CHAPTER 4David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,740. They have made prepayments of $1,100 and also have a child tax credit of $1,000. What is the amount of their tax refund or taxes due? (1)Total tax$1,740 (2)Child tax credit1,000 (3)Prepayments1,100 Tax refund $(360) Explanation: David and Lilly will receive a tax refund of $360 calculated as follows: Tax refund = $1,740 − $1,100 − $1,000 = −$360 Prepayments are fully refundable when payments exceed the taxes after credits because the refundable amount is essentially an overpayment of taxes. 2. Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income causing the joint return year 2 tax liability to be understated by $9,000 and Crewella’s year 3 separate return tax liability to be understated by $6,950. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.) a. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return? b. What amount of tax can the IRS require Jasper to pay for Crewella’s year 3 separate tax return? Explanation: a. Because Jasper is jointly and severally liable for the year 2 return, he is responsible to pay the entire $9,000. b. Because they filed separately in year 3, Jasper is not responsible for any of the $6,950. $0 #3 In each of the following independent situations, determine the taxpayer’s filing status and the number of personal and dependency exemptions the taxpayer is allowed to claim. a. Frank is single and supports his 17-year-old brother, Bill. Bill earned $3,000 and did not live with Frank. Single with two exemptions. b. Geneva and her spouse reside with their son, Steve, who is a 20-year-old undergraduate student at State University. Steve earned $13,100 at a part-time summer job, but he deposited this money in a savings account for graduate school. Geneva paid all of the $12,000 cost of supporting Steve. Married filing jointly with three exemptions. c. Hamish’s spouse died last year, and Hamish has not remarried. Hamish supports his father Reggie, age 78, who lives in a nursing home and had interest income this year of $2,500. Head of household with two exemptions. d. Irene is married but has not seen her spouse since February. She supports her spouse's 18-year-old child Dolores, who lives with Irene. Dolores earned $4,500 this year. Head of household with two exemptions. e. Assume the same facts as in part d. Also assume that Craig is Irene’s husband. Craig supports his 12-year-old son Ethan, who lives with Craig. Ethan did not earn any income. What is Craig's filing status? Head of household with two exemptions. Explanation: a. Single with two exemptions; one personal and one dependency exemption for Bill. Frank will file as single, not head of household. Bill is not a qualifying person for purposes of the head of household test because Bill did not live as member of Frank’s household for more than half the year. Frank can claim an exemption for Bill because Bill qualifies as Frank’s qualifying relative as follows: Test Relationship Age Residence Support Gross income Bill Yes, Bill is taxpayer’s brother. Not applicable to qualifying relative Not applicable to qualifying relative Yes, more than half of Bill’s support is provided by Frank. Yes, Bill’s gross income ($3,000) is less than the exemption amount. b. Married filing jointly with two personal exemptions and one dependency exemption for Steve. Steve meets the test to be Geneva and her husband’s qualifying child as follows: Test Relationship Age Residence Support Steve Yes, Steve is the taxpayers’ son. Yes, under age 24 and a full-time student (and younger than parents). Yes, temporary absences away at school count as time in the parents’ home Yes, even though the Steve earned $13,100, he did not use any of that money to provide for his support. Steve’s parents provided more than half (all, in fact) of his support for the year. A qualifying child is not subject to the gross income test. c. Head of household with two exemptions. Hamish is not a qualifying widower because he does not maintain a household for a dependent child. However, he does qualify for head of household because he is not married and he pays more than half the cost of maintaining a separate household that is the principal place of abode for his father, and his father also qualifies as his dependent (as a qualifying relative) as follows: Because Reggie is considered to be Hamish’s qualifying relative (and a qualifying person for purposes of the head of household filing status), Hamish may also claim a dependency exemption for Reggie. Test Relationship Age Residence Support Gross income Reggie Yes, Reggie is Hamish’s father. Not applicable to qualifying relative Not applicable to qualifying relative Yes, Hamish provides more than half of Reggie’s support. Yes, Reggie’s gross income of $2,500 is less than the exemption amount. d. Head of household with two exemptions. Irene qualifies for being treated as unmarried for the year (abandoned spouse) as follows: Test Married Separate return Maintains home Time separated Irene Yes, Irene is still married at the end of the year. Yes, Irene files a separate return from her spouse. Yes, Irene provides more than half the cost of maintaining a home for a qualifying child. Yes, Irene has not lived with her spouse for the last six months of the year. Because she is treated as though she were unmarried, she may file as head of household because she pays more than half the costs (for more than half the taxable year) of maintaining a household that is the principal place of abode for a dependent who is her qualifying child. Dolores is Irene’s qualifying child, as determined below: Test Relationship Age Residence Support Dolores Yes, Dolores is the taxpayers’ stepchild. Yes, under age 19 (and younger than Irene) Yes, Dolores lived with taxpayer for more than half of the year. Yes, Dolores did not provide more than half of her own support. Irene may claim one personal exemption for herself and one dependency exemption for Dolores. e. Head of household with two exemptions. Craig qualifies for being treated as unmarried (abandoned spouse rules) as follows: Test Married Separate return Maintains home Time separated Craig Yes, Craig is still married at the end of the year. Yes, Craig files a separate return from his spouse. Yes, Craig provides more than half the cost of maintaining a home for a qualifying child. Yes, Craig has not lived with his spouse for the last six months of the year. Because he is treated as though he were unmarried, he may file as head of household because he pays more than half the costs (for more than half the taxable year) of maintaining a household that is the principal place of abode for a dependent who is his qualifying child. Ethan is Craig's qualifying child, as determined below: Test Relationship Age Residence Support Ethan Yes, Ethan is the taxpayers’ child. Yes, under age 19 (and younger than Craig) Yes, Ethan lived with taxpayer for more than half of the year. Yes, Ethan did not provide more than half of his own support. Craig may claim one personal exemption for himself and one dependency exemption for Ethan. Note that both Irene in part d. and Craig may claim head of household filing status because they both qualify to be treated as unmarried for filing status purposes. Three years ago, Adrian purchased 160 shares of stock in X Corp. for $19,520. On December 30 of year 4, Adrian sells the 160 shares for $11,520. (Input the amount as positive value.) a. Assuming Adrian has no other capital gains or losses, how much of the loss is Adrian able to deduct on her year 4 tax return? Capital loss$3,000 b-1. Assume the same facts as in part a, except that on January 20 of year 5, Adrian purchases 160 shares of X Corp. stock for $11,520. How much loss from the sale on December 30 of year 4 is deductible on Adrian’s year 4 tax return? Capital loss$0 b-2. What basis does Adrian take in the stock purchased on January 20 of year 5? The basis of the new 160 shares of stock is $19,520 Explanation: a. Adrian has a $8,000 long-term capital loss. She can offset $3,000 of the capital loss against ordinary income. The remaining $5,000 of the capital loss (i.e. $8,000 less the $3,000 deducted currently) is carried forward indefinitely. b-1. & b-2. Adrian has a realized $8,000 long-term capital loss on the sale of the 160 shares. However, she has purchased substantially identical stock within the 61 day period (30 days before the sale until 30 days after the sale); therefore, her loss is limited by the wash sale rules. Since Adrian purchased 160 shares the loss is not currently recognized. The loss is added to the basis of the new shares purchased. Thus, the basis of the 160 new shares of stock is $19,520 (i.e. the $11,520 purchase price plus the unrecognized loss of $8,000). Terry was ill for three months and missed work during this period. During his illness, Terry received $4,700 in sick pay from a disability insurance policy. What amounts are included in Terry’s gross income under the following independent circumstances? a. Terry has disability insurance provided by his employer as a nontaxable fringe benefit. Terry’s employer paid $2,080 in disability premiums for Terry this year. Amount included$4,700 b. Terry paid $2,080 in premiums for his disability insurance this year. Amount included$0 c. Terry’s employer paid the $2,080 in premiums for Terry, but Terry elected to have his employer include the $2,080 as compensation on Terry’s W-2. Amount included$0 d. Terry has disability insurance whose cost is shared with his employer. Terry’s employer paid $1,500 in disability premiums for Terry this year as a nontaxable fringe benefit, and Terry paid the remaining $580 of premiums from his after-tax salary. