ACC 211 - CH 1-11 PROBLEMS COMBINED
#24.) In 2017, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In 2018, Company W's taxable income before any Section 179 deduction was $1,812,000. Compute its 2018 Section 179 deduction if: a. The total cost of qualifying property purchases in 2018 was $13,600.
Company W's deduction is $17,900 ($13,600 + $4,300 carry-forward of 2017 expense) which is less than the limited dollar amount for 2018 of $1,000,000. Company W may deduct $17,900 in 2018.
#24.) In 2017, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In 2018, Company W's taxable income before any Section 179 deduction was $1,812,000. Compute its 2018 Section 179 deduction if: b. The total cost of qualifying property purchases in 2018 was $998,000.
Company W's total cost is $1,002,300, which is more than the limited dollar amount for 2018 of $1,000,000. Company W may deduct $1,000,000 in 2018 and will have a $2,300 carry-forward to 2019.
#27.) Corporation A and Corporation Z go into partnership to develop, produce, and market a new product. The two corporations contribute the following properties in exchange for equal interests in AZ Partnership. Corporation A - Cash $100,000 & Business Equipment (FMV) $30,000 Corporation Z - Cash $50,000 & Business Equipment (FMV) $80,000 Corporation A's tax basis in the contributed equipment is $34,000, and Corporation Z's tax basis in the contributed equipment is $12,000. a. Compute each corporation's realized and recognized gain or loss on the formation of AZ Partnership.
Corporation A realized a $4,000 loss and Corporation Z realized a $68,000 gain on the contribution of business equipment to AZ Partnership. Neither corporation recognizes gain or loss.
#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. c. Compute Suber's book basis and tax basis in the equipment at the beginning of next year.
Cost of equipment Book - $800,000 Tax - $800,000 Accumulated depreciation Book - (62,500) Tax - (114,320) Adjusted basis at beginning of next year Book - $737,500 Tax - $685,680
#19) Jayathi and Kris each own 50% general partnership interest in the JK Partnership. The following info is available regarding the partnerships 2017 activities. Sales revenue: 500,000 Selling exp: 200,000 long term capital gain: 9,000 nondeductible exp: 2,000 partnership debts, Beg of Year: 120,000 partnership distributions: Jayanthi: 50,000 Krish: 50,000 B. Calculate Jayanthi's allocable share of partnership interest.
Each partner has 50% ordinary income= 135,000 (previously calulated) Sepately stated items: capital gains: 9000/2=4,500 non deductible exp: 2000/2=1000 distributions: 50,000
#24.) Firm L has $500,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($30,000 annual before-tax cash flow). Investment B would pay 4.8 percent ($24,000 annual before-tax cash flow). The return on Investment A is taxable, while the return on Investment B is tax exempt. Firm L forecasts that its 21 percent marginal tax rate will be stable for the foreseeable future. a. Compute the explicit tax and implicit tax that Firm L will pay with respect to Investment A and Investment B.
Firm L pays $6,300 explicit tax and no implicit tax on Investment A and no explicit tax and $6,000 implicit tax on investment B. The implicit tax is the $6,000 difference between the before-tax return on the taxable investment and the tax-exempt investment.
#5.) Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9,500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: a. Firm A incurs the expense
If Firm A incurs the $9,500 expense, the after-tax cost is $7,505 ($9,500 - $1,995 tax savings at 21 percent).
#5.) Firm A has a 21 percent marginal tax rate, and Firm Z has a 28 percent marginal tax rate. Firm A owns a controlling interest in Firm Z. The owners of Firm A decide to incur a $9,500 deductible expense that will benefit both firms. Compute the after-tax cost of the expense assuming that: b. Firm Z incurs the expense
If Firm Z incurs the $9,500 expense, the after-tax cost is $6,840 ($9,500 - $2,660 tax savings at 28 percent).
#19.) Mr. G has $15,000 to invest. He is undecided about putting the money into tax-exempt municipal bonds paying 3.5 percent annual interest or corporate bonds paying 4.75 percent annual interest. The two investments have the same risk. b. How would Mr. G's investment choice change if his tax rate is only 12% compared to 32%?
In this case, Mr. G's after-tax yield on the corporate bonds is 4.18 percent (4.75% before-tax yield - [4.75% x 12% marginal tax rate]). Therefore, he should invest in the corporate bonds.
#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. b. Assuming that the equipment has a seven-year recovery period and is subject to the half-year convention, compute MACRS depreciation for the year.
Initial basis of equipment $800,000 Year 1 recovery percentage for 7-year MACRS .1429 MACRS depreciation $114,320
#5.) KNB sold real property to Firm P for $15,000 cash and Firm P's assumption of the $85,000 mortgage on the property. b. Compute KNB's after-tax cash flow from the sale if its adjusted basis in the real property is $40,000 and its marginal tax rate is 35 percent.
KNB's realized gain on sale is $60,000 ($100,000 amount realized - $40,000 adjusted basis), and the tax cost of the transaction is $21,000 ($60,000 gain × 35%). Therefore, KNB's after-tax cash flow is negative: $15,000 cash received - $21,000 tax cost = $(6,000).
