ADS depreciation is computed using _________________ recovery method. However, for purposes of the AMT, depreciation of personal property is computed using the _______________________________ method with an appropriate switch to the __________________ method. The taxpayer must use the __________________________________________ convention, whichever is applicable, for all property other than eligible real estate. The ______________ convention is used for eligible real estate.

Stright line 150 percentage declining balance striaght line half year or mid quarter mid month

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the all events test and the economic performance test.

TRUE

Litigate

Tax court -> tax experts U.S District Court -> generalists. Possible jury trial U.S Federal claims -> national generalists All the court follows supreme court's rule

For each of the following determine the amount the that should be included in gross income Linda won the craig country fair beauty pageant. She received a 10,000 scholarship that paid her 6,000 for tuition and 4000 for meals and housing for the academic year

The $10,000 Linda received cannot be excluded as a prize because it was not received in recognition of a qualifying achievement (e.g., scientific, artistic). Moreover, she entered the contest. However, the $6,000 tuition award (but not the $4,000 received for meals and housing) can qualify as a scholarship.

Eve is 67 and unmarried. She receives $12,000 a year in SS benefits and $20,000 from a taxable pension. She is in the 15% marginal tax bracket on her Federal income tax return. She claims the standard deduction. She is considering selling stock she has held for more than 1 yr. Her cost of he stock is $6,000, and its fair market value is $13,000. She has no other gains or losses for the year. She as asked you to estimate the tax consequences of selling the stock

The $7,000 recognized gain ($13,000 - $6,000) will be taxed at 0% as a long-term capital gain. However, the $7,000 recognized gain is included in her taxable income. Therefore, the gain will cause some of her Social Security benefits to be subject to tax. Without the additional gain, $500 of Eve's Social Security benefits will be subject to tax. However, the additional $7,000 recognized gain included in gross income and adjusted gross income will cause $4,000 of Eve's Social Security benefits to be included in her gross income. .5[$20,000 + $7,000 + .5($12,000) - $25,000] = $4,000. Therefore, the additional tax that would result from the gain would be as follows: Tax on additional gross income from Social Security ($3,500 × 15%) $525 Tax on long-term capital gain ($7,000 × 0%) -0- Additional tax liability.

AICPA Ethical guidelines

The American Institute of CPAs has issued numerous pronouncements, called the "Statements on Standards for Tax Services," dealing with CPAs engaged in tax practice. Do not take questionable positions on a client's tax return in the hope that the return will not be selected for audit by the IRS. A practitioner can use a client's estimates if they are reasonable under the circumstances Every effort should be made to answer questions appearing on tax returns Upon learning of an error on a past tax return, advise the client to correct it. Do not, however, inform the IRS of the error.

Answer the following question regarding Federal tax legislation. Where does Federal tax legislation generally originate?

The House Ways and Means Committee

Discuss the treatment of a business bad debt when the business also has long-term capital gains.

The business bad debt is treated as an ordinary loss; hence, the fact that the business has long-term capital gains has no relevance.

Sandra, a cash basis taxpayer, purchased a certificate of deposit for $970 on July 1, 2013, that matures on June 30, 2014, with the maturity value being $1,000. Also on July 1, 2013, she purchased a certificate of deposit for $940 that matures on June 30, 2015, with the maturity value being $1,000. Is Sandra required to recognize any income from the certificates in 2013, 2014, or 2015? Explain?

The certificates are original issue discount instruments. Sandra is required to recognize an amortized portion of the $60 interest on the 2 year certificate in 2013, 2014, and 2015. However, the certificate that matures within one year of purchase is not subject to interest amortization and therefore the interest is deferred until 2015.

On December 29 2015 an employee received a 5,000 check from her employer's client. The check was payable to the employer. The employer did not remit the funder the employer until Dec 30, 2015 The employer deposited th check on Dec 31 2015 but the bank did not credit the employer's bank account until January 2 2016 When is the cash basis employer required to include the 5000 in Gross income

The check is a cash equivalent. The employer, as principal, must recognize the income when his agent, the employee, collected it in 2015.

Discuss the circumstances under which the cost of repairs to the damaged property can be used to measure the amount of casualty loss.

The cost of repairs can be used as a method for measuring the amount of a casualty loss if the repairs are necessary to restore the property to its condition before the casualty, the amount spent for the repairs is not excessive, and the repairs do not extend beyond the damage suffered. In addition, the value of the property after the repairs must not, as a result of the repairs, exceed the value of the property immediately before the casualty.

Discuss the tax treatment of the sale of 1244 stock at a gain.

The gain on the sale of § 1244 stock is treated as a capital gain.

accounting method

The method under which income and expenses are determined for tax purposes.

Internal Revenue Service

The responsibility for administering the Federal tax laws rests with the Treasury Department. The IRS is part of the Department of the Treasury and is responsible for enforcing the tax laws. The Commissioner of Internal Revenue is appointed by the President and is responsible for establishing policy and supervising the activities of the IRS.

The income tax return for 2015 was filed on June 25, 2016.

The statute of limitations will begin to run on June 25, 2016.

The income tax return for 2015 was never filed because the taxpayer thought no additional tax was due.

The statute of limitations will not begin to run.

The income tax return for 2015 was prepared on April 4, 2016, but was never filed. Through some misunderstanding between the preparer and the taxpayer, each expected the other to file the return.

The statute of limitations will not begin to run.

Amos began a business, Silver, Inc., on July 1, 2012. The business extracts and processes silver ore. During 2015, Amos becomes aware of the domestic production activities deduction and would like to take advantage of this deduction. Identify the relevant tax issues for Silver, Inc.

The tax issues for Silver, Inc., are as follows: •Is the extraction and processing of silver ore a manufacturing activity? •Can the deduction be taken for prior years? •What laws will apply for prior years?

How does the pay-as-you-go procedure apply to wage earners?

The tax law requires employers to withhold a specified dollar amount from wages paid to the employee to cover income taxes.

How does the pay-as-you-go procedure apply to persons who have income from sources other than wages?

The tax law requires the taxpayer to make quarterly payments to the IRS for estimated taxes.

The taxpayer performs services with payment due from the customer within 30 days. All customers pay within the time limit. What would be the benefit to the taxpayer using the cash method of accounting rather than the accrual method?

The taxpayer can defer income by using the cash method of accounting because customers or clients pay subsequent to the taxpayer performing the services (i.e., defer recognizing income until the receivables are converted to cash).

The income tax return for 2015 was filed on February 19, 2016

The three-year statute of limitations will begin to run on April 15, 2016.

FICA v.s. FUTA

The two major employment taxes are FICA (Federal Insurance Contributions Act-commonly referred to as the Social Security tax) and FUTA (Federal Unemployment Tax Act). Both taxes can be justified by social and public welfare considerations. FICA is imposed on both the employer and employee, while FUTA is imposed only on the employer. FICA is administered by the Federal government. FUTA, however, is handled by both the Federal and state governments. Only FUTA are reduced based on a merit rating system.

One of the tax advantages of hiring family members to work in your business is that FICA taxes are avoided.

This statement is false because only children under 18 employed in the family's/parent's unincorporated business are exempted from FICA tax.