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) b. Last year Louis claimed itemized deductions of $6. Louis received a tax benefit for the lesser of the refund ($1. if any.700]. A portion of the disability pay is excluded from Terry’s gross income because Terry paid a portion of the insurance premiums.700. $4. c. The disability pay of $4. The disability pay of $4. Hence. Explanation: a. Louis’s itemized deductions included state income taxes paid of $2. must Louis include in gross income under the following independent scenarios? Assume the standard deduction last year was $6.520 refund in gross income. a.620 refund of state income taxes that he paid last year. Because he didn’t itemize his deductions.620.Explanation: a. Louis must include $425 of the $1. Louis’s itemized deductions included state income taxes paid of $2. $0. the answer is the same as for part b. Even though his employer paid the premium. so he is treated as though he paid the premiums.080) × $4. the disability insurance premiums of $2. Terry can exclude $1.500. b.525 − $6. Consequently.080 paid by Terry’s employer are excluded from Terry’s gross income.311 = [($580/$2.500. the premium is taxable compensation to Terry. c. Last year Louis claimed itemized deductions of $7.700 is included in Terry’s gross income because Terry’s employer paid the insurance premiums as a nontaxable fringe benefit to Terry.630 and he chose to claim the standard deduction.075.525. Last year Louis had itemized deductions of $4.520 tax . d. b. $3.389. In April of this year he received a $1. $0. Louis received no tax benefit from the $1. How much of the refund. Louis’s itemized deductions included state income taxes paid of $4.620) or the excess of the itemized deductions above the standard deduction ($6.100.100 = $425). Thus.700 is excluded from Terry’s gross income because Terry paid the insurance premiums. Note: the cost of disability insurance premiums is not deductible as a medical expense. Louis files as a single taxpayer. Therefore.750. Rubio’s share of the limited partnership loss for the year is $19.520).520 refund in gross income.750 (tax basis) in purchasing a limited partnership interest in which he will have no management rights in the company. Louis must include the entire $1.750 loss reduces his tax basis to zero leaving him with a $3. ($16. Rubio’s $19.000.) a.750.000 loss carryover because of the tax basis loss limitation.620 − $6. How much of Rubio's $19. b.000 of loss. (Input all amounts as positive values. c.750 at-risk carryover. In addition. After applying the tax basis and at-risk limitations. His at-risk amount is $10. Hence. because Rubio is a limited partner this loss is considered a passive loss. Because Rubio has only passive income of $6.overpayment. his share of income from a different limited partnership was $6.100 = $1.850 of the $10. and he had $46. Hence. Rubio’s $19.520) or the excess of the itemized deductions above the standard deduction ($7.750 loss is allowed considering only the tax basis loss limitations? b.750 loss reduces his atrisk amount to zero leaving him with a $6. How much of the loss from part (a) is allowed under the at-risk limitations? c. Rubio’s initial tax basis in the limited partnership is $16. How much of Rubio’s $19.850.000 loss leaving him with a $3.000. .750 loss allowed under the tax basis limitation less the $10. none of the refund is included in his gross income. However. he may only deduct $6.150 passive activity loss that can be carried forward indefinitely. Rubio can potentially deduct $10.300 in long-term capital gains.750 loss from the limited partnership can he deduct in the current year considering all limitations? Explanation: a. c. Louis received a tax benefit for the lesser of the refund ($1. Rubio’s initial at-risk amount in the limited partnership is $10.400 in wage income and $14. Rubio recently invested $16.850 (from another limited partnership). Rubio may only deduct this loss in the current year to the extent he has passive income.000 amount Rubio has at risk). Determine if Clyde’s move qualifies for a moving expense deduction and calculate the amount (if any) under the following circumstances: (Leave no cells blank .be certain to enter "0" wherever required. He would like to accept the assignment.00 points Clyde currently commutes 55 miles to work in the city. but he thinks it might require that he move to the other side of the city. b-1 Does Clyde’s move qualify for a moving expense deduction? Yes b-2 Calculate the amount of deduction. b. He also estimates the costs of a move as follows: Lodging while searching for an apartment Transportation — auto (100 miles @ 19 cents/mile) Mover's fee (furniture and possessions) Meals while en route $ 174 19 3.Same as part (a). his new commute would be almost 120 miles. except Clyde’s new commute would be almost 134 miles and the movers intend to impose a $890 surcharge on the moving fee for the additional distance. his new commute would be almost 64 miles.) a.Clyde estimates that unless he moves across town.Same as part (a). c. except Clyde estimates that unless he moves across town. He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably.650 77 a-1 Does Clyde’s move qualify for a moving expense deduction? No a-2 Calculate the amount of deduction. c-1 Does Clyde’s move qualify for a moving expense deduction? Yes c-2 Calculate the amount of deduction. Assume that Clyde is employed for 39 of the next 52 weeks.2. award: 10 out of 10. . What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo? . Clyde now qualifies for a moving expense deduction (assuming he is employed for 39 of the next 52 weeks). To qualify for a moving expense deduction the new commute from Clyde’s current residence would need to be a minimum of 105 miles.480 1.070 730 9.Explanation: a. Clyde would not qualify for a moving expense deduction.) a. Natalie rented out the condo for 99 days.669 (mover’s fee of $3.00 points Natalie owns a condominium near Cocoa Beach in Florida. 3.350 1. That is.650 + $19 of mileage) are deductible for AGI. Zero.559. (Do not round intermediate calculations. his commute from his old residence to the new job must be more than 50 miles longer than his current commute. receiving $22. Round your final answers to the nearest whole dollar amount. c. Clyde qualifies for a moving expense deduction (assuming he is employed for 39 of the next 52 weeks). award: 0 out of 10. Assume there are 365 days in the year. This year. Estimated costs of $3. Estimated costs of moving increase to $4. b. she incurs the following expenses in connection with her condo: Insurance Advertising expense Mortgage interest Property taxes Repairs & maintenance Utilities Depreciation $720 915 4. Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. She personally used the condo for 52 days during her vacation. This excludes the cost for lodging while searching for an apartment and the meals en route.000 of gross income.000 During the year. and this total is deductible for AGI. 000 (2.400 (rather than $22.049 .496 + $1.070 = $702 Utilities = (99/151) × $730 = $479 Less: Total Tier 2 expenses $ Balance Tier 3 expenses: Depreciation (99/151) × $9.000).b.496) 19.049. Assume that gross rental revenue was $3.180 Property taxes = (99/365) × $1.480 = $401 Less: Total Tier 1 expenses $ Balance Tier 2 expenses: Insurance = (99/151) × $720 = $472 Repairs & Maintenance = (99/151) × $1.504 (1. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo? c.901) 22. a.852 (5.350 = $1. If Natalie’s basis in the condo at the beginning of the year was $159. calculated as follows: Gross rental income Tier 1 expenses: Advertising expense = $915 Mortgage interest = (99/365) × $4.951 $ 10.901) $ 11. what amount of for AGI deductions may Natalie deduct in the current year related to the condo? Explanation: Note that the home falls into the residence with significant rental use category.000. what is her basis in the condo at the end of the year? d.000 = $5.901 $ Balance—net income from rental of condo Total “For AGI” deductions ($2.652) 17.652 + $5. $10. 079 Total “from AGI” deductions $ 4. Natalie is allowed to deduct all $2. In total. $3. 4. Her deductions for these items are computed as follows: Mortgage interest [(266/365) × $4.901) 153.249 c. Natalie is also able to deduct $904 of the tier two expenses. she will deduct $3.400.496 of the tier 1 expenses (advertising expense and the portion of the mortgage interest expense and real property taxes allocated to the rental use of the home) as for AGI deductions (these deductions would not be limited to rental revenue even if it created a loss).480] $ 3. $153.350] Real property taxes [(266/365) × $1. calculated as follows: Beginning basis $ Less: depreciation actually deducted Adjusted basis $ 159. If he does not participate in an employer-sponsored plan.170 1. what is the maximum deductible IRA .00 points John (age 59 and single) has earned income of $3.400 of rental related expenses—leaving her with $0 net income from the property.b. Natalie may deduct the personal-use portion of the mortgage interest and property taxes since they are deductible without regard to rental income.600.099. He has $35. award: 10 out of 10.000 of unearned (capital gain) income.099 d. a.000 (5. 