#40.) Lyle Company owns commercial real estate with a $360,000 initial cost basis and $285,000 accumulated straight-line depreciation. The real estate is subject to a $120,000 recourse mortgage and has an appraised FMV of only $100,000. The mortgage holder is threatening to foreclose on the real estate because Lyle failed to make the last four mortgage payments. Determine the tax consequences of foreclosure assuming that: b. The mortgage holder agrees to accept the real estate in full satisfaction of the recourse debt.
Lyle recognizes a $25,000 Section 1231 gain ($100,000 FMV - $75,000 adjusted tax basis) on foreclosure of the real estate and $20,000 ordinary cancellation-of-debt income.
#27.) Corporation A and Corporation Z go into partnership to develop, produce, and market a new product. The two corporations contribute the following properties in exchange for equal interests in AZ Partnership. Corporation A - Cash $100,000 & Business Equipment (FMV) $30,000 Corporation Z - Cash $50,000 & Business Equipment (FMV) $80,000 Corporation A's tax basis in the contributed equipment is $34,000, and Corporation Z's tax basis in the contributed equipment is $12,000. c. Compute the partnership's tax basis in the equipment contributed by each corporate partner.
AZ Partnership's basis in the equipment contributed by A is $34,000 and in the equipment contributed by B is $12,000.
#25.) Refer to the facts in the proceeding problem. In 2018 YZ generated 7000 ordinary business income and 18000 dividend and and interest income. The partnership made no distributions. At the end of the year YZ had 21000 debt. B. compute Zeldas adjusted basis in ZY interest at end of 2018.
Adjusted basis at end of 2018: 9080
#28.) Ajax Inc. was form on April 25 and elected a calendar year for tax purposes. Ajax paid $11,200 to the attorney who drew up the articles of incorporation and $5,100 to the CPA who advised the corporation concerning the accounting and tax implications of its organization. Ajax began business operations on July 15. To what extent can Ajax deduct its $16,300 organizational costs on its first tax return?
Ajax Inc. can deduct $5,000 of its $16,300 organizational costs and must capitalize the $11,300 remainder. It can elect to amortize the capitalized cost over 180 months at the rate of $62.78 per month. If it makes this election, Ajax can also deduct $377 amortization (6 months × $62.78). With the election, Ajax can deduct $5,377 organizational cost on its first tax return.
#40.) Lyle Company owns commercial real estate with a $360,000 initial cost basis and $285,000 accumulated straight-line depreciation. The real estate is subject to a $120,000 recourse mortgage and has an appraised FMV of only $100,000. The mortgage holder is threatening to foreclose on the real estate because Lyle failed to make the last four mortgage payments. Determine the tax consequences of foreclosure assuming that: a. Lyle must pay $20,000 cash to the mortgage holder in full satisfaction of its recourse debt.
Lyle recognizes a $25,000 Section 1231 gain ($100,000 FMV - $75,000 adjusted tax basis) on foreclosure of the real estate.
#41.) Lyle Company owns commercial real estate with a $360,000 initial cost basis and $285,000 accumulated straight-line depreciation. The real estate is subject to a $120,000 non-recourse mortgage and has an appraised FMV of only $100,000. The mortgage holder is threatening to foreclose on the real estate because Lyle failed to make the last four mortgage payments. Determine the tax consequences of foreclosure.
Lyle recognizes a $45,000 Section 1231 gain ($120,000 relief of non-recourse debt - $75,000 adjusted tax basis).
#19.) Mr. G has $15,000 to invest. He is undecided about putting the money into tax-exempt municipal bonds paying 3.5 percent annual interest or corporate bonds paying 4.75 percent annual interest. The two investments have the same risk. a. What investment should Mr. G make if his marginal tax rate is 32 percent?
Mr. G's before-tax and after-tax yield on the tax-exempt bonds is 3.5 percent. His after-tax yield on the corporate bonds is 3.23 percent (4.75% before-tax yield - [4.75% x 32% marginal tax rate]). Therefore, he should invest in the municipal bonds.
#1.) The stock of AB and YZ is a publicly traded , and no shareholder owns more than a 1% interest in either corporation. AB owns 40% percent and YZ owns 60% of the stock of Alpha, which owns 90% of the stock of Beta. YZ and Beta each own 50% of the stock of Kappa. Which of these corporations forms an affiliated group eligible to file a consolidated tax return?
Alpha and Beta are eligible. Reason: 1 parent corporation directly owns 80% of at least 1 subsidiary
#26.) James who is in the 35%marginalk tax bracket, owns 100% of the stock of JJ Inc. This year, JJ generates $500,000 taxable income and pays $100,000 dividend to James. Compute his tax on the dividend under each of the following assumptions: B. Federal tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax.
income-(income*.21) = 100,000 1X-.21X=100,000 .79X=100,000 X=126582.28 Because of tax credit of 126582, his individual tax on dividend is 0
#24.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of SJL stock. In each of the following cases, compute Mr. ZJ's recognized gain on the exchange of assets for stock. b. Immediately after the exchange, ZJL has 1,500 shares of outstanding stock, which Mr. ZJ owns 1,000 shares.