Evaluate the following statement: "In dividing up assets when a couple divorces, the basis of the assets is not relevant because the property division is nontaxable."

This statement is seldom true. Basis is important because the transferor's basis becomes the transferee's basis. The difference between the basis and selling price is the taxable gain or loss when the asset is sold. If the asset will never be sold, then basis would not be relevant. But seldom can the person receiving the property be certain the property will never be sold.

What is the purpose of the unified transfer tax credit?

To eliminate the tax on modest gifts and estates.

Deductions for AGI

Trade or business expenses. Losses on property dispositions. Alimony. One-half of self-employment tax. Contributions to retirement plans. Moving expenses. Interest on student loans. Tuition.

A taxpayer using the specific charge-off method may claim a deduction when a specific business debt becomes either partially or wholly worthless or when a specific nonbusiness debt becomes wholly worthless.

True

A transfer of appreciated property (fair market value is greater than adjusted basis) in satisfaction of a debt is an event that triggers the realization of income.

True

All personal property placed in service in 2018 and used in a trade or business qualifies for additional first-year depreciation.

True

An employee of an education institution may be able to exclude the value of campus housing provided by the employer

True

An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature

True

An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature.

True

Assets used in a trade or business or for the production of income are eligible for cost recovery if they are subject to wear and tear, decay or decline from natural causes, or obsolescence.

True

Because of the exclusion for accident and health insurance, employees will have a greater after-tax and after-insurance income if the employer pays a lower salary but also pays the insurance premiums.

True

Beginning in 2018, an NOL can be carried forward indefinitely.

True

By borrowing on the policy's cash surrender value, the owner can actually receive the policy's increase in value in cash without recognizing income

True

Casualty and theft losses attributable to personal use property are subject to the $100 per event and the 10 percent-of-AGI limitations if the loss occurs in a Federally declared disaster area.

True

Casualty and theft losses incurred by an individual in connection with a trade or business are deductible for AGI.

True

Constructive ownership provisions are applied to determine whether the taxpayers are related

True

Constructive ownership provisions are applied to determine whether the taxpayers are related.

True

Each Exclusion has its own legislative history and reason for enactment

True

Expenses in connection with the acquisition or improvement of land or depreciable property are not research and experimental expenditures.

True

For personal property placed in service in 2018, the § 179 maximum deduction is limited to $1,000,000.

True

Generally, a theft loss is deducted in the year of discovery.

True

Generally, to be deductible legal fees incurred in connection with a divorce must relate solely to tax advice in a divorce proceeding.

True

If a taxpayer sells goods or provides services on credit and the account receivable subsequently becomes worthless, a bad debt deduction is permitted only if income arising from the creation of the account receivable was previously included in income.

True

If amortization is permitted, it will be over a 15-year period.

True

If an automobile is placed in service in 2018, the limitation for cost recovery in 2020 will be based on the cost recovery limits for the year 2018.

True

If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

True

If the creditor reduces the debt as an act of love, affection, or generosity, the debtor has simply received a nontaxable gift.

True

If the homeowner rents the home for 14 days or less, then all of the rental income received would escape taxation.

True

If the mid-quarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter.

True

If the payment is limited to be for services rendered, it is not a gift, even though the payment is made without legal or moral obligation and the payor receives no economic benefit from the transfer

True

If the taxpayer has a partial claim of recovery, only part of the loss can be claimed in the year of discovery.

True

If the taxpayer's goal is to recover the cost of fixed assets as quickly as possible, the taxpayer should choose assets with longer lives when electing § 179 expensing.

True

In general, after 2017, losses on personal use property (e.g., a car, furniture, or a residence) are not deductible.

True

In general, only losses from the operation of a trade or business and casualty and theft losses can create an NOL.

True

In many situations, the Code allows the debtor to reduce his or her basis in the assets by the realized gain from the discharge of indebtedness.

True

In some cases, Congress has enacted exclusions to rectify the effects of judicial decisions or IRS pronouncements

True

Investing in Series EE U.S. government savings bonds can allow the taxpayer to earn tax-exempt interest if the bond proceeds are used for qualified higher education expenses.

True

It is generally preferable to elect an immediate write-off of the research expenditures because of the time value of the tax deduction.

True

Legal fees incurred in connection with a criminal defense are deductible only if the crime is associated with the taxpayers trade or business or income-producing activity

True

Neither "ordinary" nor "necessary" is defined in the Code or Regulations

True

Neither "ordinary" nor "necessary" is defined in the Code or Regulations.

True

One of the more difficult tasks is determining if and when a bad debt is worthless.

True

Property used for the production of income is not eligible for § 179 expensing.

True

Property which is classified as personalty may be depreciated.

True

Realty (real property) generally includes land and buildings permanently affixed to the land

True

Related parties include Brothers and sisters, spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer.

True

Related parties include brothers and sisters, spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer.

True

Related parties include two corporations that are members of a controlled group.

True

Section 212 allows deductions for ordinary and necessary expenses paid or incurred for the production or collection of income.

True

Section 212 expenses may be for AGI or from AGI.

True

Sections 101 through 150 provide authority for excluding specific items from gross income

True

T or F At the time taxpayers charge expenses on their credit cards, they are allowed to claim the deduction.

True

T or F Constructive ownership provisions are applied to determine whether the taxpayers are related.

True

T or F If the homeowner rents the home for 14 days or less, then all of the rental income received would escape taxation.

True

T or F Legal fees incurred in connection with a criminal defense are deductible only if the crime is associated with the taxpayer's trade or business or income-producing activity.

True

T or F Promising to pay or issuing a note does not satisfy the actually paid requirement.

True

T or F Related parties include brothers and sisters, spouse, ancestors (parents and grandparents), and lineal descendants (children and grandchildren) of the taxpayer.

True

T or F Related parties include two corporations that are members of a controlled group.

True

T or F Section 212 allows deductions for ordinary and necessary expenses paid or incurred for the production or collection of income.

True

T or F Section 212 expenses may be for AGI or from AGI.

True

T or F The courts developed the principle that a payment in violation of public policy is not a necessary expense and is not deductible.

True

T or F The period in which an accrual basis taxpayer can deduct an expense is determined by applying the all events test and the economic performance test.

True

T or F To avoid a properly authorized deduction from being disallowed, the taxpayer must be vigilant in maintaining all business receipts and in documenting the business purpose of the deduction.

True

T or F To be disallowed, the bribe or kickback must be illegal under either Federal or state law and must also subject the payor to a criminal penalty or the loss of a license or privilege to engage in a trade or business.

True

T or F To deduct more than $1,000,000 in compensation, publicly held corporations must structure compensation packages so that the excess income meets the exceptions to this rule.

True

T/F A taxpayer using the specific charge-off method may claim a deduction when a specific business debt becomes either partially or wholly worthless or when a specific nonbusiness debt becomes wholly worthless

True

T/F An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the taxpayer and is not capital in nature.

True

T/F Constuctive ownership provisions are applied to determine whether the taxpayers are related

True

T/F If a taxpayer sells goods or provides services on credit and the account receivable subsequently becomes worthless, a bad debt deduction is permitted only if income arising from the creation of the account receivable was previously included in income.