000 and $70.000) or earned income ($11. In this case.600. c. what is the maximum deductible IRA contribution John can make in 2014 if he has earned income of $11.500. Taxpayers who are participants in an employer sponsored retirement plan are allowed to make deductible contributions to an IRA account as long as they meet certain AGI restrictions.600. So his deductible contribution is $3. Deductible contributions to an IRA account are limited to the lesser of $5. $3.500 or earned income. he is allowed to deduct $3.500 or earned income. he/she may make a contribution of up to the lesser of $6.000 catch up contribution). So. $6. John’s AGI of $38. what is the maximum deductible IRA contribution John can make in 2014? c. In 2014.600 earned income + 35.500 or earned income (The $6.00 points Simpson is a single individual who is employed full-time by Duff Corporation. award: 0 out of 10. Thus.000 catch-up contribution for taxpayers age 50 and over). The $5.500 standard limit + $1. If he does participate in an employer-sponsored plan.500 = $5.500 limit is increased to $6.500? Explanation: a. Deductible contributions are limited to the lesser of $5. John may make a total deductible contribution equal to the lesser of $6. So. Thus.000 AGI phase-out threshold.500 (5. he is allowed to deduct $6.600.500).500 or earned income.600 (3. If he does not participate in an employer-sponsored plan. If the individual is at least 50 years old by the end of the year.500.600 or (2) the maximum deductible amount of $6.600. This year Simpson reports AGI of $58.contribution John can make in 2014? b. 1.000 and has incurred the following medical expenses: .000. John is allowed to make a contribution equal to the lesser of $6.000 capital gain) falls below the $60.500 for taxpayers who have reached the age of 50 by the end of the year (taxpayers age 50 or older at the end of the year are allowed to make an additional $1.500. b. the deductibility of IRA contributions is phased-out proportionally for AGI between $60. John’s deductible contribution is the lesser of (1) his earned income of $3.500 + 1. $3. 2. Suppose that Simpson was reimbursed for $455 of the physician's charges and $1.965 less $5.140 980 715 2. respectively. Explanation: a.190 525 585 1.015 and this amount is included with Simpson’s other itemized deductions. b. In addition. Simpson’s medical expense deduction is $8. Hence. cash-method taxpayer with one personal exemption and an AGI of $35.000.000) = $3.330 of state and federal income taxes. What is the amount of taxes that Tim can deduct as an itemized deduction? .165 and this amount is included with Simpson’s other itemized deductions.330 with his state income tax return for the previous year. Same as a.285 2.965 less $2.130 a. award: 0 out of 10. except Simpson’s medical expenses are first reduced by reimbursements $8. Finally. Tim expects to receive a refund of $350 for state income taxes when he files his state tax return for this year in April next year.800 (10 percent × 58.150 then reduced by the floor limit $5. All expenses are qualified medical expenses except for the over-the-counter drugs.695 for the hospital costs.000) = $1. During the year. Tim made estimated payments of $952 and $1. In April of this year Tim paid $1.780 of state income tax and $12. Tim had $3. Calculate the amount of medical expenses that will be included with Simpson’s itemized deductions after any applicable limitations. Calculate the amount of medical expenses that will be included with Simpson’s itemized deductions after any applicable limitations. b.Dentist charges Physician's charges Optical charges Cost of eyeglasses Hospital charges Prescription drugs Over-the-counter drugs Medical insurance premiums (not through an exchange) $1.775 of federal income tax withheld from his salary.00 points Tim is a single.800 (10 percent × 58. but the cost of the subscription and half the cost of the supervisor lunches (assuming Zack has sufficient substantiation) will be deductible as miscellaneous itemized deductions subject to the 2% floor (from AGI). Zack discovered a number of unreimbursed expenses related to his employment in Dallas prior to his move to Houston. and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction. Cost of bus transportation from his home to the airport Subscription to Journal of Security Guards Lunch with colleagues Cost of self-defense course at local community center Cost of lunch with supervisor during evaluations Total $ 180 63 225 600 348 $ 1.062.Explanation: Tim can deduct the state taxes paid with last year’s return.00 points Zack is employed as a full-time airport security guard.00 points In each of the following independent cases. Explanation: The cost of bus transportation is a nondeductible personal expense. . because it appears to maintain or improve Zack’s skills in the business. state tax withheld during the year.416 Identify which expenses are deductible and whether the deductions are for or from AGI. but may be taxable next year under the tax benefit rule 3. a total of $6. The expected refund next year will not affect the deductions for this year. (2) deductible from AGI. and estimated payments of state tax. award: 0 out of 10. 4. indicate the amount (1) deductible for AGI. This year Zack's employer transferred him from Dallas to Houston. The cost of the course is also deductible as a miscellaneous itemized deduction subject to the 2% of AGI floor. award: 0 out of 10. At year-end. f. Timothy. Because of his high pay. he receives no allowance or reimbursement from his employer for advertising expenses even though his position requires him to advertise frequently. but he won $62 playing slot machines. b. spent $101 for small tools to be used on his job. for . d. a professor at a community college. from .trade expense assuming that the special duty uniforms cannot be adapted to normal use. $0 for AGI. d. he spent $2.650 on legitimate business advertisements. but she was not reimbursed for the expenditures. Her employer reimbursed her for $9 of this amount under an accountable plan. Trey is a self-employed special-duty nurse. $88 from AGI (miscellaneous itemized deduction as unreimbursed employee business expense). e. a plumber employed by ACE Plumbing. He spent $460 for uniforms. Note that the accountable plan only reimburses deductible expenses. Wayne lost $440 on the bets he made at the race track. $465 from AGI as miscellaneous itemized deduction as employee business expenses. f. but he was not reimbursed by ACE. Jake is a perfume salesperson. . b. Explanation: a. from .miscellaneous itemized deduction as employee business expense.miscellaneous itemized deduction as employee business expense.a. Income and expenses associated with the $9 reimbursement completely offset each other and are ignored. Mary. c. c. spent $465 for magazine subscriptions. The magazines were helpful for her research activities. During the year. e. Fran spent $97 for uniforms for use on her job. Explanation: a. Wayne's gambling loss deduction is limited to his winnings.500 0 5. Description (1) Taxable income (2) Preferentially taxed income (3) Income taxed at ordinary rates (4) Tax on income taxed at ordinary rates Amount $ 40.500 $ (5) Tax on preferentially taxed income Tax on taxable income Explanation 40.300 of qualified dividends.25 (1) − (2) (40.25 Amount $ 40.) a.081.500 (4) + (5) b. What is her tax liability in each of the following alternative situations? Use Tax rate schedule for reference. (Do not round intermediate calculations. Her $40. Description (1) Taxable income Explanation . Her $40. award: 3.981.34 out of 10.500.500 − 36. In 2014.981. All of her income is salary from her employer.500 of taxable income includes $15.900) × 25% + 5. her taxable income is $40.300 of qualified dividends. c. b.981. Lacy’s total tax is $5.$62 from AGI as a miscellaneous itemized deduction not subject to 2% floor.25 (see tax rate schedule for Single individuals) 0 $ 5.25.500 of taxable income includes $1.851. Round your answer to 2 decimal places.00 points Lacy is a single taxpayer. 1. Lacy’s total tax is $5.25. Description (1) Taxable income (2) Preferentially taxed income (3) Income taxed at ordinary rates (4) Tax on income taxed at ordinary rates (5) Tax on preferentially taxed income Tax on taxable income Amount $ Explanation 40. in order to avoid the underpayment penalty? b. Assuming Lloyd does not make any additional payments. a.500 15.25 540.00 points This year Lloyd.866.900 − 25.200) × 0% + (15. award: 0 out of 10.200 − 36.300 25.00 $ 3.200 3.866. He estimates that his tax withholding from his employer will be $8.350.326.25 (2) × 15% [Note that if (2) were ordinary income it would have been taxed at 15%] (4) + (5) c.300 − (36. Last year.200 5.200)) × 15% (4) + (5) 2. his total tax liability was $15.656.900.900 − 25.075) × 15% + 907. a single taxpayer. Lacy’s total tax is $3.25. estimates that his tax liability will be $11.25 (1) − (2) (39.851.300 39.655. what is the amount of his underpayment .900) × 25% + 5.50 (36. How much does Lloyd need to increase his withholding by (for the year).081.200 − 9.25 (1) − (2) (25.25 195 $ 5.(2) Preferentially taxed income (3) Income taxed at ordinary rates (4) Tax on income taxed at ordinary rates (5) Tax on preferentially taxed income Tax on taxable income 1. 