Although Mr. ZJ owns a 66.7 percent majority interest in ZJL's outstanding stock, he does not meet the 80 percent control requirement and must recognize a $154,000 gain ($400,000 FMV of stock received - $246,000 adjusted basis of business assets transferred) on the exchange of property for stock.
#5.) This year, GHJ Inc. received the following dividends: BP (taxable California corporation in which GHJ holds 2% interest) $17300 MN Inc. (taxable Florida corporation in which GHJ holds a 52% stcok interest) $80,800 AB inc. (taxable French corporation in which a GHJ holds 21% interest) $17,300
BP: 17300*50%= 8650 MN: 80800*65%= 52520 AB: 17300* 100%= 17300 total dividends-received deduction=78470
#28.) BZD, a calendar year corporation made the following year end accurals fro 2018 financial statements purposes. In each case determine how much of the accrued expense is deductible on BZD's 2018 federal tax return. B. $40,000 expense and $40,000 liability for the CEO's 2017 bonus. BZD paid $20,000 to the CEO on March 1, 2019 and the remaining $20,000 on May 1, 2019. BZD and CEO are not related parties.
BZD pays $20,000 on 3/19 to CEO: yes, deductable in 2018 because its within the 2.5 month rule BZD 20,000 paid on 5/1: no, not eligible for 2018 (can next year)
#24.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of SJL stock. In each of the following cases, compute Mr. ZJ's recognized gain on the exchange of assets for stock. a. Immediately after the exchange, ZJL has 20,000 shares of outstanding stock, which Mr. ZJ owns 1,000 shares.
Because Mr. ZJ does not own at least 80 percent of ZJL's outstanding stock immediately after the exchange, he must recognize the entire $154,000 realized gain ($400,000 FMV of stock received - $246,000 adjusted basis of business assets transferred) on the exchange of property for stock.
#28.) BZD, a calendar year corporation made the following year end accurals fro 2018 financial statements purposes. In each case determine how much of the accrued expense is deductible on BZD's 2018 federal tax return. C. $219,700 expense and 219,700 liability for accumulated vacation pay. No employees took vacation between January 1 and March 15, 2019.
$0 is deductible - no employees took vacation
#5.) KNB sold real property to Firm P for $15,000 cash and Firm P's assumption of the $85,000 mortgage on the property. a. What is KNB's amount realized on the sale?
$100,000 ($15,000 cash + $85,000 relief of debt)
#26.) James who is in the 35%marginalk tax bracket, owns 100% of the stock of JJ Inc. This year, JJ generates $500,000 taxable income and pays $100,000 dividend to James. Compute his tax on the dividend under each of the following assumptions: A. The federal tax rules currently in effect apply to the dividend payment.
$100,000 *15%=15000
#6.) Mr. & Mrs. J own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. c. How much additional revenue will the government collect if Mr. and Mrs. J respond to the rate increase by working less and earning only $110,000 next year?
$110,000 decreased tax base x 40% $44,000 Tax collected on original $125,000 base x 32%(40,000) Additional revenue collected from Mr. and Mrs. J $4,000
#6.) Mr. & Mrs. J own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. a. Based on a static forecast, how much additional revenue will the federal government collect from Mr. and Mrs. J next year?
$125,000 tax base (Mr. and Mrs. J's taxable income) x 8% rate increase = $10,000 additional revenue collected from Mr. and Mrs. J.
#6.) Mr. & Mrs. J own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple's federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. b. How much additional revenue will the government collect if Mr. and Mrs. J respond to the rate increase by working harder and earning $140,000 next year?
$140,000 increased tax base x 40% $56,000 Tax collected on original $125,000 base x 32%(40,000) Additional revenue collected from Mr. and Mrs. J $16,000
#3.) Determine the tax basis of the business asset acquired: b. TTP Inc. acquired inventory in exchange for 800 shares of TTP common stock listed on Nasdaq at $212 per share on the date of exchange.
$169,600 cost basis (FMV of stock exchanged for inventory)
#1.) Use the present value tables in Appendix A and Appendix B to compute the NPV of each of the following cash inflows: a. $18,300 received at the end of the 15 years. The discount rate is 5%.
$18,300 , 15 years, 5% 18300*0.481=8802.3
#3.) Determine the tax basis of the business asset acquired: d. Company C purchased equipment by paying $2,000 cash at date of purchase and financing the $18,000 balance of the price under a three-year deferred payment plan.
$20,000 cost basis ($2,000 cash paid + $18,000 deferred payment)
#3.) Determine the tax basis of the business asset acquired: a. Firm L paid $5,950 cash plus $416 sales tax plus a $500 installation charge for a satellite dish.
$6,866 cost basis ($5,950 purchase price + $416 sales tax + $500 installation cost)
#3.) Determine the tax basis of the business asset acquired: c. Firm Q acquired machinery in exchange for architerctural drawings rendered by Firm's Q's junior partner. The partner spent 20 hours on the drawings, and his hourly billing rate is $350.
