Income and Farms Flashcards
Mr. Zurn owns an apartment house for which he provides no services to his tenants. On December 1, 2020, he received a $2,400 payment for the first 6 months’ rent in 2021. He also received a security deposit of $400. What is the amount of gross rental income Mr. Zurn should include on his 2020 income tax return?
A. $800
B. $2,400
C. $400
D. $2,800
$2,400
Both cash- and accrual-basis taxpayers must include amounts in gross income upon actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts under Reg. 1.61-8(b). Since Mr. Zurn has an unrestricted claim to the $2,400 of rent paid in advance, it would be included in his rental income. The security deposit of $400 would not be included in rental income since it was not intended as an advance rental payment. (Mr. Zurn does not have an unrestricted claim since it must be returned unless there are damages or rent is not paid.) Therefore, Mr. Zurn’s gross rental income is $2,400.
Gross income from a hobby activity of an individual is
A. Not reported if less than $400.
B. Reported as gross income on line 1, Schedule C (Form 1040).
C. Netted against related expenses, and the excess, if any, is reported as other income on Schedule 1, line 8, Form 1040.
D. Reported as other income on Schedule 1, line 8, Form 1040.
Reported as other income on Schedule 1, line 8, Form 1040.
Income from activities from which a profit is not expected must be included on the tax return. Such activities include hobbies and farm activities operated for recreation and pleasure. Related expenses are not deductible. The income is reported on Schedule 1, line 8, of Form 1040.
In 2019, the Birch Company had gross income of $163,000, a bad debt deduction of $5,000, and other allowable deductions of $58,500. Birch uses the accrual method of accounting and the specific charge-off method for bad debts. In 2020, Birch recovered $1,600 of the bad debt that had been deducted in 2019. What portion of the bad debt recovery should be included in Birch’s income for 2020?
A. $0
B. $5,000
C. $3,400
D. $1,600
$1,600
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $5,000, the full amount of the $1,600 recovery is included in gross income.
In 2019, the Hydrangea Company (a sole proprietorship) had gross income of $158,000, a bad debt deduction of $3,500, and other allowable deductions of $49,437. The business reported on the accrual method of accounting and used the specific charge-off method for bad debts. The entire bad debt deduction reduced the taxable income on the 2019 return. In 2020, the business recovered $2,000 of the $3,500 deducted in 2019. How should the recovery be treated?
A. Amend the 2019 return to add the $2,000.
B. Include $3,500 in income on the 2020 return.
C. None of the answers are correct.
D. Include $2,000 in income on the 2020 return.
Include $2,000 in income on the 2020 return.
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $3,500, the full amount of the $2,000 recovery is included in gross income.
Shawn Smith, sole proprietor, had the following transactions during 2020:
Received rental income
$7,500
Performed legal services for ATI Corporation in return for 10 shares of stock
$24,000
Recovered accounts receivable that had been written off and deducted in 2018 (did not reduce tax)
$20,000
What amount must Mr. Smith include in gross income for 2020?
A. $51,500
B. $31,500
C. $27,500
D. $44,000
$31,500
Income is included in the taxable year in which all the events have occurred that fix the right to receive such income and in which the amount can be determined with reasonable accuracy. The rental income is included in gross income. The payment for legal services performed is also included in gross income. The fair market value of the stock is the amount included [Sec. 83(a)]. Under Sec. 111, the recovery of a bad debt is excluded from income if the previous deduction did not reduce taxes. Therefore, $31,500 ($7,500 + $24,000) is included in gross income.
Sierra Corporation issued $40,000, 5-year bonds for $43,000 on March 1 of the current year. How much of the bond premium must Sierra report on its current-year income tax return?
A. $500
B. $3,000
C. $0
D. $600
$500
Under Reg. 1.61-12(c)(2), in the case of a bond, the amount of amortizable bond premium for the taxable year is included in income. The amount is amortized over the life of the bond. Thus, Sierra must report $600 each year [($43,000 – $40,000) ÷ 5]. In the current year, Sierra has to recognize only $500 because the bonds were issued for only 10 months [$600 × (10 months ÷ 12 months)].