9 × 0.75 (2) Required withholding $2. he will need to increase his withholding or make estimated payments this year to avoid the underpayment penalty.00) $1.350 × 0.350 × 0. Taxpayers can avoid an underpayment penalty if their withholdings and estimated tax payments equal or exceed one of the following two safe harbors: (1) 90 percent of their current tax liability [$11.00) $1.560.80 (780.560 × 8% × ¼ = $31.75 ($11.553.00 3.215 for Lloyd] or (2) 100 percent of their previous year tax liability (110 percent for individuals with AGI greater than $150.00 ($11.00) $390 × 8% × ¼ = $7.215 (safe harbor 1) or $15.50 ($11.50) ($8.25 7. he will avoid the underpayment penalty (assuming his current year tax projection is accurate).350 × 0.40 (1.350 × 90% = $10.900 (safe harbor 2).900 for Lloyd assuming his AGI was $150.penalty? Assume the federal short-term rate is 5 percent.20 Total = $78. What is the maximum American opportunity credit that Elaine can claim for the tuition payment and .661. Round your answers to 2 decimal places.560 or makes four quarterly estimated payments of $390 each.200 of tuition and $720 for books for her dependent son to attend State University this past fall as a freshman.50 5.350 × 0.00 points In 2014.9 × 0.75) ($8.170 × 8% × ¼ = $23.327. Lloyd will owe $78 in underpayment penalty computed as following: (1) Actual withholding Dates th April 15 June 15th September 15th January 15th $2.000 or less]. Elaine paid $2.25 ($11.215.9 × 0.491.163.000). (Negative amounts should be indicated by a minus sign.60 (1.655 × ¾) 8. Since Lloyd’s withholding does not equal or exceed $10. With an 8% penalty rate (federal short-term rate of 5% plus 3%).655 × ½) 6.655 × ¼) 4.25) ($8.107. [100% of $15.655.00) $780 × 8% × ¼ = $15.170.00 10.) Explanation: a. Elaine files a joint return with her husband. award: 0 out of 10. If he increases his withholding by $1.9 × 1) (1) − (2) Over (Under) Withheld Penalty Per Quarter $(390. b. 780. Elaine may claim an AOC of $1.920 − 2.00 $ 20.000 × 100% + (2.920 − 2.50 (1) × (6) 1.500.230 (1) − (7) b.000 0 % (4)/(5) or 100% max.000) × 25% 101.000. Description Amount Explanation .00 $ 7. (Round your intermediate calculations to two decimal places and final answer to the nearest whole dollar amount.books in each of the following alternative situations? a. Because Elaine’s AGI exceeds the threshold amount. Elaine may claim an American opportunity credit (AOC) of $2.00 $ $ Explanation 2.450. 0 (1) × (6) 2. Elaine’s AGI is $220.450 (1) − (7) c.000 $ $ 0 (2) − (3) {but not < 0 and limited to a maximum of $20.230 Explanation 2.) c.000.500 160.500. Description (1) AOC before phase-out (2) AGI (3) Phase-out threshold (4) Excess AGI (5) Phase-out range for taxpayer filing as married filing jointly (6) Phase-out percentage (7) Phase-out amount AOC after-phase-out $ Amount 2.000. b. Explanation: a.000) × 25% (2) − (3) $180.00 160.000 × 100% + (2.230.000.230.000 35 % (4)/(5) or 100% max.000 − $160. Elaine’s AGI is $167.000 − $160. Elaine’s AGI is $101.000.000 (3) Phase-out threshold (4) Excess AGI $ (5) Phase-out range for taxpayer filing as married filing jointly (6) Phase-out percentage (7) Phase-out amount AOC after-phase-out $ 20.000} $180. she may not claim an AOC. Description (1) AOC before phase-out $ (2) AGI $ Amount 2.00 $167. When must Janine recognize the income from the $7.2% × $117.700 in FICA taxes.2% of Social Security taxes on the first $117.670 advance payment for services if she uses the cash method of accounting? Year 0 b.000 100 % (4)/(5) 2.670 payment from a client for 26 months of security services she will provide starting on September 1 of year 0. When must Janine recognize the income from the $7.000 × 1.000 (3) Phase-out threshold (4) Excess AGI (5) Phase-out range for taxpayer filing as married filing jointly (6) Phase-out percentage (7) Phase-out amount AOC after-phase-out 2.230 (1) × (6) 0 (1) − (7) 4.920 − 2.670 advance payment for services if she uses the accrual method of accounting? .00 points Rasheed works for Company A. a.230 $ 60. Rasheed will pay 6. Janine received a $7. Assuming he has no other sources of income. award: 0 out of 10.(1) AOC before phase-out $ (2) AGI $ 2.35% of Medicare taxes on the remaining 236.45% + $236.00 points In October of year 0. In total.45% of Medicare taxes on his first $200. 1.500 160.000 in salary during 2014. Rasheed will pay $7. award: 0 out of 10.000 − $160.000 × 100% + (2.000 $ $ (2) − (3) (limited to $20.000) × 25% 220.000 × 2.500 $ 20. and he will pay 1. what amount of FICA tax will Rasheed pay for the year? Explanation: For 2013.35%) for a total of $15. This amounts to $295 per month.000) $180.000 of his salary.000 of salary.000 of salary and 2.254 of Social Security taxes (6.000) and $8. earning $436.446 of Medicare taxes for the year ($200. Josh paid interest of $8.180 she earns in year 0 (4 months × $295) and she must recognize the remaining $6.500 from the First State Bank using his business assets as collateral. . 2. Janine received the payment for a security system (inventory) that she will deliver and install in year 2. she reports the income when the inventory is delivered. b. When would Janine recognize the income from the advance payment for sale of goods if she uses the accrual method of accounting and she uses the full-inclusion method for advance payments? Year 0 Explanation: a. c. Janine must recognize the $1.000 of interest on the bonds. Suppose that instead of services. Suppose that instead of services. When would Janine recognize the income from the advance payment for inventory sale if she uses the accrual method of accounting and she uses the deferral method for reporting income from advance payments? For financial accounting purposes.670 as income this year because she received it this year.800 on the borrowed funds. a. then she would recognize the entire prepayment of $7. Janine received the payment for the delivery of inventory to be delivered next year. Year 2 d.Year 0 and Year 1 c.670 in year 2 when she delivers the goods. Josh borrowed $87. she would recognize the entire prepayment of $7. Janine must recognize the entire $7. d. Over the course of a year. He used the money to buy City of Blanksville bonds.490 in year 1 (she is allowed to defer the prepaid income for only one year).670 as income in year 0. If Janine uses the full inclusion method. but he received $7.00 points Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following situations. If Janine uses the deferral method. award: 0 out of 10. The amount he paid to his brother is comparable to what he would have paid to an unrelated party to do the same work.440 or selling the equipment to a junk shop for $680. However.700 is deductible and the remaining $2.000 to construct a new driveway for access to the property. Capital expenditures are not deductible. $0. Amy had the choice of repairing the equipment for $2. $0. $6.550 to install a robotic machine for Josh’s business. The amount paid to install a machine is capitalized because the cost benefits the useful life of the machine. the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Once the installation was completed by his brother. 3. $0. He also paid $12.450 of equipment for use in her business.700 but the mayor assured Josh that after his son was hired. d. c.b. What amount can Amy deduct for the loss of the equipment? . she does not claim any depreciation expense for the equipment. d.700 to employ the mayor’s son in the business.320. Josh began calibrating the machine for operation. What amount can Amy deduct for the loss of the equipment? b. Josh purchased a piece of land for $64.00 points This year Amy purchased $3. c. After the accident. Amy repaired the equipment for $1. a mechanic. Explanation: a. he had not started using the machine in his business. The interest expense is not deductible (expense associated with tax-exempt income). a.500 in order to get a location to expand his business. by the end of the year. Josh paid his brother. award: 0 out of 10. However. Note that because Amy did not place the equipment into service during the year.000 is either unreasonable in amount or against public policy (as a bribe). After the accident. b. some city business would be coming his way. Only $16. Josh would typically pay an employee with these responsibilities about $16. Amy sold the equipment. This year Josh paid $18. award: 0 out of 10. a. Ryan can provide written documentation of the business purpose for trips totaling 4. Amy could not replace the equipment so she had the equipment repaired for $4.450 – $680) b. Round your final answer to the nearest dollar amount. Amy can deduct $1. After the accident. In this case Amy can deduct $3. Amy can claim a casualty loss deduction for the tax basis of the machine less any recovery.900. Ryan paid $1.00 points Ryan is self-employed.) a. Hence.260 miles on business trips. 