$7,000 cost basis (FMV of services exchange for machinery)
#49.) Twelve years ago, Mr. and Mrs. Chang purchased a business. This year, they sold the business for $750,000. On date of sale, the business balance sheet showed the following assets: Tax Basis: A/R - $41,200 Inventory - 515,000 Furniture and Fixtures - Cost: $395,000 - Accumulated Depreciation: (321,800) = $73,700 Purchased Goodwill - Cost: $250,000 - Accumulated amortization: (203,600) = $46,400 Total Tax Basis: $676,300 The sales contract allocated $40,000 of the purchase price to accounts receivable. $515,000 to inventory, and $70,000 to furniture and fixtures. Assuming that the Changs' marginal tax rate on ordinary income is 32 percent and their rate on capital gain is 15 percent, compute the net cash flow from the sale of their business.
$726,416 Net cash flow
#1.) Use the present value tables in Appendix A and Appendix B to compute the NPV of each of the following cash inflows: C. $1300 received annually at the end of each of the next 7 years. The discount rate is 6%.
1300*5.582=7256.6
#19) Jayathi and Kris each own 50% general partnership interest in the JK Partnership. The following info is available regarding the partnerships 2017 activities. Sales revenue: 500,000 Selling exp: 200,000 long term capital gain: 9,000 nondeductible exp: 2,000 partnership debts, Beg of Year: 120,000 partnership distributions: Jayanthi: 50,000 Krish: 50,000 C. If Jayanthi has no other sources of taxable income, what is her total gross income for 2017?
135,000 (ordinary income) + 4,500 (capital gains) = 139,500
#1.) Use the present value tables in Appendix A and Appendix B to compute the NPV of each of the following cash inflows: D. $40,000 received annually at the end of the next 3 years and $65,000 received at the end of the 4th year. The discount rate is 3%.
40000*2.829=113,160 65000*0.971=63115
#19) Jayathi and Kris each own 50% general partnership interest in the JK Partnership. The following info is available regarding the partnerships 2017 activities. Sales revenue: 500,000 Selling exp: 200,000 Depreciation exp: 30,000 long term capital gain: 9,000 nondeductible exp: 2,000 partnership debts, Beg of Year: 120,000 partnership distributions: Jayanthi: 50,000 Krish: 50,000 A. Calculate the partnerships ordinary income and include which items are separately stated.
500,000 (sales revenue) - 200,000 (selling exp) - 30,000 (depr exp) = 270,000 (ordinary income)
#16.) Firm W has the opportunity to invest $150,000 in a new venture. The projected cash flows from the venture are as follows: year 0 year 1 year 2 initial investment 13000 16250 23400 deductible investment (3900) (6000) (8100) nondeductible expenses (350) (2000) 0 B. ABC uses 3% discount rate
5000*0.943=4715 8000*0.943=7544 160000*0.943=150880
#16.) Firm W has the opportunity to invest $150,000 in a new venture. The projected cash flows from the venture are as follows: year 0 year 1 year 2 initial investment 13000 16250 23400 deductible investment (3900) (6000) (8100) nondeductible expenses (350) (2000) 0 A. ABC uses 6% discount rate
5000*0.971=4855 8000*0.971=7768 160000*0.971=155360
#28.) BZD, a calendar year corporation made the following year end accurals fro 2018 financial statements purposes. In each case determine how much of the accrued expense is deductible on BZD's 2018 federal tax return. A.$55000 expense and a $55000 liability for unpaid December salaries. BZD paid the entire liabilities to its emloyees befrore the nef of January 2019.
55,000 exp can be deducted in 2018 because compensation was paid 3/15 ( 2.5 months after year end) (pg 6-21 in book)
#1.) Use the present value tables in Appendix A and Appendix B to compute the NPV of each of the following cash inflows: B. $5800 received at the of 4 years and $11,600 received at the end of 8 years.
5800*0.855=4959 11600*0623=7226.8
#27.) Corporation A and Corporation Z go into partnership to develop, produce, and market a new product. The two corporations contribute the following properties in exchange for equal interests in AZ Partnership. Corporation A - Cash $100,000 & Business Equipment (FMV) $30,000 Corporation Z - Cash $50,000 & Business Equipment (FMV) $80,000 Corporation A's tax basis in the contributed equipment is $34,000, and Corporation Z's tax basis in the contributed equipment is $12,000. b. Compute each corporation's tax basis in its half interest in AZ Partnership.
A's basis in its one-half equity interest in AZ Partnership is $134,000, while Z's basis in its one-half equity interest in AZ Partnership is $62,000.
Shine Inc manufactures laundry detergent and other cleaning products.This year, the government increased the corporate tax rate by 2%. The marketing department determined that Shine could not raise prices and retain its market share. The production department concluded that manufacturing costs cannot be reduced by another penny. Consequently, Shine's before tax profits remain constant, while after tax profits decline by the full tax increase. The stock market reaction to the decline in earnings is a fall in stock price. A. Who bears the incidence of the increase in Shines corporate tax? B. Who would your answer change if Shine held its after tax profit constant by shutting down the on site day care center for its employees preschool children and eliminating this operating cost from its budget?
A.Shareholders B. Employees
#24.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of SJL stock. In each of the following cases, compute Mr. ZJ's recognized gain on the exchange of assets for stock. c. Immediately after the exchange, ZJL has 1,200 shares of outstanding stock, which Mr. ZJ owns 1,000 shares.