In Year 1, Luanne had gross income of $80,000, a bad debt deduction of $7,500, and other allowable deductions of $67,000 on her Schedule C (Form 1040). She uses the accrual method of accounting and the specific charge-off method for bad debts. During Year 2, she recovered $5,500 of the debt that she had deducted in Year 1. How must Luanne report the recovery of the bad debt?
A. She must file an amended income tax return for Year 1.
B. She must include $5,500 in nonbusiness “other income” on her Form 1040 for Year 2.
C. She must include $5,500 in “other income” on her Schedule C for Year 2.
D. She must reduce her bad debt deduction for Year 2 by $5,500.
She must include $5,500 in “other income” on her Schedule C for Year 2.
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $7,500, the full amount of the $5,500 recovery is included in gross income. This amount is reported as “other income” on Schedule C.
In Year 1, Ms. Azalea had gross income of $110,000, a bad debt deduction of $12,000, and other allowable deductions of $75,000 on her Schedule C (Form 1040). She uses the accrual method of accounting and the specific charge-off method for bad debts. During Year 2, she recovered $8,000 of the debt that she had deducted in Year 1. How must Ms. Azalea report the recovery of the bad debt?
A. She must file an amended income tax return for Year 1.
B. She must include $8,000 in “other income” on her Schedule C for Year 2.
C. She must reduce her bad debt deduction for Year 2 by $8,000.
D. She must include $8,000 in nonbusiness “other income” on her Form 1040 for Year 2.
She must include $8,000 in “other income” on her Schedule C for Year 2.
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $12,000, the full amount of the $8,000 recovery is included in gross income. This amount is reported as “other income” on Schedule C.
Sanders Corporation issued a $10,000, 10-year debenture for $12,000 on January 1, 2015. In 2020, how much income must Sanders report on its income tax return from issuance of this bond?
A. $200
B. $2,400
C. $0
D. $2,000
$200
Under Reg. 1.61-12(c)(2), in the case of a bond, the amount of amortizable bond premium for the taxable year is included in income. The amount is amortized over the life of the bond. Thus, Sanders must report $200 [($12,000 – $10,000) ÷ 10].
Which of the following would generally be reported as other income for a business?
A. Proceeds from international sales.
B. Income not reported on a Form 1099-MISC.
C. Bad debts recovered.
D. Sales tax collected.
Bad debts recovered.
If a deduction is claimed for a bad debt on the income tax return and later all or part of it is recovered (collected), all or part of the recovery may have to be reported in gross income. The amount included is limited to the amount actually deducted. However, the amount deducted that did not reduce the tax can be excluded. Report the recovery as “other income” on the appropriate business form or schedule.
Scott Corporation transferred stock with a fair market value of $20,000 to its creditor in satisfaction of indebtedness of $30,000. The stock’s book value was $15,000. How much ordinary income from this transaction should Scott include in its income tax return?
A. $0
B. $15,000
C. $5,000
D. $10,000
$10,000
Under Sec. 61(a)(12), taxpayers, including corporations, must recognize gain from the discharge of indebtedness. If a corporation transfers stock to its creditors in satisfaction of indebtedness, it will have income from the discharge of the indebtedness to the extent that the amount or adjusted issue price of the debt satisfied exceeds the value of the distributed stock. The exception that exists under Sec. 108(a), whereby a corporation would not have income from the discharge of indebtedness if it is insolvent or is involved in bankruptcy, does not apply because Scott Corporation is neither insolvent nor involved in bankruptcy. Therefore, the amount of ordinary income included on Scott’s return is $10,000 ($30,000 indebtedness – $20,000 stock FMV).