4. In this case. What business expense amount can Ryan deduct (if any) for these trips? b. Ryan estimates that he drove approximately 2. Amy can claim a casualty loss deduction for the lesser of the economic loss (the cost of repair) or the tax basis of the machine. The pro rata portion would be calculated as the business percentage of total mileage ($3. During the year. For partial destruction of a business asset.c. Ryan can claim the direct cost of these trips.040 miles. he drove his car a total of 20.450.040 / 20. Amy cannot claim any cost recovery. For partial destruction of a business asset.300 miles. but he can only provide written documentation of the business purpose for trips totaling 1.920 for gasoline on these trips. Amy can claim a casualty loss deduction for the lesser of the economic loss (the cost of repair) or the tax basis of the machine. the deduction for auto use is limited to direct costs (such as gas and oil) and the pro-rata portion of indirect costs (such as depreciation). Amy can claim a casualty deduction for $2. For the complete destruction of a business asset. Hence. c. (Do not round intermediate calculations. However. Ryan could deduct . His depreciation on the car if he was using it fully for business purposes would be $3. including gas ($1.770 ($3.750.320.200 miles (a combination of business and personal travel). What amount can Amy deduct for the loss of the equipment? Explanation: Note: Since the machine was not placed in service. This year Ryan used his personal auto for several long business trips.920) and depreciation on the auto. What business expense amount can Ryan deduct (if any) for these trips? Explanation: a.200]) or $780.900 × [4. Ryan can claim the direct cost of these trips including depreciation on the auto (for the business portion of the total mileage).104 = $1. Otherwise she would need to deduct the $1.00 points Rebecca is a calendar-year taxpayer who operates a business. Here. he can deduct $728 (i. Explanation: a. Ryan can only substantiate 1. 1.300 × 0.300 miles.e.260) × $1.900] + [(1. he can deduct $2. Alternatively.800 for an accountant to evaluate the accounting system of Rebecca’s business. d.300 / 2.100 for property taxes on her factory. b. $1. year 1.$2.800 in year 1 when the accountant provided the services .e. Indicate the amount of these payments that she may deduct in year 0 under both the cash method of accounting and the accrual method of accounting. b. it is likely that she would qualify for the deduction in year 0.700. Rebecca paid for the accounting services in advance and as long as she reasonably expected that the accountant would finish the services within 3 ½ months after the payment. Alternatively. $3. year 1.920] = $251 + $1. 5.180 for interest on a short-term bank loan relating to the period from October 1. $4..040 × 0. c. If he has records to substantiate the business use. and based on the standard mileage rate of 56¢ per mile. Ryan’s total expense deduction would consist of depreciation and expenses calculated as follows: [(1. since she made the payment in December and the accountant provided the services a month later.800 under the accrual method. Likely $1. She made the following business-related expenditures in December of year 0. she may treat payment as economic performance.800 for new office furniture. Ryan can claim a standard mileage rate. .262 (i. $1. 4.800 under the cash method.56). $4. Ryan is allowed to deduct the cost of using his personal auto in his business activities only if he can substantiate the business use.200) × $3.300 / 20. and based on the standard mileage rate of 56¢ per mile.56). The furniture was delivered on February 15. a..355. award: 0 out of 10. year 0 through March 31. b. The accountant spent three weeks in January of year 1 working on the evaluation. Ryan can claim a standard mileage rate. economic performance takes place when the goods are provided to her. Even under the cash method taxpayers may not deduct interest expense in excess of the amount of accrued interest. What amount of the travel costs can Melissa deduct as business expenses? (Round your answer to the nearest dollar amount.) d. which she considers personal in nature. $4. $925 for lodging. and $500 for cab fare. she spent $630 for breakfast and dinner over the three days of the conference. deductible only when paid. What amount of the travel costs can Melissa deduct as business expenses? (Round your answer to the nearest dollar amount. Suppose that while Melissa was on the coast. d. she also spent two days sightseeing the national parks in the area.) .100 under both the cash method and accrual method. absent a special election. To do the sightseeing. Taxes are a payment liability and are therefore. She bought breakfast on the way to the conference hotel and she bought dinner on her way home each night from the conference.590 (the interest allocable to October November and December) under both the cash method and the accrual method. $225 for meals. and $395 for meals during this part of her trip.00 points Melissa recently paid $540 for round-trip airfare to San Francisco to attend a business conference for three days. What amount of the travel costs can Melissa deduct as business expenses?(Round your final answer to the nearest whole dollar amount. $430 per night for three night’s lodging.) c. she paid $1. In addition.$0 under both the cash and accrual method. She attended the conference in San Francisco and paid $340 for the registration fee.) b.780 for transportation. c. What amount of the airfare can Melissa deduct as a business expense? (Round your answer to the nearest dollar amount. Melissa also paid the following expenses: $340 fee to register for the conference. award: 0 out of 10. $1. because the asset will provide a benefit for more than 12 months. Suppose that Melissa’s permanent residence and business was located in San Francisco. 6. However. She drove 167 miles over the course of three days and paid $188 for parking at the conference hotel. In this case. Suppose that Melissa made the trip to San Francisco primarily to visit the national parks and only attended the business conference as an incidental benefit of being present on the coast at that time. she must capitalize the expenditure and she will begin depreciating it in year 1 when she places the asset in service. a. 56 cents per mile for the 167 miles she drove to and from the conference ($94) and the parking fee of $188.000. c. Since business was the primary reason for the trip. Melissa can deduct $2. and the appraised value of the land was $141.750. None of the costs of sightseeing is deductible. If the purpose of the trip is primarily personal.250. d. and cab fare). WR Outfitters sold to Bob a warehouse and the land for $201. Round your answers to the nearest dollar amount. What would be Bob’s basis in the warehouse and in the land if the appraised value of the warehouse is $92. This solution uses the relative appraised values of the land and the warehouse to allocate the purchase price between these two assets. Which appraisal would Bob likely prefer? Appraised value in part (a) Explanation: NOTE: This is a bargain purchase. she is not allowed to deduct the cost of her meals going to and coming from the conference each day. because her primary purpose for the trip appears to be business (3 days business vs. The appraised fair market value of the warehouse was $112. Chapter 10 property acquisition and cost recovery 1.) a. The sales price is less than the appraised value.290 + (50% × $225) + $500] b. on December 29. However.750? c.Explanation: a. 50 percent of the meals. relating to the business portion of the trip.782 of travel costs [$340 registration + $540 + $1.250.00 points Wanting to finalize a sale before year-end. award: 0 out of 10. . 2 days personal) she is allowed to deduct her airfare to San Francisco and her other expenses in part a. However.242) can be deducted (the registration. then none of the air fare is deductible and only those direct costs associated with the conference ($2. What is Bob’s basis in the warehouse and in the land? b. and the appraised value of the land is $161. (Do not round intermediate calculations. Melissa would be allowed to deduct the registration fee for the conference of $340 and she could deduct 0. because her travel did not require her to be away from home overnight. lodging. Table 2.000 946.000 (purchase price) × $201.250) based on the appraisal.172 basis for the land is the amount of the $201.001.000 (purchase price) × $141. Bob's cost basis for the land is $127.250).a.828. which is depreciable.349.436.750+ 112.) Explanation: The maximum depreciation expense is $1. The formula used to determine the basis allocated to the land is $201.250 + 161.750). the purchase price must be allocated between the land and the warehouse. Table 4 and Table 5. Bob would likely prefer the appraisal from part (a).000 purchase price that is allocated to the land based on the relative value of the land ($161.000 73.999 basis for the land is the amount of the $201. b. the purchase price must be allocated between the land and the warehouse. The formula used to determine the basis allocated to the land is $201. Round your answer to the nearest whole dollar amount. Bob's cost basis in the land is $112.) (Take the §179 deduction only on the Furniture. The $127. c.172. Because the purchase price is less than the appraised values for the land and the warehouse.750) to the value of the land ($161.750) plus the value of the warehouse ($112. award: 0 out of 10. 2.000 purchase price that is allocated to the land based on the relative value of the land ($141.000 $2.999.000/($92.000 What is the maximum total depreciation expense that Chaz may deduct in 2014? (Use MACRS Table 1.00 points Chaz Corporation has taxable income in 2014 of $392.000 before the §179 expense and acquired the following assets during the year: Asset Office furniture Computer equipment Delivery truck Total Placed in Service September 12 February 10 August 21 Basis $1. Use the same process to determine that Bob’s basis in the warehouse is $73.250) based on the appraisal. Table 3. Use the same process to determine that Bob’s basis in the warehouse is $88. Because the purchase price is less than the appraised values for the land and the warehouse.330. because the appraisal allows him to allocate more basis to the warehouse. The $112.750) plus the value of the warehouse ($92.140 determined as follows: .750) to the value of the land ($141.750/($141. 