Because Mr. ZJ will own 83 percent of ZJL's outstanding stock immediately after the exchange, he does not recognize gain on the exchange of property for stock.
#24.) Firm L has $500,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($30,000 annual before-tax cash flow). Investment B would pay 4.8 percent ($24,000 annual before-tax cash flow). The return on Investment A is taxable, while the return on Investment B is tax exempt. Firm L forecasts that its 21 percent marginal tax rate will be stable for the foreseeable future. b. Which investment results in the greater annual after-tax cash flow?
Because the explicit tax on Investment A exceeds the implicit tax on Investment B, Firm L should invest in the latter. Investment A results in $23,700 after-tax cash flow ($30,000 $6,300 explicit tax), while Investment B results in $24,000 after-tax cash flow.
#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. a. Compute book depreciation for the year.
Book depreciation is calculated as follows. Cost of equipment $800,000 Residual value (50,000) Depreciable basis $750,000 ÷ 120 months = $6,250 monthly depreciation Ten months × $6,250 = $62,500 book depreciation
#11.) Government G levies an income tax with the following rate structure: Percentage rate - 6%, Bracket - 0 to $30,000 Percentage rate - 10%, Bracket - $30,001 to $70,000 Percentage rate - 20%, Bracket - $70,001 to $200,000 Percentage rate - 28%, Bracket - Everything in excess of $200,000 Taxpayer O earns $50,000 annually during years 1 through 10. Taxpayer P earns $20,000 annually during years 1 through 5 and $80,000 annually during years 6 through 10. a. How much total income does each taxpayer earn over the 10-year period?
Both taxpayers earn $500,000 total income over the 10-year period.
#24.) Zelda owns a 60% general interest in YZ Partnership. At the beginning of 2016, the adjusted basis in her YZ interest was $95,000, For 2017, YZ generated a $210,000 business loss, earned 14,600 dividend and interest income on its investments, and recognized a 6200 capital gain. YZ made no distributions to its partners and had no debt. a. How much partnership income will Zelda report on her 2018 return? Assume excess business loss limitation does not apply.
step 1: find basis basis 2016: 95000 increased by: div & share income (14600*60%) 8760 share cap gain (6200 * 60%) 3720 = 107480 answer: can deduct 107480
#8.) Indicate whether this is a primary authority or secondary authority: i. Internal Revenue Code section
Primary
#8.) Indicate whether this is a primary authority or secondary authority: a. Private letter ruling from the IRS.
Primary for taxpayer to whom issued
#25.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of ZJL stock. Assume that Mrs. L, who is Mr. ZJ's business colleague, transfers $200,000 cash to ZJL Corporation in exchange for 500 shares of ZJL stock. Mr. ZJ and Mrs. L's transfers occur on the same day, and after the exchange ZJL has 1,500 shares of outstanding stock (1,000 owned by Mr. ZJ and 500 owned by Mrs. L). a. Compute Mr. ZJ's recognized gain on the exchange of assets for stock.
Mr. ZJ and Mrs. L are both transferring property to ZJL Corporation in exchange for stock. Immediately after the exchange, the transferors will own 100 percent of ZJL's outstanding stock. Consequently, Mr. ZJ's exchange is nontaxable, and he does not recognize any gain on the exchange.
#25.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of ZJL stock. Assume that Mrs. L, who is Mr. ZJ's business colleague, transfers $200,000 cash to ZJL Corporation in exchange for 500 shares of ZJL stock. Mr. ZJ and Mrs. L's transfers occur on the same day, and after the exchange ZJL has 1,500 shares of outstanding stock (1,000 owned by Mr. ZJ and 500 owned by Mrs. L). b. Compute Mr. ZJ and Mrs. L's tax basis in their ZJL stock.
Mr. ZJ's basis in his 1,000 shares will be a $246,000 substituted basis. Mrs. L's basis in her 500 shares will be a $200,000 cost basis.
#10.) Mrs. DK, a resident of Rhode Island, traveled to Delaware to purchase an oil painting from a local artist. The cost of the painting was $9,400. Rhode Island has a 7 percent sales and use tax, while Delaware has no sales and use tax. c. How much Rhode Island use tax would Mrs. DK owe if she purchased the painting from a dealer in Milwaukee and paid Wisconsin's 5 percent sales tax on the transaction?
Mrs. DK owes $188 Rhode Island use tax ($658 - $470 credit for Wisconsin sales tax [$9,400 × 5%]).
#10.) Mrs. DK, a resident of Rhode Island, traveled to Delaware to purchase an oil painting from a local artist. The cost of the painting was $9,400. Rhode Island has a 7 percent sales and use tax, while Delaware has no sales and use tax. a. How much Rhode Island use tax does Mrs. DK owe on the purchase she made in Delaware?
Mrs. DK owes $658 Rhode Island use tax ($9,400 × 7%).
#10.) Mrs. DK, a resident of Rhode Island, traveled to Delaware to purchase an oil painting from a local artist. The cost of the painting was $9,400. Rhode Island has a 7 percent sales and use tax, while Delaware has no sales and use tax. b. How much Rhode Island use tax would Mrs. DK owe if she purchased the painting from a gallery in New York City and paid 8.75 percent state and local sales tax on the transaction?