Lite Corporation transferred its own stock to one of its creditors in satisfaction of a $15,000 debt. At the time of the transfer, the stock had a fair market value of $14,000. Lite is a solvent corporation. As a result of the transfer, Lite will recognize income of
A. $1,000
B. $0
C. $15,000
D. $14,000
$1,000
Under Sec. 61(a)(12), taxpayers, including corporations, must recognize gain from the discharge of indebtedness. If a corporation transfers stock to its creditors in satisfaction of indebtedness, it will have income from the discharge of the indebtedness to the extent that the amount or adjusted issue price of the debt satisfied exceeds the value of the distributed stock. Therefore, the amount of gain included on Lite’s return is $1,000.
Which of the following amounts should be included as income to John?
A. The lessee erects a carport on the rental property without notifying John. Upon inspection, John estimates the value of the carport is approximately $2,000.
B. John owns a rental house and the rental agreement directs the lessee to pay the $1,000 monthly rent to Michelle, his ex-wife.
C. John ships goods on consignment to a vendor. The fair market value of the goods is $10,000.
D. The consignment vendor sells $3,000 of John’s goods and places the proceeds in an escrow account controlled by the vendor.
John owns a rental house and the rental agreement directs the lessee to pay the $1,000 monthly rent to Michelle, his ex-wife.
This involves the assignment of income doctrine, which says that an individual is taxed on the earnings from his or her personal services. Assigning this income to another individual does not permit a person to avoid being taxed on the income. This doctrine includes income from property, so income from property is taxed to the owner of the property. This $1,000 monthly rent is included in John’s income because John owns the property that is earning the income. In order for John to transfer the income to his ex-wife, he must transfer the property.
Luck and Charm Partnership provides consulting services to the public. In 2020, the firm performed services and in exchange received a truck with a fair market value of $10,000 and an adjusted basis of $7,500. The firm also received lawn care services with a fair market value of $5,000. Luck and Charm uses the cash basis method for accounting purposes. What must Luck and Charm report as income for 2020?
A. $5,000
B. $12,500
C. $15,000
D. $10,000
$15,000
Section 61(a) enumerates types of income that constitute gross income. The list is not exhaustive: (1) compensation for services, including fees, commissions, and fringe benefits; (2) gross income derived from business; (3) gains derived from dealings in property; (4) interest; (5) rents; (6) royalties; (7) dividends; (8) alimony; (9) annuities; (10) income from life insurance and endowment contracts; (11) pensions; (12) income from discharge of indebtedness; (13) income in respect of a decedent; and (14) income from an interest in an estate or trust. The truck and lawn care services are both considered compensation for services rendered and included in the gross incomes of Luck and Charm at the compensation’s fair market value.
Ted, a cash-basis taxpayer, owned and operated a business. He began having difficulty paying his business debts in late 2019. Ted owed Jeff, his computer consultant, $800 for services rendered to his business and $300 for personal services. In 2020, Jeff forgave the entire debt of $1,100. Ted was not bankrupt or insolvent. What is the amount Ted will be required to include in income on his tax return for 2020? A. $1,100 B. $800 C. $0 D. $300
$300
A taxpayer who is solvent generally realizes income to the extent that debts are forgiven (Sec. 108). However, income is not recognized from a canceled debt to the extent the payment would have been a deduction when paid. Therefore, the $800 is not income to Ted because, as a cash method taxpayer, it would have been deductible when paid (Publication 334).
Supplemental wages are compensation paid in addition to an employee’s regular wages. They do NOT include payments for
A. Vacation pay.
B. Accumulated sick leave.
C. Travel reimbursements paid at the federal government per diem rate.
D. Nondeductible moving expenses.
Travel reimbursements paid at the federal government per diem rate.
Supplemental wages are compensation paid in addition to an employee’s regular wages. They do not include payments for travel reimbursements paid at the federal government per diem rate.
Basil Company, a cash-basis taxpayer, had the following activity during 2020: Sales in 2020, uncollected $40,000 Sales in 2020, collected $1,000,000 Total sales in 2020 $1,040,000 Collections on 2019 bad debt $50,000 What is the amount of income to be reported for 2020?