099.600 36.000 (4) − (5) not limited by taxable income Chaz will receive the most benefit by applying the §179 amount to the furniture 7-year property.000 From (3) $ (6) Maximum §179 expense after phaseout $ 151.000 assets 2013 amount (2.140 .300 $ $ 1.240 473. award: 0 out of 10.00 (7-year) 0 0 0 Compute rs (5946.436.000 151.500 14.000 year) §179 Expense Bonus depreciati on Total depreciation expense 3.500 Remainin g Basis Rate $589.330.000) [§179(b)(2)] $ (4) Maximum 179 expense before phaseout (5) Phase-out of maximum §179 expense 349.000. §179 Original Expens Remainin Asset Basis e g Basis Furniture $1.Description Amount (1) Property placed in service $ (2) Threshold for §179 phase-out (3) Phase-out of maximum §179 expense Explanation Total of qualifying 2.099.000 73.000 946.000 $ 1.00 $1.00 % 94.29 % Depreciation Expense $ 84.500 36.000 (1) − (2) (permanently disallowed) 2013 amount 500.00 points Bonus Depreciation $ 589.000 $ 1.500 20.000 20.000 473.00 $151.349.000 year) Delivery truck (5 73.00 % 7.000 [§179(b)(1)] 349.179. Table 2.830.Jose purchased a delivery van for his business through an online auction. What is DLW's year 1 cost recovery for each asset? (Round your answers to the nearest dollar amount.200 20.830 *Note that the registration fee. Table 4 and Table 5.490.500 Total cost basis $ Business preparation cost Business preparation cost Business preparation cost 36. answer the following questions: a.00 points DLW Corporation acquired and placed in service the following assets during the year: (Use MACRSTable 1. registration costs of $3. and an engine tune-up for $347. In addition.000 Assuming DLW does not elect §179 expensing or bonus depreciation.090.759. Table 3.) .090 Sales tax 3. award: 0 out of 10. Jose incurred the following expenses before using the van: shipping costs of $1.500 of sales tax and a registration fee of $259. His winning bid for the van was $30. paint to match the other fleet vehicles at a cost of $1.750 1. 4. cost basis in the delivery van.) Asset Computer equipment Furniture Commercial building Date Acquired 3/4 3/28 10/14 Cost Basis $ 18. What is Jose’s cost basis for the delivery van? Explanation: $36. and engine tune-up are costs for repairs and maintenance that are not required to be capitalized.490 Paint 1. which included $3. computed as follows: Description Purchase price Shipping costs Amount $ Explanation* 30. wash and detailing for $132.300 306.750. washing and detailing. b. She made the .56% years Depreciation Expense 18.200 $ 20.00% 7 years % 306.300 $306.178 b. The corporation began business on April 1 of year 1.000 39 12.535% Total Depreciation Expense (1) × (2) Depreciation $3. award: 0 out of 10.00 points Nicole organized a new corporation.901 $1.000 (2) Rate 20.00% 14.49 50. under the half-year convention for personal property.50% Building $ 2.747 $ 1.300 17.178.200 Total Depreciation Expense 5 years $ 1. calculated as follows: Asset Computer equipment Furniture Building Purchase Date 4-Mar 28-Mar 14-Oct Quarter 1st 1st 4th Recovery Period 5 years 7 years 39 years (1) Original Basis $ 18.) Explanation: a. calculated as follows: Asset Comput er equipme nt $ Furnitur $ e Original Basis Recove ry Portion Period Rate of Year 19.503.637 $8.20 50.775 $ 981 $ 4.00% % 20. What is DLW's year 3 cost recovery for each asset if DLW sells all of these assets on 2/27 of year 3? (Round your answers to the nearest dollar amount.640 $2.503 5. $4. $8.29% 0. 875 a.875 for organizational expenditures and $260 of amortization for start-up costs.200. total start-up costs are $10. The corporation will deduct amortization expense of $1. Therefore.000. if Nicole started a sole proprietorship instead? Explanation: a.000 of the start-up costs because the amount of organizational expenditures is under $50.000 17.following expenditures associated with getting the corporation started: Expense Attorney fees for articles of incorporation March 1 – March 30 wages March 1 – March 30 rent Stock issuance costs April 1 – May 30 wages Date Amount February 10 $ 42.) d. What would be the allowable organizational expenditures. The corporation may immediately expense $5.000 $ 0 Explanation §195(b)(1)(A) (ii) §195(b)(1)(A) (ii) (2) − (3) .000 and the amount of start-up costs is under $50.200 (3) Phase-out threshold (4) Immediate expense phase-out 50.050) before business began.000 of the organizational expenditure and $5.000 (2) Total start-up expenditures $ 10. b. The start-up costs are the wages ($7.500 March 30 March 30 April 1 May 30 7. including immediate expensing and amortization.150) and rent ($3. What amount can the corporation deduct as amortization expense for the organizational expenditures and for the start-up costs for year 1 (not including the amount it immediately expensed)? (Round intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount. c.150 3.500 of attorney fees related to the drafting articles of incorporation.050 20. The only qualifying organizational expenditure is the $42. What is the total amount of the start-up costs and organizational expenditures for Nicole's corporation? b. What amount of the start-up costs and organizational expenditures may the corporation immediately expense in year 1? c. computed as follows: Description Start-up costs Amount (1) Maximum immediate expense $ 5. Typically.200 (2) − (5) (7) Recovery period in months (8) Monthly straight-line amortization (9) Teton business months during year 1 Year 1 straight-line amortization for start-up costs 28.000 (2) − (3) (1) − (4) $ 37.(5) Allowable immediate expense (6) Remaining organizational expenditures $ 5.875 (6)/(7) April through December (8) × (9) d. They are not authorized for sole proprietorships.33 × 9 $ 1. Organizational expenditures are only authorized for corporations (§248) and partnerships (§709).500 (2) − (5) 180 15 years §248(a)(2) (7) Recovery period in months (8) Monthly straight-line amortization (9) Teton business months during year 1 15 years §195(b)(1)(B) 180 208.00 points . sole proprietorships do not incur many of the expenses that would qualify as organizational expenditures anyway.000 (1) − (4) $ 5.000 $ $ 0 5.000 §248(a)(1)(B) 5. Chapter 11 Property disposition 1.89 × 9 $ 260 Organizational expenditures Description Amount (1) Maximum immediate expense $ (2) Total organizational $ expenditures (3) Phase-out threshold (4) Immediate expense phase-out (5) Allowable immediate expense (6) Remaining organizational expenditures Year 1 straight-line amortization for organizational expenditures (6)/(7) April through December (8) × (9) Explanation §248(a)(1) Given in 42.500 problem 50. award: 0 out of 10. 000.400) Given Amount $ $ 101.800. b.000 54. Rafael received $94. Rafael also paid a commission of $8.400 in selling expenses.250 mortgage on the asset he sold to Jamal.750 on the transaction.100 (1) + (2) + (3) b.000 Explanatio n Given Given (7.500 (1) + (2) + (3) . Explanation: a.700 on the transaction.750) $ 155. computed as follows: Property received (1) Cash (2) Relief of debt (3) Commissions Amount realized c. $101.500 of cash and a vehicle worth $14.Rafael sold an asset to Jamal. Amount $ Explanation 108.000 of cash and was relieved of a $54.100. What is Rafael's amount realized on the sale in each of the following alternative scenarios? a. $155.250 of cash. Rafael also paid a commission of $6. Rafael also pays $7. computed as follows: Property received (1) Cash (2) Vehicle (3) Commission s Amount realized 94.500 14. a parcel of land worth $85.500.250 (6. Rafael received $33. c.500. Rafael received $108. and marketable securities of $17. 530 loss. See the following computation: Description (1) Amount realized (2) Basis (3) Gain (Loss) realized (4) Amount Explanation $ 4.00 points Deirdre sold 153 shares of stock to her brother. (Loss amounts should be indicated by a minus sign. What amount of gain or loss does James recognize if he sells the stock for $5.250 85. James.896? d. What amount of gain or loss does James recognize if he sells the stock for $4.850. award: 0 out of 10.$127. she is not allowed to recognize any of the loss because she sold the stock to a related party (her brother).661.131 Given $ 5.700) 127. for $4. Though Deirdre realizes a $1. Deirdre purchased the stock several years ago for $5.850 (1) + (2) + (3) + (4) 2.131. What gain or loss does Deirdre recognize on the sale? b.800 (8. What amount of gain or loss does James recognize if he sells the stock for $3.366? Explanation: a.661 Given $ (1.967? c.530) no recognized loss on related .530) (1) − (2) (1.500 17. computed as follows: Property received (1) Cash (2) Land (3) Marketable securities (4) Commissions Amount $ Amount realized $ Explanation 33.) a. 131 Part c $ 4.Disallowed loss Gain/(Loss) recognized party sale $ 0 (3) − (4) b. $0 (see calculations below) d. award: 0 out of 10. Longworth depreciated the machine by $22. (Loss amounts should be indicated by a minus sign. Between the date of the purchase and the date of the sale. Longworth Partnership purchased a machine for $53.967 $ 4. $306 gain (see calculations below) c.500? c. In year 3.00 points In year 0.500 to use in its business. Longworth sold the machine for $40.700. ($765) loss (see calculations below) Description (1) Amount realized (2) Adjusted basis Part b $ 5.530 (the amount of Deirdre’s disallowed loss) (3) − (4) 3. What amount of gain or (loss) is recognized on the sale? b. then $0) or $1.530) disallowed loss $ 1. What amount of gain or (loss) is recognized on the sale if the sale proceeds were increased to $66. What amount of gain or (loss) is recognized on the sale if the sale proceeds were decreased to $23.836 $ 765 $ (765) (4) Benefit of Deirdre’s ($1.131 (3) Realized gain (loss) $ 1.131 Part d $ 3.600? Explanation: a.530 $ 765 $ Recognized Gain/(Loss) $ 306 $ $ (765) 0 0 Explanation Given in problem (1) − (2) Lesser of (3) (if a loss.) a. .500.896 $ 4.366 $ 4. 