Mrs. DK owes no Rhode Island use tax because her $823 New York sales tax ($9,400 × 8.75%) exceeds $658.
#37.) TRW Inc. began business in 2018 and incurred net operating losses for its first two years. In 2020, it became profitable. The following table shows TRW's taxable income before consideration of these NOL's. 2018: ($420,000) 2019: ($358,000) 2020: $81,000 2021: $41,000 2022: $210,000 2023: $298,000 2024: $387,000 2025: $$905,000 Recompute TRW's taxable income for 2020 through 2025 after allowable net operating loss deduction.
NOL: 778,00 2020: 81000- 64800= 162,000 2021: 41,000-32800= 8200 2022: 210,000-168,000= 420000 2023: 29800-238400=59600 2024: 387000-274000= 113,000 2025: 905000-0=905000
#9.) Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2, $24,000; year 3, $17,600. b. Compute the NPV if Company K can defer the receipt of years 0 and 1 cash flows/income until year 2. (It would receive no cash in years 0 and 1 and would receive $57,000 cash in year 2.)
NPV = $44,886
#9.) Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2, $24,000; year 3, $17,600. a. If the before-tax cash flows represent taxable income in the year received, compute the NPV of the cash flows.
NPV = $46,864
#9.) Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2, $24,000; year 3, $17,600. c. Compute the NPV if Company K can defer paying tax on years 0 and 1 cash flows until year 2. (It would receive $24,000 cash in year 2 but would pay tax on $57,000 income.)
NPV = $47,712
#21.) Firm y has the opportunity to invest in a new venture. The projected cash flows are as follows: Year 0: Initial cash revenues of $300,000 Year 1, 2,3; generate cash revenues of $50,000 year 1,2,3: incure fully deductible cash expenditures of $30,000 Year 3: Incure nondeductable cash expenditure of $10,000 Year 3: receive $300,000 cash as a return as a return of the initial investment Assuming a 6% discount rate and a 30 marginal tax rate, compute the NPV of the cash flows resulting from investment in this opportunity.
NPV($18,978)
#19.) Company DL must chose between 2 business opportunities. Opportunity 1 will generate an $8000 deductible loss in year 0, $5000 deductible loss in year 1, and $20000 taxable income in year 2. Opportunity 2 will generate $6000 taxable income in year 0 and $5000 taxable income in years 1 and 2. The income and loss reflect before cash inflow and outflow. Firm E uses a 5% discount rate to compute NPV and has a 40% marginal tax rate over the 3 year period. Which opportunity should Firm E chose?
Opp 1: NPV$41,193 Opp 2: NPV$42,266 Company DL should choose Opportunity 2.
#8.) Indicate whether this is a primary authority or secondary authority: d. Treasury regulations
Primary
#8.) Indicate whether this is a primary authority or secondary authority: e. IRS revenue procedure
Primary
#8.) Indicate whether this is a primary authority or secondary authority: f. US Tax Court memorandum decision
Primary
#8.) Indicate whether this is a primary authority or secondary authority: g. US Tax Court regular decision
Primary
#8.) Indicate whether this is a primary authority or secondary authority: h. US Supreme Court decision
Primary
#34.) SEP, a calendar year corporation, reported $918,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporation's records reveal the following information: SEP incurred $75,000 of research costs that resulted in a new 17-year patent for the corporation. SEP expensed these costs for book purposes. SEP's depreciation expense per books was $98,222, and its MACRS depreciation deduction was $120,000. SEP was organized two years ago. For its first taxable year, it capitalized $27, 480 start-up costs and elected to amortize them over 180 months. For book purposes, it expensed the costs in the year incurred. Compute SEP's taxable income.
SEP's net book income before tax $918,000 Research costs 0 Book depreciation expense $98,222 MACRS depreciation (120,000) Depreciation Deduction (21,778) Amortization of start-up costs ([$27,480 / 180 months] × 12 months) = (1,832) SEP's taxable income $894,390 SEP can deduct the $75,000 research costs, so it has no book/tax difference.
#8.) Indicate whether this is a primary authority or secondary authority: b. CCH Federal Tax Service.
Secondary
#8.) Indicate whether this is a primary authority or secondary authority: c. BNA Tax Management Portfolios.
Secondary
#8.) Indicate whether this is a primary authority or secondary authority: j. Article published in Journal of Corporate Taxation
Secondary
#12.) Firm L, which operates a mail-order clothing business, is located in State L. This year, the firm shipped $18 million of merchandise to customers in State R. State R imposes a 6 percent sales and use tax on the purchase and consumption of retail goods within the state. a. Do State R residents who purchased Firm L merchandise owe use tax on their purchases?
State R residents who purchase property out-of-state (i.e., through the mail) but use and consume the property in State R owe the 6 percent use tax.
#12.) Which of the following statements regarding secondary authorities is FALSE? a. Secondary authorities are an excellent starting point in the tax research process. b. Secondary authorities attempt to explain and interpret primary authorities. c. Secondary authorities are helpful to the tax researcher in locating relevant primary authorities. d. Secondary authorities often provide sufficient support for tax research conclusions.