True

T/F Neither "ordinary" nor "necessary" is defined in the Code or Regulations

True

T/F One of the most difficult tasks is determining if and when a bad debt is worthless

True

T/F Section 212 allows deductions for ordinary and necessary expenses paid or incurred for the production or collection of income.

True

T/F Section 212 expenses may be deducted for or from AGI

True

T/F The courts developed the principle that a payment in violation of public policy is not a necessary expense and is not deductible.

True

T/F The period in which an accrual basis taxpayer can deduct an expense is determined by applying the all events test and the economic performance test.

True

T/F To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation

True

T/F To be deductible, any trade or business expense must be "ordinary and necessary." Such expenses are deducted for AGI.

True

T/F To be disallowed, the bribe or kickback must be illegal under either federal or state law and must also subject the payor to a criminal penalty or loss of a license or privelege to engage in a trade or business

True

T/F When an expenditure for a tangible asset that has an ascertainable life, it is capitalized and may be deducted as deprectiation (or cost recovery) over its depreciable life.

True

Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction.

True

Taxable income of a trade or business is computed without regard to the amount expensed under § 179.

True

Taxpayers may elect to use the straight-line method under ACRS for personalty. a. True b. False

True

The basis of cost recovery property is reduced by the cost recovery allowed, and not less than the allowable amount.

True

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

True

The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.

True

The deduction for qualified business income will not create or increase a net operating loss

True

The key date for calculating cost recovery is the date the asset is placed in service.

True

The law permits three alternatives for the handling of research and experimental expenditures.

True

The meals and lodging exclusion enables employees to receive from their employer what they ordinarily must purchase with after-tax dollars.

True

The meals and/or lodging are furnished by the employer on the employers business premises for the convenience of the employee.

True

The noncompete agreement is considered a § 197 intangible if it is acquired in connection with the acquisition of a business

True

The period in which an accrual basis taxpayer can deduct an expense is determined by applying the all events test and the economic performance test.

True

The taxable income computation for purposes of the § 179 limit includes the deduction for MACRS

True

To avoid a properly authorized deduction from being disallowed, the taxpayer must be vigilant in maintaining all business receipts and in documenting the business purpose of the deduction.

True

To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation

True

To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation.

True

To be deductible, any trade or business expense must be "ordinary and necessary." Such expenses are deducted for AGI.

True

To deduct more than $1 million in compensation, publicly held corporations must structure compensation packages so that the excess income meets the exceptions to this rule.

True

To qualify as a gift the payment must be made "out of affection, respect, admiration, or charity"

True

Under a flexible spending plan, the employee accepts lower cash compensation in return for the employer agreeing to pay certain costs that the employer can pay without the employee recognizing gross income.

True

When a business is being purchased, if possible the purchaser should bargain for more of the purchase price being allocated to equipment rather than goodwill and covenants not to compete. a. True b. False

True

When an expenditure is for a tangible asset that has an ascertainable life, it is capitalized and may be deducted as depreciation (or cost recovery) over its depreciable life.

True

b. If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer's goal may be to slow down cost recovery. In such a situation, the taxpayer should choose the straight-line cost recovery method.

True

b. Listed property includes any computer or peripheral equipment, with the exception of equipment used exclusively at a regular business establishment, including a qualifying home office.

True

c. A taxpayer may be able to avoid the mid-quarter convention by designating § 179 treatment for assets placed in service during the last quarter of the taxable year.

True

d. In determining the percentage of business usage for listed property, a mileage-based percentage is used for automobiles.

True

e. The law places special limitations on cost recovery deductions for passenger automobiles (any four-wheeled vehicle manufactured for use on public streets, roads, and highways with an unloaded gross vehicle weight rating of 6,000 pounds or less.)

True

f. The luxury auto limits are imposed before any percentage reduction for personal use.

True

Depletion claimed by a sole proprietor is reported on Schedule C. a. True b. False

True Depletion claimed by a sole proprietor is reported on Schedule C.

If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Schedule C. a. True b. False

True Depreciation is supported by completing Form 4562 and then transferred to Schedule C.

If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may want to elect to use straight line depreciation to slow down the cost recovery. a. True b. False

True If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer should elect to use straight line depreciation to slow down the cost recovery and preserve the deductions for later, higher tax rate years.

Land improvements generally are eligible for cost recovery. a. True b. False

True Land improvements are 15-year class property.

If a taxpayer uses regular MACRS for 15 and 20-year class property, an alternative minimum tax adjustment is not necessary with respect to the depreciation on that property. a. True b. False

True No adjustment is required on 15 and 20-year class property because they use 150% declining-balance depreciation.

All eligible real estate under ACRS is permitted one-half month of cost recovery in the month of disposition. a. True b. False

True One-half month of cost recovery is permitted in the month of disposition for realty under ACRS.

Regarding the computation of cost recovery in the year of sale of an asset using the mid-quarter convention, indicate whether the following statements are "True" or "False". • If the mid-quarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter. • If the mid-quarter convention applies, no cost recovery deduction is allowed in the year of sale. • If the mid-quarter convention applies, one-quarter of the annual cost recovery deduction is allowed in the year of sale.

True, False, False

Prop.Reg. § 1.581-2(c)(4) Type of Regulation, Related Code Section, Regulation Section Number, Paragraph Designation, Sub Paragraph

Type of Regulation = 1 Related Code Section = 581 Regulation Section Number = 2 Paragraph Designation = (c) Sub Paragraph = (4) Regulations may be issued in proposed, temporary, or final form. Appropriate abbreviations are used, such as Prop.Reg., Temp.Reg., and Reg. Since Regulations interpret the Code, they are arranged in the same sequence as the Code. A number is added at the beginning, however, to indicate the type of tax or the administrative, procedural, or definitional matter to which they relate. For example, the prefix 1 designates the Regulations under the income tax law. Subparts are added for further identification of the Code Section, Regulation number, paragraph, and any related subparagraph. This example is a Proposed Regulation. While 1 refers to the type of Regulation (i.e., income tax), 581 is the related Code Section number, 2 is the subsection number, (c) is the paragraph designation, and (4) is the subparagraph number.

The audit is conducted at the office of the IRS.

Unlike a field audit, which involves an examination of numerous items reported on the return, an office audit is restricted in scope.

In addition to ethical constraints, a tax return preparer may be subject to certain statutorily sanctioned penalties, including the following:

Various penalties involving procedural matters. Penalty for understatement of a tax liability based on a position that lacks any realistic possibility of being sustained. Penalty for any willful attempt to understate taxes Penalty for failure to exercise due diligence in determining eligibility for, or the amount of, an earned income tax credit.

Tax Rates

What we are given Tax rates are applied to the tax base to determine a taxpayer's liability. The tax rates may be proportional or progressive.

When would an account receivable give rise to a bad debt deduction

When the account receivable was previously included in gross income.

A taxpayer who sells property on an installment basis can recognize gain on the sale over the period the payments are received

Wherewithal to pay concept

Prepaid income is taxed to the recipient in the year received and not in the year earned

Wherewithal to pay concept

Does the use of the credit for a gift affect the amount of credit available for the estate tax?