000 35.500 Explanation Given Given Given 31.400) 0 (2) − (3) (1) − (4) Lesser of (3) or (5) (7.000 (7.700 53.500 Explanation Given Given Given 31.700 (2) − (3) (1) − (4) Lesser of (3) or (5) 0 (5) − (6) $ Because the entire gain is caused by depreciation deductions. $35. b.700 ordinary income.600 53.500 22.500 ordinary and $13. the remaining gain is §1231. 4.500 (2) − (3) (1) − (4) Lesser of (3) or (5) 13.500 22.700 9. the entire gain is treated as ordinary income under §1245. Description (1) Amount realized (2) Original basis (3) Accumulated depreciation (4) Adjusted basis (5) Gain/(Loss) recognized (6) Ordinary income (§1245 depreciation recapture) §1231 gain Amount $ $ $ 40.$9.500 53.500 22. c.400) ordinary loss.00 points Explanation Given Given Given .000 (5) − (6) Only the gain caused by depreciation is treated as ordinary income under §1245.500 31.400) (5) − (6) Only gains are treated as ordinary income under §1245.000 §1231) computed as follows: Description (1) Amount realized (2) Original basis (3) Accumulated depreciation (4) Adjusted basis (5) Gain/(Loss) recognized (6) Ordinary income (§1245 depreciation recapture) §1231 gain Amount $ $ $ $ 66.500 22. ($7.000 9.500 gain ($22. any loss is §1231. award: 0 out of 10. computed as follows: Description (1) Amount realized (2) Original basis (3) Accumulated depreciation (4) Adjusted basis (5) Gain/(Loss) recognized (6) Ordinary income (§1245 depreciation recapture) §1231 loss Amount $ $ $ $ 23. What are Lily's taxable income and tax liability for the year? Use Tax Rate Schedule reference.400 $ 311.400 Accumulated Depreciation $64.000 Gain/ (Loss) $105.000 Lily's taxable income before these transactions is $259. Taxable income before transactions Unrecaptured §1250 gain Taxable income Tax liability Ordinary income: (311.000 − 186.Lily Tucker (single) owns and operates a bike shop as a sole proprietorship.800 §1231 gain is offset by the $53.000 is Unrecaptured §1250 $41. (Do not round intermediate calculations.400 − 52.350) × 33% + $45. This gain will be taxed at 25 percent.000 Cost $303.400) §1231 Netting: The $41. This year.800 is §1231 $(53.400 × 25% Total tax liability $ 259.000 27.600 loss then reduces the unrecaptured §1250 gain of $64.428 .800 128.800 Adjusted basis $239.400 §1231 loss.800 128.400) = $259.100 $ 82.400 and her tax liability is $82.000. See the following calculations: Asset Building Sales Price $344. Round your answers to the nearest whole dollar amount.000 ($259.353.400.400 (53. The remaining $11.) Explanation: Lily's taxable income is $311.75 Capital gain: $52.328 13. she sells the following long-term assets used in her business: Asset Building Equipment Sales Price $344.000 181.000 52.428.000 to $52.000 208.400) Equipment Character $64.400 =$ 69. 000 $53. The offset rules allow a taxpayer to offset debt relief with cash paid or with other liabilities assumed. A summary of the exchange is as follows: Transferred Warehouse Land Mortgage on warehouse Cash Assets Received Land FMV $475.5.750 14.000 61.500 (land) + 342.500 liability assumed] or (5) 179.500.000 $ 43. Consequently.500 61.000 − $53.500.000 What is Prater’s realized and recognized gain on the exchange and its basis in the assets it received in the exchange? Explanation: Gain realized is $208.000 (5) − (6) 328.250. and Prater’s adjusted basis in the land is $328.500 (6) Gain recognized (7) Deferred gain Adjusted basis in new property $ $ $ Given. enters into an exchange in which it gives up its warehouse on 10 acres of land and receives a tract of land.250 Original Accumulated Basis Depreciation $320.250 FMV $507.000. award: 0 out of 10. Description (1) Amount realized in likekind (2) Amount realized from boot Amount Explanation $ 507.500 43.750 (3) Total amount realized $ 550. gain recognized is $29.00 points Prater Inc. FMV of land Mortgage relief (3) − (4) Lesser of [(2) − cash paid or 29.000 (1) − (7) *Prater has debt relief of $43.500 14. Prater .750 (4) Adjusted basis $ (1) + (2) $320.750 and can offset this boot with cash paid of $14.500 + $61.250 (cash paid) (5) Gain realized $ 208.250 $14. a calendar-year taxpayer. (RC).000 of goodwill for both book and tax purposes.683. award: 0 out of 10.750) (1. award: 0 out of 10.000 is $27. When the purchase price was allocated to the assets purchased.750 (1) + (2) + (3) 2.000 (27.00 points On August 1 of year 1.642. acquired the assets of another business in a taxable acquisition. At the end of year 1. What is LNS corporation’s taxable income for the year? Explanation: $489.) a-1. Included in the $2.160.750 of taxexempt interest income. however.is allowed to net the debt relief against cash paid and he is treated as receiving only the $29. RC determined it had purchased $1.160.160.000.750. LNS reports $1. Chapter 13 corporate formations and operations 1. the auditors concluded that $445. (Do not round intermediate calculations. and they required RC to write down the goodwill by $445.000 of the goodwill had been impaired.500 in ordinary and necessary business expenses.500 net liabilities he’s been relieved of as boot. In year 2. What book-tax difference associated with its goodwill should RC report in year 1? .00 points LNS corporation reports book income of $2.000 for book purposes. Riverside Corp. the auditors for RC determined that the goodwill had not been impaired during the year. computed as follows: Description (1 Total ) revenue Tax(2 exempt ) interest income (3 Deductions ) Taxable income Amount $ Explanation 2.500) $ 489.642. Is it permanent or temporary? Temporary b-1. For book purposes RC writes off (deducts) $445. it reports a $332. it will amortize and expense $46.200).800 unfavorable temporary book-tax difference in year 2. second.683.000 in goodwill. RC amortizes $112.000 2.000 What are LNS’s minimum first.) Quarter-End First Second Third Cumulative Taxable Income $1.255. Consequently.683. for book purposes. RC will report a favorable $46. Consequently. in year 1. What book-tax difference associated with its goodwill should RC report in year 2? b-2. and fourth quarter estimated tax payments determined using the annualized income method? (Round "Annualization Factor for Fourth quarter" to 7 decimal places. 3. Is it favorable or unfavorable? Favorable a-3. However.750) for tax purposes.a-2. (Use Corporate Tax Rate Table. award: 0 out of 10. RC does not deduct any of the goodwill because there is no impairment.750 temporary difference associated with the goodwill. For tax purposes.200 of the goodwill for tax purposes ($1.00 points For the current year. Is it permanent or temporary? Temporary Explanation: a.000 using the straight line method over 15 years (180 months). In year 2.750 of the goodwill ($1.000/180 × 12 months = $112.683. RC amortizes the $1. Consequently. in year 1. LNS corporation reported the following taxable income at the end of its first. b.) .660. second.515.000 3. third.000/180 months × 5 months = $46. Is it favorable or unfavorable? Unfavorable b-3. and third quarters. What amount of gain or loss does Ivan realize on the transfer of the property to his corporation? b.) a. 4.500 92.200 $116. (Any answer representing a loss should be entered as a negative number. The property transferred to the corporation had the following fair market values and tax bases: Inventory Building Land Adjusted FMV Basis $ 15.200 $ 18. a building.500 54.250 Total $169.750 The fair market value of the corporation’s stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ivan.000 61.Installment First quarter Second quarter Third quarter Fourth quarter Explanation: No further explanation details are available for this problem. and land to the corporation in return for 100 percent of the corporation’s stock. What amount of gain or loss does Ivan recognize on the transfer of the property to his corporation? Taxable Incom .500 44. The transaction met the requirements to be taxdeferred under §351. award: 0 out of 10.00 points Ivan incorporated his sole proprietorship by transferring inventory. 