A. $1,090,000
B. $1,000,000
C. $1,040,000
D. $1,050,000
$1,050,000
Basil Company reports income and expenses on the cash basis; thus, cash and checks received are deposited and included in income. Therefore, the $40,000 in uncollected sales has not been included in income. The recovery of the bad debt collections will be included in income. Basil Company will report $1,050,000 of income.
In 2019, Rex, a sole proprietor of Bay View Wrecking, had gross income of $200,000, a business bad debt deduction of $6,000, and other expenses of $156,000. Bay View Wrecking employed the accrual method of accounting and used the specific charge-off method for bad debts. In 2020, Bay View Wrecking recovered $4,500 of the $6,000 previously deducted in 2019. What is the correct way for Rex to report this recovery?
A. Report $4,500 as “Other Income” on Schedule C in 2020.
B. Report $4,500 as a reduction of “Bad Debt” on Schedule C in 2020.
C. Report $4,500 as “Other Income” on an amended 2019 Form 1040X return.
D. Report $4,500 as “Other Income” on return Schedule 1 Form 1040, line 21 in 2020.
Report $4,500 as “Other Income” on Schedule C in 2020.
Bad debt written off in prior tax years that is later recovered is reported as “Other Income” on Schedule C.
John, a cash-basis taxpayer, is a salesman. He sold $100,000 of merchandise in March 2020. His commission is 2% of sales. In November 2020, he received $2,000 in commissions for those sales and an advance of $7,000 in commissions for future sales in 2021. What amount must John include in his income for 2020?
A. $9,000
B. $3,167
C. $2,000
D. $0
$9,000
Section 61(a) defines commissions as gross income in the year earned. Advance payments in anticipation of future services are also included in the gross income of a cash-basis taxpayer. Therefore, the $7,000 advance for future sales is also included in the gross income in the year of receipt.
Joe, a cash-basis taxpayer, owned and operated a business. He began having difficulty paying his business debts in late 2020. Joe owed Gail, his computer consultant, $2,200 for services rendered at his business and $500 for non-business services rendered at his home. In 2020, Gail forgave the entire debt of $2,700. Joe is neither bankrupt nor insolvent. What amount will Joe be required to include in income on his tax return for 2020?
A. $500
B. $2,700
C. $0
D. $2,200
$500
A taxpayer who is solvent generally realizes income to the extent that debts are forgiven (Sec. 108). Joe will recognize the $500 of personal debt forgiveness. However, income is not recognized from a canceled debt to the extent the payment would have been a deduction. Therefore, the $2,200 is not income to Joe because, as a cash-method taxpayer, it would have been deductible (Publication 334).
In 2019, Katie Good, a sole proprietor of Good’s Bike Shop, had gross income of $235,000, a bad debt deduction of $7,000, and other expenses of $65,850. She reported the business on the accrual method of accounting and used the specific charge-off method for bad debts. In 2020, she recovered $5,000 of the $7,000 bad debt deducted in 2019. How much will she claim in income and in what year?
A. $7,000 in 2020.
B. Amend 2019 to eliminate bad debt deduction of $7,000.
C. Amend 2019 to reduce bad debt deduction by $5,000.
D. $5,000 in 2020.
$5,000 in 2020.
When an amount that was previously deducted in a prior year is later recovered, that amount is included in the year it was recovered as income. Thus, the $5,000 recovered is to be income in the 2020 return.
Optimistic borrowed $20,000 to buy a machine for his printing business. Shortly thereafter, the economy went into a deep recession and Optimistic was not able to repay the debt although he was not insolvent. In the current year, the creditor reduced the debt by $10,000 so Optimistic could afford to pay it. The creditor was not the seller of the machine. As a result of this reduction of debt,
A. Any tax effect from the reduction of the debt is deferred until final payment by Optimistic.
B. Optimistic has $10,000 of income.
C. The purchase price of the machine is adjusted to reduce Optimistic’s basis in the machine.
D. The debt is a qualified business indebtedness and the basis of the machine must be reduced.
Optimistic has $10,000 of income.