Yes

Is the same amount available for both the Federal gift tax and the estate tax?

Yes

Tax Relevant Information Do the costs exceed $50,000? Did Brash Corporation incur any § 195 expenditures when it was formed? How will the acquisition cost of the assets be allocated to various classes of assets (equipment, building, land, intangibles, etc.)? Can George use the immediate expense election (§ 179) and/or additional first-year (bonus) depreciation on any of the assets?

Yes No Yes Yes

a relevant tax issue Do the expenditures satisfy § 195 requirements? Are the expenditures subject to capitalization? Are the costs deductible as business expenses if incurred by one of George's current businesses?

Yes Yes Yes

Are the costs incurred subsequent to the purchase of the land that are attributable to maintenance of the mountain roads, trails, and slopes capitalized and subject to depreciation?

Yes a tax relevant issue

If construction costs of the resort's mountain roads, trails, and slopes are depreciated, what is the correct recovery period?

Yes a tax relevant issue

Can a portion of the purchase costs of a ski resort, which are allocated to the construction costs of the resort's mountain roads, trails, and slopes, be depreciated?

Yes a tax revelent issue

deductions for agi

a determination peculiar to individual taxpayers. Generally, it represents gross income less business expenses, expenses attributable to the production of rent or royalty income, the allowed capital loss deduction, and certain personal expenses.

A tax is progressive if

a higher rate of tax applies as the tax base increases.

Hobby Loss

a non deductible loss arising from a personal activity as contrasted with an activity engaged in for profit

Glenda, a calendar year and cash basis taxpayer, rents property from Janice. As part of the rental agreement, Glenda pays $8,400 rent on April 1, 2018 for the 12 months ending March 31, 2019. a. Glenda's deduction for rent expense in 2018 is $____. b. Assume the same facts, except that the $8,400 is for 24 months rent ending March 31, 2019. Glenda's deduction for rent expense in 2018 is $____.

a) $8400 B) 8400*9/24= 3150

Printers Company pays a $25,000 annual membership fee to a trade association for paper wholesalers. The trade association estimates that 60% of its dues are allocated to lobbying activities. a. Printers Company's total deductible expense for tax purposes is $_____. b. Assume the same facts as above except that the $25,000 was incurred for in-house lobbying expenses. Printers Company's total deductible expense for tax purposes is $_____.

a) .40*25000= 10000 b) 0

Martha was considering starting a new business. During her preliminary investigations related to the new venture, she incurred the following expenditures: Salaries $22,000 Travel 18,000 Professional fees 13,000 Interest on a short-term note 4,000 Martha begins the business on July 1 of the current year. a. Classify for Martha the following expenditures as "Qualifies as a startup costs" or "Does not qualify as a startup cost". 1) Salaries 2) Travel 3) Professional fees 4) Interest on a short-term note b. If Martha elects § 195 treatment, enter the startup expenditure deduction for the current year. In your calculations, round any division to 2 decimal places. Round your final answer to the nearest dollar. Current year startup expenditure equals $___

a. 1) Qualifies as a startup cost 2) Qualifies as a startup cost 3) Qualifies as a startup cost 4) Does not qualify as a startup cost b. $3,700 [5,000 - (53,000-50,000)] + {[(53,000 - 2,000)/180] x 6 months}

Lopez acquired a building on June 1, 2013, for $1,000,000. Compute the depreciation deduction assuming the building is classified as (a) residential and (b) non residential. Click here to access the depreciation table to use for this problem. If required, round your answers to the nearest dollar. a. If the building is classified as residential rental real estate, Lopez's cost recovery deduction is $___ for 2018. b. If the building is classified as nonresidential real estate, Lopez's cost recovery deduction is $___ for 2018.

a. $36,360 b. $25,640 a. Residential rental real estate: $1,000,000 x .03636 (Exhibit 8.8) = $36,360 b. Nonresidential rental real estate: $1,000,000 x .02564 (Exhibit 8.8) = $25,640

McKenzie purchased qualifying equipment for his business that cost $212,000 in 2018. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. If an amount is zero, enter "0". a. McKenzie's § 179 expense deduction is $___ for 2018. His § 179 carryover to 2019 is $___. b. How would your answer change if McKenzie decided to use additional first-year (bonus) depreciation on the equipment? Hint: See Concept Summary 8.5. McKenzie's § 179 expense deduction is $___ for 2018. His § 179 carryover to 2019 is $___.

a. $5,600, $206,400 b. $212,000, $0

Xavier Corporation begins business on March 1, 2018. The corporation incurs start-up expenditures of $38,000. Round your final answers to the nearest dollar. a. If Xavier elects amortization under § 195, the total start-up expenditures that Xavier may deduct in 2018 is $___ b. Assume the same facts except the start-up costs totaled $52,000. The total start-up expenditures that Xavier may deduct in 2018 is $___

a. $6,833 = 5,000 + {[(38,000-5,000)/180] x 10 months} b. $5,722 = [5,000 - (52,000 - 50,000)] + {[(52,000 - 3,000)/180] x 10 months}

Wes acquired a mineral interest during the year for $10,000,000. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined, and 45,000 tons were sold for $12,000,000. Other related expenses amounted to $5,000,000. Assume the mineral depletion rate is 22%. a. What is the taxable income before the deduction for depletion? b. Under cost depletion, what is the amount of the deduction? c. Under percentage depletion, what is the amount of the deduction? d. Wes's lowest taxable income after the depletion deduction is ___

a. $7,000,000 b. $1,800,000 [(10,000,000/250,000)*45,000] c. 2,640,000 = lesser of (7,000,000 * 50%) or (12,000,000 * 22%) d. 4,360,000

The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good conditions. the company is actually more concerned about damage than about tenants not paying rent. a. discuss the tax effects of the following alternatives: -$1,000 damage deposit with no rent payment. -$500 damage deposit and $500 rent for the final month of the lease. -$1,000 rent for the final 2 months of the lease and no damage deposit. b. which option do you recommend? why?

a. - The $1,000 damage deposit is not taxed in the year of receipt. - The damage deposit is not taxable at the time it is collected, but the $500 prepaid rent is taxed in the year of receipt. -The $1,000 prepaid rent is taxed in the year of receipt. b. The Bluejay Apartments should use the first option. By doing so, it maximizes deferrals without affecting the cash flows.

For the following assets, indicate the cost recovery periods under MACRS. a. Land improvements. b. Water utilities. c. Single-purpose agricultural or horticultural structures. d. Office furniture, fixtures, and equipment. e. Computers and peripheral equipment. f. Any horse that is not a racehorse and is more than 12 years old at the time it is placed in service.

a. 15 b. 20 c. 10 d. 7 e. 5 f. 3

Al is a medical Dr. who conducts his practice as a sole proprietor. During 2013, he received cash of $280,000 for medical services. Of the amount collected $40,000 was for services provided in 2012. At the end of 2013, Al had accounts receivable of $60,000, for all services rendered in 2013. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2014. Compute Al's gross income for 2013. a. Using the cash basis of acct. b. Using accrual basis of acct. c. Advise Al on which method of acct he should use.

a. Al's gross income for 2013 on the cash basis is $292,000 ($280,000 + $12,000), which is the amount he actually collected in that year. b. Al's gross income computed by the accrual method is as follows: Cash received $292,000 Less: Income received but will not be earned until 2014 (12,000) Less: Beginning of the year accounts receivable (40,000) Plus: End of year accounts receivable 60,000 $300,000 c. Al should use the cash method of accounting so that he will not have to pay income taxes on uncollected accounts receivable.