Statement d. is false. Secondary authorities should not be relied on or cited in reaching tax research conclusions.
#11.) Which of the following statements regarding the U.S. Supreme Court is FALSE? a. The Supreme Court may agree to hear an appeal (grant certiorari) or refuse to hear it (deny certiorari). b. The Supreme Court generally agrees to hear tax cases only when the case involves a significant principle of law or because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue. c. During an average term, the Supreme Court generally hears no more than a dozen federal tax cases. d. Decisions of the US Tax Court may be appealed directly to the Supreme Court, without being heard by one of the US Courts of Appeals.
Statement d. is false. Tax Court decisions must first be appealed to the appropriate Circuit Court of Appeals. The party losing at the Circuit Court level may then appeal to the U.S. Supreme Court.
#25.) Refer to the facts in the proceeding problem. In 2018 YZ generated 7000 ordinary business income and 18000 dividend and and interest income. The partnership made no distributions. At the end of the year YZ had 21000 debt. A. How much partnership income will Zelda report on her 2018 return? Assume the excess business limitation does not apply.
Step 1: find basis end of 2017: 0 end adj basis beg. basis 2018: 0 increased by: business income (7000*60%) 4200 dividends (18000*60%) 10800 debt (21000*60%) 12600 =27600 basis decreased by 2017 carry forward: 126000 (210000*60%) - 107480 (previously calulated in #24) = (18520)
#10.) Government G levies an income tax with the following rate structure: Percentage rate - 6%, Bracket - 0 to $30,000 Percentage rate - 10%, Bracket - $30,001 to $70,000 Percentage rate - 20%, Bracket - $70,001 to $200,000 Percentage rate - 28%, Bracket - Everything in excess of $200,000 a. Taxpayer A's taxable income is $119,400. Compute A's tax and average tax rate. What is A's marginal tax rate?
Taxpayer A's tax on $119,400 of income is computed as follows: 6% of first $30,000 of income = $1,800 10% of next $40,000 of income = 4,000 20% of next $49,400 of income = 9,880 Total tax = $15,680 Taxpayer A's average tax rate is 13.13% ($15,680 / $119,400), and his marginal tax rate is 20%.
#10.) Government G levies an income tax with the following rate structure: Percentage rate - 6%, Bracket - 0 to $30,000 Percentage rate - 10%, Bracket - $30,001 to $70,000 Percentage rate - 20%, Bracket - $70,001 to $200,000 Percentage rate - 28%, Bracket - Everything in excess of $200,000 b. Taxpayer B's taxable income is $383,900. Compute B's tax and average tax rate. What is B's marginal tax rate?
Taxpayer B's tax on $383,900 of income is computed as follows: 6% of first $30,000 of income = $1,800 10% of next $40,000 of income = 4,000 20% of next $130,000 of income = 26,000 28% of next $183,900 of income = 51,492 Total tax = $83,292 Taxpayer B's average tax rate is 21.70% ($83,292 / $383,900), and his marginal tax rate is 28%.
#24.) Zelda owns a 60% general interest in YZ Partnership. At the beginning of 2016, the adjusted basis in her YZ interest was $95,000, For 2017, YZ generated a $210,000 business loss, earned 14,600 dividend and interest income on its investments, and recognized a 6200 capital gain. YZ made no distributions to its partners and had no debt. b. Compute Zelda's adjusted basis in her YZ interest at the end of 2017.
business loss: 210,000 max deduction: 107480 (previously calculated in part a) soo... 107480 max deduction - 107480 deduction = 0 adjusted tax basis
#11.) Government G levies an income tax with the following rate structure: Percentage rate - 6%, Bracket - 0 to $30,000 Percentage rate - 10%, Bracket - $30,001 to $70,000 Percentage rate - 20%, Bracket - $70,001 to $200,000 Percentage rate - 28%, Bracket - Everything in excess of $200,000 Taxpayer O earns $50,000 annually during years 1 through 10. Taxpayer P earns $20,000 annually during years 1 through 5 and $80,000 annually during years 6 through 10. b. Compute each taxpayer's average tax rate for the 10-year period.
Taxpayer O paid an annual tax of $3,800 on $50,000 taxable income. Thus, Taxpayer O paid $38,000 tax for the 10-year period and had an average tax rate of 7.6% ($38,000 ÷ $500,000). Taxpayer P paid an annual tax of $1,200 on $20,000 taxable income for years 1 through 5 and an annual tax of $7,800 on $80,000 taxable income for years 6 through 10. Thus, taxpayer P paid $45,000 tax for the 10-year period and had an average tax rate of 9% ($45,000 ÷ $500,000).
#2.) In each of the following cases, determine if the United States has jurisdiction to tax Mrs. CM. c. Mrs. CM is a citizen and resident of Brazil. She owns no property and conducts no business in the United States.
The United States does not have jurisdiction to tax Mrs. CM.
#2.) In each of the following cases, determine if the United States has jurisdiction to tax Mrs. CM. a. Mrs. CM is a US citizen but is a permanent resident of Sao Paulo, Brazil.
The United States has jurisdiction to tax Mrs. CM because she is a U.S. citizen.