The cancellation of indebtedness is included in gross income under Sec. 61(a)(12). Under Sec. 108, the discharge of indebtedness is excluded from gross income if the debtor is insolvent, in bankruptcy reorganization, a farmer, or a taxpayer other than a C corporation that has invested in real property. The canceled debt can also be excluded if it relates to a purchase-money debt reduction. Since none of these apply, the $10,000 reduction of debt is included in Optimistic’s income.
Sally, a calendar-year, cash-basis taxpayer, operates a used furniture business in a building she owns. At the end of the current year, her basis in the building is $175,000, and the difference between the building’s $100,000 value and the $150,000 mortgage reflects countrywide declining real property values. Because Sally’s ability to make full payments on the mortgage that was taken out 2 years ago has decreased with demand for her inventory, the lender reduced the principal amount of the mortgage to $120,000 at year end. Which of the following statements is the best answer regarding the mortgage principal adjustment?
A. Sally must either report $30,000 of gross income for the current year or reduce the property’s basis next year.
B. The $30,000 adjustment is not includible in gross income for the current year.
C. Sally must report $30,000 of gross income on her current-year tax return.
D. Sally must reduce the property’s basis on the first day of her next tax year.
Sally must either report $30,000 of gross income for the current year or reduce the property’s basis next year.
Discharge of debt is gross income [Sec. 61(a)(12)]. Sally is not insolvent, so the debt discharged is not excluded under Sec. 108(a)(1)(B). However, under Sec. 108(a)(1)(D), a taxpayer may elect to exclude discharged debt incurred or assumed in connection with the purchase of real property used in a trade or business. The discharged debt may be excluded to the extent the taxpayer reduces his or her basis in the property. The basis reduction is limited to the lesser of (1) the adjusted basis of real estate held by the taxpayer, or (2) excess of the debt principal before discharge over the fair market value of the property which secures the debt. Thus, Sally must either report gross income or reduce the property’s basis in the amount of $30,000 ($150,000 original mortgage – $120,000 new mortgage amount). Basis reduction is made at the beginning of the year following discharge.
During the current year, Mrs. R, a cash-basis lawyer, had the following transactions:
Cash fees for legal services
$100,000
Gain on sale of personal auto
$300
Her business building’s appreciation in value
$20,000
Fair market value of stock received for services
$10,000
Interest income on personal loan to her son
$10,000
What is Mrs. R’s gross income from her business?
A. $130,000
B. $120,300
C. $110,000
D. $100,000
$110,000
The gain on the sale of a personal automobile and the interest on a personal loan are not income from the taxpayer’s business, although they are items of gross income. The appreciation on the taxpayer’s building is not included in gross income since there has been no event causing the realization of the income, e.g., a sale or exchange. Mrs. R’s only self-employment income consists of $100,000 of cash fees and the $10,000 value of stock received (Sec. 83), which total $110,000.
In Year 3, the Rox Company had gross income of $178,000, a bad debt deduction of $7,000, and other allowable deductions of $181,000. Rox carried the Year 3 NOL of $10,000 to Year 4; it was used in full to lower Rox’s tax for Year 4. In Year 5, Rox recovered $5,000 of the bad debt deducted in Year 4. What is the amount of the bad debt recovery that Rox should include in income for Year 5?
A. $4,000
B. $5,000
C. $0
D. $1,000
$5,000
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $7,000, the full amount of the $5,000 recovery is included in gross income.
Which of the following fringe benefits cannot be excluded from the employee’s income?
A. Transportation up to $270 per month.
B. Holiday gifts other than cash with a low market value.
C. Memberships in municipal athletic facilities for employees, their spouses, and their dependent children.
D. Qualified employee discounts given employees on certain property and services offered to customers in the ordinary course of the line of business in which the employee performs services.
Memberships in municipal athletic facilities for employees, their spouses, and their dependent children.