Alva received dividends on her stocks as follows: Amur Corp $60,000 Blaze $40,000 Grape $22,000 a. Alva purchased the Grape stock 3 yrs ago, and she purchased the Amur stock 2 yrs ago. She purchased the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at a $5,000 loss. Alva had no other capital gains and losses for the yr. She is in the 35% marginal tax bracket. Compute Alva's tax on her dividend income for 2013. b. Alva's daughter, who is 25 and not her dependent, had taxable income of $6,000, which included $1,000 of dividends on Grape, inc stock. The daughter had purchased the stock 2 yrs ago. Compute the daughters tax liability on the dividends. c. Alva can earn 5% before-tax interest on a corporate bond or a 4% dividend on a preferred stock. Assuming that the appreciation in value is the same, which investment produces the greater after-tax income? d. the same as (c), except that Alva's daughter is to make the investment.

a. Amur dividends (Note 1) $ 60,000 Blaze dividends (Note 2) 40,000 Grape dividends 22,000 Total dividend income $122,000 Note 1: Even though Amur is a foreign corporation, the dividend is a qualified dividend because its stock is traded on an established U.S. securities market. Note 2: The dividend paid by Blaze is not a qualified dividend because the holding period requirement is not satisfied (i.e., must be held more than 60 days during the 121-day period beginning 60 days before the ex-dividend date). Qualified dividends Amur dividend $60,000 Grape dividend 22,000 $82,000 Applicable rate × 15% Tax on qualified dividends $12,300 Non-qualifying dividends Blaze dividend $40,000 Applicable rate × 35% Tax on non-qualified dividends $14,000 b. The daughter is in the 10% marginal tax bracket. She has $1,000 of qualified dividends which are eligible for the alternative tax rate of 0% (rather than the usual 15%). So the daughter's tax liability on the dividends is $0 ($1,000 × 0%). c. Alva's after-tax return on the bond is 3.25% [(1 - .35)(.05)]. Her after-tax return on the stock is 3.4% [(1 - .15)(.04)]. Therefore, the stock yields the greater after-tax return, since any appreciation in value is the same. d. The daughter is in the 10% marginal tax bracket. Therefore, her after-tax return on the bond is 4.5% [(1 - .10)(.05)]. Her after-tax return on the stock is 4.0% [(1 - .00)(.04)]. Therefore, the bond yields the greater after-tax return.

Determine the taxpayer's gross income for tax purposes in each of the following situations: a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the exchange. Deb's cost of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of the year. b. Deb needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Deb's cost of the stock was $3,000. Based on her broker's advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt. c. Deb's boss gave her 2 tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face value price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert.

a. Deb must recognize $300 interest income and $1,700 gain ($11,700 - $10,000) when she exchanged the bond for stock. Of the value of the corporate stock she received, $300 was for her accrued interest. The remaining $11,700 was in exchange for the bond whose cost was $10,000. The fact that the stock decreased in value after the exchange is not relevant because she still owns the stock and thus has not realized the loss in value. b. Deb did not realize income when she borrowed on the property. Her net worth did not increase - assets and liabilities increased by an equal amount. c. Deb must recognize compensation income of $600 ($300 × 2), the fair market value of the tickets at the time she received them.

Indicate whether the following statements are "True" or "False" regarding the legislative process. a. When the Senate version of the bill differs from that passed by the House, the President resolves these differences. b. Assuming no disagreement between the House and the Senate, a bill passed by the Senate is referred to the President for approval or veto. c. Joint Conference Committee Reports often explain the provisions of the proposed legislation and are therefore a valuable source in ascertaining the intent of Congress.

a. False b. True c. True

Classify each of the following expenditures paid in 2018 as a deduction for AGI, partially deductible for AGI, a deduction from AGI, partially deductible from AGI, or not deductible: a. Barak contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual). b. Keith pays child support to his former wife, Renee, for the support of their son, Chris. c. Judy pays professional dues that are not reimbursed by her employer. d. Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment. e. Oni, a private citizen, pays a moving company for moving her household goods (a qualified moving expense) to Detroit, where she is starting a new job. She is not reimbursed by her employer. f. Ralph pays $6,000 of property taxes on his personal residence and $5,000 of state income taxes.

a. For AGI b. Not deductible c. not deductible d. partially deductible from AGI e. not deductible f. partially deductible from agi

For each of the following determine the amount that should be included in gross income: a. Peyton was selected the MVP in the Super Bowl. In recognition of this, he was awarded an automobile with a value of $60,000. Peyton did not need the automobile so he asked that the title be put in his parents' names. b. Jacob was awarded the Nobel Prize. When he was presented the check for $1.4mil, Jacob said, "I do not need the money. Give it tot he UN to use toward the goal of world peace." c. Linda won the Craig County Fair beauty pageant. She received a $10,000 scholarship that paid her $6,000 tuition and $4,000 for meals and housing for the academic yr.

a. Peyton is required to include $60,000 in gross income, the value of the automobile. The award does not satisfy the right type of achievement requirement to qualify for exclusion from gross income. In addition, the provision which requires the recipient to contribute the award to a qualified governmental unit or nonprofit organization is not satisfied. b. Jacob can exclude from his gross income the $1.4 million Nobel Peace Prize received and then contributed to the United Nations, assuming the United Nations is a qualified nonprofit organization. c. The $10,000 Linda received cannot be excluded as a prize because it was not received in recognition of a qualifying achievement (e.g., scientific, artistic). Moreover, she entered the contest. However, the $6,000 tuition award (but not the $4,000 received for meals and housing) can qualify as a scholarship.

Drake Appliance Comp, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effect of each of the following transactions on the company's 2013 gross income assuming that the company uses any available options to defer its taxes. a. In Dec. 2012, the company received a $1,200 advance payment from customer for an appliance that Drake special ordered from the manufacturer. The appliance did not arrive from the manuf. until Jan 2013, and Drake immediately delivered to the customer. The sale was reported in 2013 for financial acct. purposes. b. In Oct. 2013, the company sold a 6-month service contract for $240. The company also sold a 36 month service contract for $1,260 in July 2013. c. On Dec. 2013, the company sold an appliance fro $1,200. The company received $500 cash and a note from the customer for $700 and $260 interest, to be paid at the rate of $40 a month for 24 months. Because of the customer's poor credit record, the fair market value of the note was only $600. The cost of the appliance was $750.

a. The $1,200 is included in the 2013 gross income. The advance payment received in 2012 for goods delivered in 2013 qualifies for deferral because the company satisfied the tax and financial accounting conformity requirement. b. For the sale of the 6 month service contract, $120 is included in 2013 gross income [$240 × 3/6 = $120]. The advance payment for services qualifies for proration over the life of the contract because all of the income will be earned by the end of the tax year following the year of receipt. Drake must include in 2013 gross income $210 ($1,260 × 6/36). Drake would include in 2014 gross income $1,050 ($1,260 - $210), the balance on the contract sold in 2013 for services that would not all be performed by the end of the tax year of receipt. That is, the portion of the advance payment that relates to services to be performed after the tax year of receipt is included in gross income in the tax year following the tax year of receipt of the advance payment. c. The company must include $1,200 in gross receipts and can deduct the cost of the appliance, $750, in arriving at gross income of $450. The fair market value of the note is not relevant for purposes of determining the accrual method taxpayer's gross income. The interest of $260 will be taxed as it accrues over the 24-month life of the contract.