#2.) In each of the following cases, determine if the United States has jurisdiction to tax Mrs. CM. a. Mrs. CM is a citizen of Brazil but is a permanent resident of Orlando, Florida.
The United States has jurisdiction to tax Mrs. CM because she is a permanent resident.
#2.) In each of the following cases, determine if the United States has jurisdiction to tax Mrs. CM. b. Mrs. CM is a citizen and resident of Brazil. She owns Manhattan real estate that generates $100,000 net rental income annually.
The United States has jurisdiction to tax Mrs. CM only on the U.S. source rental income generated by the Manhattan real estate.
#12.) Firm L, which operates a mail-order clothing business, is located in State L. This year, the firm shipped $18 million of merchandise to customers in State R. State R imposes a 6 percent sales and use tax on the purchase and consumption of retail goods within the state. b. If State R could legally require Firm L to collect a 6 percent tax on mail-order sales made to residents of the state, how much additional revenue would the state collect? Explain the reasoning behind your answer.
The fact that Firm L must collect the State R use tax does not affect the legal liability of State R residents to pay the tax. However, very few people actually pay a self-assessed use tax. Thus, State R might collect as much as $1,080,000 additional revenue (6 percent of $18 million sales to State R customers) if Firm L was required to collect use tax at point of sale and remit the tax to State R.
#24.) Zelda owns a 60% general interest in YZ Partnership. At the beginning of 2016, the adjusted basis in her YZ interest was $95,000, For 2017, YZ generated a $210,000 business loss, earned 14,600 dividend and interest income on its investments, and recognized a 6200 capital gain. YZ made no distributions to its partners and had no debt. c. Would your answers change if Zelda received 5000 cash distribution fro YZ during 2017?
Yes: 107480 (max deduction) - 5000 (gain) = 102480
#25.) Mr. ZJ owns a sole proprietorship. The business assets have a $246,000 aggregate adjusted basis. According to an independent appraisal, the business is worth $400,000. Mr. ZJ transfers his business to ZJL Corporation in exchange for 1,000 shares of ZJL stock. Assume that Mrs. L, who is Mr. ZJ's business colleague, transfers $200,000 cash to ZJL Corporation in exchange for 500 shares of ZJL stock. Mr. ZJ and Mrs. L's transfers occur on the same day, and after the exchange ZJL has 1,500 shares of outstanding stock (1,000 owned by Mr. ZJ and 500 owned by Mrs. L). c. Compute ZJL's tax basis in the assets transferred from Mr. ZJ.
ZJL's tax basis in the assets transferred from Mr. ZJ will be their $246,000 carryover basis.
#23.) Zeno Inc. sold two capital assets in 2018. The first sale resulted in a $53,000 capital loss, and the second sale resulted in a $25,600 capital gain. Zeno was incorporated in 2014 and its tax records provide the following information: 2014: Ordinary Income - 443,000, Net capital gain - 22,000, Taxable Income - 465,000 2015: Ordinary Income - 509,700, Net capital gain - 0, Taxable Income - 509,700 2016: Ordinary Income - 810,300, Net capital gain - 4,120, Taxable Income - 814,420 2017: Ordinary Income - 921,000, Net capital gain - 13,600, Taxable Income - 934,600 a. Using a 34 percent tax rate (Zeno's marginal tax rate prior to 2018), compute Zeno's tax refund from the carry-back of its 2018 nondeductible capital loss.
Zeno has a $27,400 nondeductible net capital loss in 2018. It can carry the loss back three years to deduct against net capital gain in those years. Zeno can deduct $4,120 capital loss carryback against 2016 capital gain and $13,600 capital loss carryback against 2017 capital gain to generate a $6,025 tax refund ($17,720 × 34%).
#23.) Zeno Inc. sold two capital assets in 2018. The first sale resulted in a $53,000 capital loss, and the second sale resulted in a $25,600 capital gain. Zeno was incorporated in 2014 and its tax records provide the following information: 2014: Ordinary Income - 443,000, Net capital gain - 22,000, Taxable Income - 465,000 2015: Ordinary Income - 509,700, Net capital gain - 0, Taxable Income - 509,700 2016: Ordinary Income - 810,300, Net capital gain - 4,120, Taxable Income - 814,420 2017: Ordinary Income - 921,000, Net capital gain - 13,600, Taxable Income - 934,600 b. Compute Zeno's capital loss carry-forward into 2019.
Zeno's capital loss carryforward is $9,680 ($27,400 - $17,720).
#19) Jayathi and Kris each own 50% general partnership interest in the JK Partnership. The following info is available regarding the partnerships 2017 activities. Sales revenue: 500,000 Selling exp: 200,000 long term capital gain: 9,000 nondeductible exp: 2,000 partnership debts, Beg of Year: 120,000 partnership distributions: Jayanthi: 50,000 Krish: 50,000 D. At the beginning of the year, Jayanthi's adjusted tax basis in her partnership interest was $25,000. Calculate her ending adjusted tax basis in her partnership interest.
beg basis: 25,000 +ord income: 135,000 -nondeduct exp: (1000) +cap gain 4,500 +debt increase 10,000 - distributions (50,000) =123,500