750. $116.000 54. Inventory Building Land Total $ 18.c.750 . computed as follows: Fair market value of stock received – Adjusted basis of the property transferred Gain realized $169. What is the corporation’s adjusted basis in each of the assets received in the exchange? Explanation: a. Ivan realizes a net gain of $52. Ivan’s tax basis in the stock received is a substituted basis of the assets transferred.200 116.750 $ 52. Ivan does not recognize any gain or loss on the transfer because the requirements of §351 are met and no boot is received in the exchange. The corporation receives a carryover basis in the assets received from Ivan. c.250 $ 116.500 44.450 b. What is Ivan’s basis in the stock he receives in his corporation? d. d.450 on this transfer. What is Laurel’s initial tax basis in her LLC interest? b.200 $ 41. If his share of the partnership debt increased by $16. but she did not guarantee any portion of the $142.500 nonrecourse mortgage securing Sand Creek’s office building.200. Laurel agreed to guarantee all $14.200 as computed in the table below: Description Beginning tax basis Increase in partner’s share of debt Partner’s share of income Ending tax basis Total Amount $ 21. what is his tax basis in his partnership interest at the end of the year? Explanation: $41. Other than the accounts payable and mortgage.200 2.000 16.000 cash and used in her sole proprietorship.000.000 during the year and his share of partnership income for the year is $4. a. Laurel’s holding period in the partnership interest begins the day the LLC interest is acquired. True . purchased 6 months ago for $294.00 points Larry’s tax basis in his partnership interest at the beginning of the year was $21.000 4. award: 0 out of 10.00 points Laurel contributed equipment worth $285.500 of Sand Creek’s accounts payable.Chapter 13 forming and operating partnerships 1. Sand Creek does not owe any debts to other creditors.000. to Sand Creek LLC in exchange for a 30 percent profits and capital interest in the LLC. award: 0 out of 10. Laurel’s profits sharing ratio is used to allocate a portion of the mortgage to her because it is nonrecourse debt. award: 0 out of 10. What is Berry Hill’s basis in the equipment? Explanation: . Laurel’s basis in her LLC interest is made up of the $294. her $14. and her $42. What is Sand Creek’s holding period in the contributed property? Explanation: a.c.500).000 in cash and equipment with a tax basis of $12.000 basis in the equipment (no depreciation was taken on the equipment prior to the contribution because it was acquired and contributed within the same calendar year) Laurel contributed. Laurel’s holding period begins the day the LLC interest is acquired because the asset she contributed is not a capital or Section 1231 asset.100 and a fair market value of $15. $294. $351. What is Joseph’s tax basis in his partnership interest? b. b.000. a.250. The LLC takes a carryover basis in the contributed property.750 share of the nonrecourse mortgage securing Sand Creek’s office building (30% × $142. 6 months. Laurel’s holding period is included in the LLC’s holding period regardless of the nature of the property Laurel contributed. What is Sand Creek’s initial basis in the contributed property? d. 3.00 points Joseph contributed $36. c.600 to Berry Hill Partnership in exchange for a partnership interest. d.500 share of accounts payable that she guaranteed. The equipment is not a Section 1231 asset because it was used in a trade or business for one year or less. Also.100. $12. Berry Hill Partnership’s basis in the equipment is a carryover basis from the partner who contributed the equipment.8 0 0 8 2 % × MD Months Deferral* (MD) 0 1. The tax basis includes the $36. If property contributed is a capital or Section 1231 asset. the holding period of the partnership interest begins on the date it is received. As a result. or October 31. $48. Tax Year End December 31 June 30 October 31 Capital/Profits % 40% 25% 35% What is the required taxable year-end for Tall Tree LLC? October 31 Explanation: Tall Tree does not have a majority interest taxable year because no partner or group of partners with the same year end owns more than 50 percent of the profits and capital interests in Tall Tree. b.5 . December 31. The table below illustrates the required computations: Possible Year Ends 12/31 Year End Months Tax Deferral* Members % Year (MD) 12/3 Eddie Robinson 40% 0 1 Pitcher Lenders 25% 6/30 6 LLC 6/30 Year End 10/31 Year End % × MD Months Deferral * (MD) % × MD 6 2. The basis in the equipment plus the basis in the cash will give us Berry Hill Partnership’s inside basis. the principal partner test is not met. June 30. Joseph’s tax basis is considered to be his outside basis in the partnership. will provide its members the least aggregate deferral. The holding period for the equipment carries over to the Berry Hill Partnership from Joseph.000 in cash and his original basis in the equipment. Otherwise. award: 0 out of 10. $12. Tall Tree must decide which of three potential year ends.100. 4. Joseph’s holding period for his outside basis would depend upon the holding period of the assets contributed. the holding period for that portion of the partnership interest includes the holding period of the contributed property.100. because all three principal partners in Tall Tree have different year ends.4 2 0.00 points Tall Tree LLC was recently formed with the following members: Name Eddie Robinson Pitcher Lenders LLC Perry Homes Inc.a. expenses.150) $(15. As the table above indicates.800) $ (1. gains.300) $ 26. losses.800) Given these items.300) $ (4.8 *Months deferral equals number of months between proposed year end and member’s year end.8 0 2.200 $(13.150) $ (15. Tall Tree must use October 31 as its year end because it provides the least amount of aggregate deferral to the members.600) $ (3.500 $ 4.600) $ (3. 5.Perry Homes Inc.00 points Turtle Creek Partnership had the following revenues. 35% 10/3 1 10 3.800) $ (1.4 0 3.) Sales revenue Long-term capital gains Cost of goods sold Depreciation—MACRS Amortization of organization costs Guaranteed payments to partners for general management Cash distributions to partners $ 60.500 $ (13.650 . award: 0 out of 10. and distributions: (An answer representing a loss should be entered as a negative number.5 Total Aggregate Deferral 4 5 1. what is Turtle Creek’s ordinary business income (loss) for the year? Explanation: Turtle Creek’s ordinary business income is calculated in the table below: Sales revenue Less: Cost of goods sold Depreciation —MACRS Amortization of organization costs Guaranteed payments Ordinary business income $ 60. a calendar-year corporation. Birch experienced a $31. Birch Corp.800 Note that guaranteed payments must be separately disclosed to the partners that receive them.00 points Birch Corp. in the amount of $9. and cash distributions must be separately disclosed so that partners can reduce the tax basis of their partnership interests by the amount of the distributions.) For the year. who has operated it as an S corporation since its inception. . What tax bases will each of the three have in his or her stock of Bumblebore? Explanation: Harry and Hermione have a basis equal to the cash they contributed ($40. award: 0 out of 10. and Ron formed an S corporation called Bumblebore.250. was formed three years ago by its sole shareholder. Hermione.200 $ 15. Ron was a bit short on cash but had a parcel of land valued at $99.300 $ 4. 2. Chapter 17 s corporations 1.000 business loss. The land was encumbered by a $57..Separately Stated Items on Schedule K-1: Long-term capital gains Guaranteed payments Cash distributions $ 4.00 points Harry. Harry and Hermione both contributed cash of $40.000 basis of the property contributed and then subtracting the $57.500 (basis of $81.000) that he decided to contribute. (Assume the loan qualifies as debt for tax purposes. has paid the interest on the loan but has not yet paid any principal. James made a direct loan to Birch Corp. James. Last year.100 mortgage that Ron was relieved of when he contributed the property to the corporation.500).100 mortgage.500 to get things started. award: 0 out of 10. Ron's $23.900 basis is computed by starting with the $81. $9.000 − 9.250 to $0.250 to $0. $18. and his debt basis is reduced from $9.100 and his basis in his Birch Corp. b. stock was $51. James’s stock basis remains at $0.100 to $0. Explanation: a. Of the $31.400 and his basis in his Birch Corp.250). His debt basis remains at $9.650 ($31. stock and Birch Corp.400 ($51. c. and what is James’s basis in his Birch Corp.000 of the loss clears the tax basis limitation. James's basis in his Birch Corp.350). At the beginning of the year. James’s stock basis is reduced from $9. b.250. debt was $9.250 clears the tax basis limitation. James’s stock basis is reduced to $20. debt in each of the following alternative scenarios? a. All $31. debt was $9.250.000 − $18.400 − 31. At the beginning of the year.350 clears the tax basis limitation. Question: Tall Tree LLC was recently formed with the following members: Name Eddie Robinson Pitcher Lenders LLC Perry Homes Inc.000 loss). James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. c. and his debt basis is reduced from $9. Tax Year End Capital/Profits % December 31 40% June 30 25% October 31 35% .250. stock was $9.750 ($31. James has a suspended loss of $12. At the beginning of the year. debt was $9.000 loss. James's basis in his Birch Corp.What amount of the loss clears the tax basis limitation. James has a suspended loss of $21.250. December 31. or October 31. the principal partner test is not met. As the table above indicates.4 2 . Also. will provide its members the least aggregate deferral. June 30. because all three principal partners in Tall Tree have different year ends. As a result.8 *Months deferral equals number of months between proposed year end and member’s year end.5 0 0 8 2 PerryHomes 35 % 10/31 10 3.4 0 0 Total Aggregate Deferral 5 3. Tall Tree must decide which of three potential year ends. Tall Tree must use October 31 as its year end because it provides the least amount of aggregate deferral to the members.5 4 1. The table below illustrates the required computations: Possible Year Ends Members % Tax Year 12/31 Year End 6/30 Year End 10/31 Year End Months Months Months Deferral* (MD) %x MD Deferral* (MD) %x MD Deferral* (MD) %x MD Eddie Robinson 40 % 12/31 0 0 6 2.What is the required taxable year-end for Tall Tree LLC? Step 1 of 1 Tall Tree does not have a majority interest taxable year because no partner or group of partners with the same year end owns more than 50 percent of the profits and capital interests in Tall Tree.8 2. .8 Pitcher Lenders 25 % 6/30 6 1.