Troy, a cash basis taxpayer, in employed by Eagle Corp., also a cash basis taxpayer. Troy is full-time employee of the corp. and receives a salary of $60,000 per yr. He also receives a bonus equal to 10% of all collections from clients he serviced during the yr. Determine the tax consequences of the following events to the corporation and to Troy. a. On Dec 31, 2013, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corp. for appraisal services Troy performed during 2013. Troy did not deliver the check to the corp until Jan 2014. b. The facts are the same as (a) except that the corp. is an accrual basis taxpayer and Troy deposited the check on Dec. 31, but the bank did not add the deposit to the corp. account until Jan 2014. c. Same (a) except that the customer told Troy to hold the check until Jan 2014 when the customer could make a bank deposit that would cover the check.

a. The cash basis corporation must recognize the income of $10,000 in 2013 when its agent, Troy, received the check, which is a cash equivalent. Troy will not recognize any bonus until it is actually or constructively received. The fact that the employer received the fees in 2014 does not affect the time Troy recognizes the bonus. b. The corporation must recognize the income in 2013, when the agent, Troy, performed the services. Troy will recognize the 10% bonus in 2014, because neither actual nor constructive receipt of the bonus occurs in 2013. c. The fact that the customer admits the check will not be honored if presented at the end of the year means the check is not a "cash equivalent." Furthermore, the restriction on when the check can be presented for payment is "substantial." Thus income is not realized in 2013.

Determine the effects of the following on a cash basis taxpayer's gross income for 2013 and 2014. a. On the morning of Dec 31, 2013, the taxpayer received a $1,500 check from a customer. the taxpayer did not cash the check until Jan 3, 2014. b. The same as part (a), except the customer asked the taxpayer not to cash the check until Jan 3, 2014 after the customer's salary check could be deposited. c. The same as part (a) except the check was not received until after the bank closed on Dec. 31, 2013.

a. The check is a cash equivalent and therefore the $1,500 must be included in the cash basis taxpayer's 2013 gross income when it was actually received. b. The check is not a cash equivalent because of the restrictive conditions placed upon it. Therefore, a cash basis taxpayer does not include the $1,500 in gross income until 2014. c. The fact that the bank was closed is not relevant. The check is a cash equivalent and therefore the $1,500 must be included in 2013 gross income.

Vito is the sole shareholder of Vito, Inc. He is also employed by the corporation. On June 30, 2013, Vito borrowed $8,000 from Vito, Inc, and on July 1, 2014, he borrowed and additional $10,000. Both loans were due on demand. No interest was charged on the loans, and the Federal rate was 4% for all relevant dates. Vito used the money to purchase a boat, and he had $2,500 of investment income. Determine the tax consequences to Vito and Vito inc. in each of the following situations. a. The loans are considered employer-employee loans. b. The loans are considered corporation-shareholder loans.

a. The employer-employee loan would be eligible for the $10,000 exemption through June 30, 2014. However, in July 2014, the total outstanding loans exceed $10,000. The $100,000 exemption does not apply to these loans. Therefore, interest is imputed on the $18,000 amount of the loans for the period July through December 2014. Vito, Inc. has interest income and Vito has compensation income of $360 [.04($18,000 × 6/12)]. Vito also has interest expense of $360 and Vito, Inc. has compensation expense of the same amount. Note that employer-employee loans are not eligible for the $100,000 exemption. b. A corporation-shareholder loan is not eligible for the $100,000 exemption and usually does not qualify for the $10,000 exemption (i.e., cannot satisfy the requirement that tax avoidance not be a principal purpose of the loan). Therefore, for 2013 and 2014, the corporation has interest income and dividends paid (not deductible) as follows: 2013 ($8,000 × 4% × 6/12) $160 2014 ($8,160 × 4% × 6/12) $163 ($8,160 + $163 + $10,000)(.04)(6/12) 366 $529 Vito has dividend income and interest expense of equal amounts.

Ridge is a generous individual. During the yr. he made interest-free loans to various family members when the Federal rate was 3%. What are the tax consequences of the following loans by Ridge: a. On June 30 2013, Ridge loaned $12,000 to his cousin, Jim, to buy a used truck. Jim's only source of income was his wages on various construction jobs during the year. b. On Aug, 1 2013 Ridge loaned $8,000 to his niece, Sonja. The loan was to enable her to pay her college tuition. Sonja had $1,200 interest income from CDs her parents had given her. c. On Sept 1 2013, Ridge loaned $25,000 to his brother, Al, to start a business. Al had $220 of dividends and interest for the year. d. On Sep 30 2013, Ridge loaned $150,000 to his mother so that she could enter a nursing home. His mother's only income was $9,000 of SS benefits and $500 of interest income.

a. The imputed interest amount for six months is $180 ($12,000 × .03 × .5). However, the imputed interest rules do not apply because the loan was less than $100,000, and Jim does not have any investment income. b. The imputed interest rules do not apply because this gift loan was for less than $10,000, and it was not used to purchase income producing property. c. The imputed interest for four months is $250 ($25,000 × .03 × 4/12). Because the amount of the loan exceeds $10,000 and the borrower had net investment income that is less than the imputed interest amount, the imputed interest is limited to an amount equal to Al's net investment income of $220. This amount would be reported as interest income for Ridge and as interest expense for Al. However, since this amount does not exceed $1,000, no interest is imputed. d. The imputed amount for three months is $1,125 ($150,000 × .03 × 3/12). This amount is reported as interest income by Ridge and as interest expense by his mother. The investment income limitation does not apply to this loan because the loan exceeded $100,000.

Nell and Kirby are in the process of negotiation their divorce agreement. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement? a. In consideration for her one-half interest in their personal residence, Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of cash. Kirby's cost of the stock was $150,000, and the value of the personal residence is $500,000. They purchased the residence 3 yrs ago for $300,000. b. Nell will receive $1,000 per month for 120 months. If she dies before receiving all 120 payments, the remaining payments will be made to her estate. c. Nell is to have custody of their 12 yr old son. She is to receive $1,200 per month until Bobby (1) dies or (2) attains age 21 (which ever comes first). After either of these events occurs, Nell will receive only $300 per month for the remainder of her life

a. The transfers of the stock and residence pursuant to the divorce are nontaxable to Nell and Kirby. Nell assumes Kirby's basis in the stock of $150,000, and Kirby's basis in the house is $300,000. However, the $50,000 cash paid by Kirby will be alimony unless the agreement specifies that the payment is "not alimony." b. The cash payments of $1,000 per month do not qualify as alimony because they will not cease upon Nell's death. The payments are excluded from Nell's gross income as they are received by her, and Kirby may not deduct the payments (would be a deduction for AGI if the payments had been classified as alimony). c. The monthly payments of $1,200 are in part child support and in part alimony. The monthly amount that will continue after the occurrence of the contingency related to the child is considered alimony. Therefore, $300 per month is alimony that must be included in Nell's gross income, and the other $900 received each month is child support. Kirby can deduct the alimony payments of $300 as a deduction for AGI.

Robert purchased and placed in service $100,000 of 7-year class assets on August 10 of the current year. He also purchased and placed in service $500,000 of 5-year class assets on November 15 of the current year. He does not claim any available additional first-year depreciation. Robert elects to use the MACRS straight-line method of cost recovery on the 7-year class assets. Regarding the calculation of cost recovery for the 5-year class assets, indicate which of the following statements are "True" and which are "False". Robert is a calendar year taxpayer. a. The cost recovery on the five-year class assets is computed using mid-quarter convention MACRS. b. The cost recovery on the five-year class assets is computed using the MACRS straight-line method. c. Neither the seven-year nor five-year assets can use the straight-line method, since those assets are not real property.

a. True b. False c. False

Label the following statements as either "True" or "False" as regards the treatment of Section 179 in a year in which a carryforward has occurred. For example, in 2018, which of the following statements would pertain to a Section 179 carryforward from 2017. a. It may be reduced, dollar-for-dollar, if the cost of § 179 property placed in service is in excess of $2,500,000. b. No limit applies to the carryover if the taxpayer is considered a small business and has total assets of less than $1,000,000. c. It may be limited to the business income in the carryforward year. d. It may be limited to the additional first-year depreciation taken in the carryforward year.

a. True b. False c. True d. False

Indicate whether the following statements are "True" or "False" regarding cost recovery for tax purposes. a. Realty (real property) generally includes land and buildings permanently affixed to the land. b. Personal use property is only personalty property (personal property) that is held for personal use rather than for use in a trade or business or an income-producing activity. c. Assets used in a trade or business or for the production of income are eligible for cost recovery if they are subject to wear and tear, decay or decline from natural causes, or obsolescence. d. The key date for the commencement of depreciation is the date an asset is purchased. e. The basis of cost recovery property is reduced by the cost recovery allowed, and not less than the allowable amount.

a. True b. False c. True d. False. e. True

Harold and Bart own 75% of the stock of Orange Motors. The other 25% of the stock is owned by Jeb. Orange Motors entered into an agreement with Harold and Bart to acquire all of their Orange stock. In addition, Harold and Bart signed a noncompete agreement with Orange Motors. Under the terms of the noncompete agreement, Orange will pay Harold and Bart $15,000 each per year for four years. Help Orange Motors by classifying the following as either "True" or "False". a. The noncompete agreement is considered a § 197 intangible if it is acquired in connection with the acquisition of a business. b. If amortization is permitted, it will be over a 15-year period. c. $15,000 is the basis for purposes of calculating MACRS depreciation. d. If amortization is permitted, it will be ratably amortized over the designated period, beginning in the middle of the quarter it was acquired.

a. True b. True c. False d. False

Label the following as "True" or "False" regarding the definition of taxable income as it is used in limiting the § 179 expensing amount. a. The taxable income computation for purposes of the § 179 limit includes the deduction for MACRS. b. Taxable income of a trade or business is computed without regard to the amount expensed under § 179. c. The aggregate amount of taxable income includes net income from a trade or business as well as from the production of income activities. d. The taxable income computation for purposes of the § 179 limit excludes the deduction for additional first-year depreciation.

a. True b. True c. False d. False

Regarding how the cost of mineral rights enter into the calculation of cost depletion, classify each statement below as either "True" or "False". a. Cost depletion is determined by using the adjusted basis of the asset, and is a deduction for adjusted gross income. b. For cost depletion of the mineral rights, an economic interest in the resource is required. c. To compute the depletion for mineral rights, the depletion per unit is multiplied by the number of units sold during the year to arrive at the cost depletion allowed.

a. True b. True c. True

Select "True" or "False" to identify some reasons why taxpayers often have more than one alternative for structuring a business transaction. a. Tax law contains many "gray" areas that are open to interpretation. b. The complexity of the tax laws makes it difficult at times to determine the correct treatment. c. The possibility of different interpretations of the tax law allows for different treatments. d. The simplicity of the Federal tax law makes it easier to come up with different treatments.

a. True b. True c. True d. False

A professional consulting business sells professional tools and equipment and provides associated services, such as repair and maintenance, to its customer base. The company's employees include technicians who are required to provide and maintain their own tools and equipment for performing the repairs and maintenance work. The company will reimburse a technician for amounts spent to purchase tools and equipment eligible for a § 179 deduction up to a set amount each year. Any costs for tools and equipment that exceed the set amount will not be reimbursed. John is a technician for the company. During the current year, he purchased equipment that qualifies for the § 179 deduction. John paid $50,000 for the equipment and was reimbursed the set amount of $40,000. Classify for John the following as either "Yes, a relevant tax issue" or "No, not a tax issue" with respect to § 179 and the computation of his taxable income. a. Is John or the professional consulting business entitled to a § 179 deduction? b. Is the § 179 deduction allowed only for employers? c. How much, if any, can John deduct under § 179 on his own tax return? d. What are the tax consequences of the reimbursements that John receives?

a. Yes, a relevant tax issue b. No, not a tax issue c. Yes, a relevant tax issue d. Yes, a relevant tax issue

The expenses of cash basis taxpayers are deductible when ________. Therefore payment ______ be made with borrowed funds. The Regulations set forth the general rule that an expenditure that creates an asset having a useful life that extends substantially beyond the end of the tax year must be ________.

actually or constructively paid. Can, capitalized

he expenses of cash basis taxpayers are deductible when ____ (incurred, actually or constructively paid, promised to be paid). Therefore, payment ____ (can, cannot) be made with borrowed funds. The Regulations set forth the general rule that an expenditure that creates an asset having a useful life that extends substantially beyond the end of the tax year must be _____ (capitalized/expensed).

actually or constructively paid; can; capitalized

The Morgan family lives in Massachusetts. They moor their sailboat in Rhode Island. The Morgan's are trying to avoid

ad valorem tax on personalty

Personalty is defined as _______________ . Personal use property is _________________ that is not held for income production or used in a trade or business. Therefore, cost recovery deductions ________ allowed for personal use assets.

any asset that is no realty realty and personal property are not

Complete the statements below that outline the difference between personal property and personal use property. Personalty is defined as ___. Personal use property is ___that is not held for income production or used in a trade or business. Therefore, cost recovery deductions ___ allowed for personal use assets.

any asset that is not realty, realty or personalty property, are not

For state income tax purposes, "piggyback" means

applying a rate to the Federal income tax liability.

Severance tax

are transaction taxes that are based on the notion that the state has an interest in its natural resources (e.g., oil, gas, iron ore, or coal). Therefore, a tax is imposed when the natural resources are extracted.

Are land improvements used in a trade or business eligible for cost recovery? Land improvements ___ eligible for cost recovery, because they have ___.

are, a MACRS class life of 15 years

Property tax (Ad Valorem)

based on value, property taxes are a tax on wealth, or capital land, house, vehicles, boat, RV

Sean is in the business of buying and selling stocks and bonds. He has a bond of Green Corporation for which he paid $200,000. The bond is currently worth only $50,000. Can Sean take a $150,000 loss for a business bad debt or for a worthless security? Sean ___________ take the loss as a business bad debt. Sean __________ take the loss as a worthless security because losses are allowed ____________________

cannot cannot only when the security is completely worthless

If business property or property held for the production of income is ____ (partially/completely) destroyed, the loss is equal to the adjusted basis of the property at the time of destruction. The ____ (complete/partial) destruction of business property and income-producing property and for ___ (only complete/only partial/complete or partial) destruction of personal use property, the loss is the ___ (greater/ lesser) of the ___ (fair market value/adjusted basis) of the property or the difference between the ___(fair market value/adjusted basis) of the property before the event and the ___ (fair market value/adjusted basis) immediately after the event.

completely, partial, complete or partial, lesser, adjusted basis, fmv, fmv

A diminishing number of states allow

deduction for Federal income taxes paid.

Personalty

defined as all assets that are not realty. Examples include a residence (realty that is personal use), an office building (realty that is business use), surgical instruments (personalty that is business use), and regular wearing apparel (personalty that is personal use)

National sales tax:

differs from a VAT in that it would be collected on the final sale of goods and services. Consequently, it is collected from the consumer, not from businesses that add value to the product

The code specifically (allows/disallows) as a deduction the expenses of producing tax-exempt income. Interest on any indebtedness used to purchase or hold tax-expempt obligations is (allowed/disallowed)

disallows, disallowed

The option to treat research and experimental expenditures as deferred expense is usually employed when a company ________________ have sufficient income to offset the research and experimental expenses.

does not

The millionaires provision ____ limit the amount of compensation that can be paid to an employee. Instead it _____ limit the amount the employer can deduct for the compensation of _____ to ______ annually.

does not, does, a covered executive, 1 million

State workers compensation laws require the ______ to pay fixed amounts for specific job related injuries. Congress has specifically ____ workers compensation benefits from inclusion in gross exclusion

employer, exepmted

deductions from agi

examples include certain medical expenses, interest on home mortgages, and charitable contributions

the income tax treatment of accident and health insurance benefits depends on whether the policy providing the benefits purchased by the tax payer or the taxpayers employer. Benefits collected under an accident and health insurance policy purchased by the taxpayer are _____ from gross income

excluded

Because the traditional IRA contribution is a deduction _____ AGI, it _____ reduce his taxable income and _____ impact on his itemized deductions.

for, does, has no

Realty

generally includes real estate and any capital improvements that are classified as fixtures. Property owned by the Federal government is exempt from tax Some states provide for lower valuations on property dedicated to agricultural use or other special uses Some states partially exempt the homestead, or personal residence, portion of property from taxation. Lower taxes may apply to a residence owned by a taxpayer aged 65 or older. When non-income-producing property (e.g., a personal residence) is converted to income-producing property (e.g., a rental house), typically the appraised value increases. Some jurisdictions extend immunity from tax for a specified period of time (a tax holiday) to new or relocated businesses

Most states allow their residents some form of tax credit for

income taxes paid to other states.

Complete the following statement regarding tax research. A large part of tax research consists of determining the

intent of Congress

Use tax

is an ad valorem tax, usually at the same rate as the sales tax, on the use, consumption, or storage of tangible property purchased outside the state but used in the state.

Gift taxes

is an excise tax levied on the right to transfer property. In this case, however, the tax is imposed on transfers made during the owner's life and not at death. $14,000 per annual exclusion

Value added taxes

is one of two proposals that would replace the Federal income tax. Under the VAT, a business would pay the tax (approximately 17 percent) on all of the materials and services required to manufacture its product.

Tax Avoidance is

legal form of reducing one's taxes

Research and experimental expenditures can be amortized ratably over a period of not _____ than _____ months. The election _____ binding.

less 60 is

If the residence is rented for 15 days or ____ in a year and is used for personal purposes than the greater of (1) __ days or (2) __ percent of the total days rented, it is treated as _____. Expenses _______ rent income

more, 14, 10, a personal/rental use residence, are allowed only to the extent of

Tax became a thing because

of civil war. An income tax was first enacted in 1634 by the English colonists in the Massachusetts Bay Colony, but the Federal government did not adopt this form of taxation until 1861. In fact, both the Federal Union and the Confederate States of America used the income tax to raise funds to finance the Civil War.

By "decoupling," a state decides not to allow a

particular Federal provision (e.g., exclusion, deduction, credit) for state income tax purposes.

Failure to pay (0.5 %)

penalty for failure to pay the tax due as shown on the return is imposed in the amount of .5 percent per month up to a maximum of 25 percent

The Federal income tax, Federal gift and estate taxes, and most state income tax rate structures are

progressive

Complete the statement below in response to the question: "How does the § 179 immediate expensing deduction affect the computation of MACRS cost recovery?" The basis of the property for cost recovery purposes is ___ by the § 179 amount. The business income limitation ___ affect basis.

reduced, does not

Regressive

social security tax. Not common. Opposite of progressive

The study of taxation is important because

taxes permeate our society

A special agent joins the audit team when

taxpayer fraud is suspected.

An RAR (or Revenue Agent's Report) that results in a "no change" means

that the audit resulted in no additional taxes being due.

The effect of the Sixteenth Amendment to the U.S. Constitution was to validate

the Federal income tax imposed on individuals.

The taxpayer can litigate the case in

the Tax Court, a Federal District Court, or the Court of Federal Claims.

The purpose of the excess business loss limitation is to limit ______________________________________________ that can be "sheltered" from tax as a result of business losses.

the amount of nonbusiness income

Tax Evasion is

the illegal avoidance form of taxes

A tax is proportional if

the rate of tax remains constant for any given income level. Such as federal excise tax of cigarettes

If the casualty occurs in a Federally declared disaster area, the casualty loss on the residence portion is ____; otherwise the loss is ____. The casualty loss on the business portion is ___ and is ____.

treated as a deduction from AGI , not deductible , allowed as a business loss , a deduction for AGI

Qualified employer-provided educational assistance (Tuition, fees, books, and supplies) at the undergraduate and graduate level is excludible from gross income

true

T/F related parties include brothers/sisters, spouse, ancestors, and lineal descendants of the taxpayers

true

T/F related parties include two corporations that are members of a controlled group

true

The employee does not have to include in gross income the value of child and dependent care services pd by the employer and incurred to enable the employee to work

true

The recipient of a gift is allowed to exclude the value of the gift from gross income

true

Tax Base

what tax calculated on: A tax base is the amount to which the tax rate is applied. tax base is taxable income. taxable income is gross income reduced by certain deductions.

Transaction

which characteristically are imposed at the manufacturer's, wholesaler's, or retailer's level, cover a wide range of transfers