Section 132 excludes certain qualified fringe benefits that are provided to an employee from the employee’s income. Excludable fringe benefits include qualified employee discounts, de minimis fringes, and qualified transportation fringes. Membership in an athletic facility qualifies only if it is for an on-premises facility available to all employees. Memberships in municipal facilities cannot be excluded as wages.
All of the following are excludable from wages EXCEPT
A. De minimis fringe benefits.
B. Meals furnished during work hours for the benefit of the employer.
C. A non-cash achievement award valued at $100.
D. Employer provided vehicles when used by employee for personal purposes.
Employer provided vehicles when used by employee for personal purposes.
Publication 15-B provides a list of some excludable fringe benefits. Included in the excludable benefits are certain achievement awards, de minimis fringe benefits, and meals provided to employees for the benefit of the employer. However, if the employer-provided vehicles are used for personal purposes, they are not excludable because they are not an excludable fringe benefit.
All of the following would be included in the gross receipts of a business for a tax year EXCEPT
A. Lease bonus and lease cancellation payments received from a lessee renting personal property or real estate from the taxpayer.
B. Sales taxes collected by a business using the cash accounting method.
C. Sales made but income not collected during the tax year for a business using an accrual accounting method.
D. The fair market value of property the business received in exchange for a good or service bartered.
Sales taxes collected by a business using the cash accounting method.
State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. When a sale is completed, the amount of sales tax charged to the customer becomes a liability, or money owed. When the tax is paid, the liability is removed. Gross receipts are reported when sales are made on the accrual accounting method. The fair market value of property received in a bartered transaction is reported as gross receipts. Lease bonus and lease cancellation payments received from a lessee are reported as gross receipts.
Barclay Corporation transferred its own stock to one of its creditors in satisfaction of a $23,000 debt. At the time of the transfer, the stock had a fair market value of $21,000. Barclay is a solvent corporation. As a result of the transfer, Barclay will recognize income of
A. $23,000
B. $21,000
C. $0
D. $2,000
$2,000
Under Sec. 61(a)(12), taxpayers, including corporations, must recognize gain from the discharge of indebtedness. If a corporation transfers stock to its creditors in satisfaction of indebtedness, it will have income from the discharge of the indebtedness to the extent that the amount or adjusted issue price of the debt satisfied exceeds the value of the distributed stock. Therefore, the amount of gain included on Barclay’s return is $2,000.
Zippy worked at the Maxwell Hotel as a desk clerk. Since there was no one to replace him during the dinner hour, the Maxwell Hotel provided Zippy’s meal out of the dining room free of charge. Zippy was allowed to go and eat elsewhere but was encouraged to eat at the hotel and mind the desk. The cost of the meals to the Maxwell Hotel was $450, and the fair market value of the meals was $800. How much must Zippy include in gross income?
A. $450
B. $800
C. $0
D. $350
$0
Section 119 provides an exclusion for meals furnished on the business premises of the employer if they are furnished to the employee for the convenience of the employer. The convenience of the employer is served by keeping Zippy at the desk during dinner. In the case of meals, the fact that the employee may accept or decline such meals is not taken into account. Therefore, Zippy may exclude the entire amount of the meals from his gross income. Note that the relevant amount Zippy would have to include in gross income if the meals did not meet the requirements of Sec. 119 is the fair market value of the meals.
Walter is an accrual-basis taxpayer who has a business with significant accounts receivable. In 2020, Walter had an $8,000 receivable owed to his business from Fred. Fred was unable to pay the full amount but did transfer a parcel of land with a fair market value of $6,000 to Walter in partial payment. Walter entered on his books the $2,000 difference as a business bad debt, but was unable to take a tax benefit from this bad debt deduction as he had no taxable income at the end of 2019. In 2020, Walter sold the land received from Fred at a $3,000 gain. At the end of 2020, how much gain from the sale of this land must Walter report in taxable income?
A. $3,000 – the entire gain.
B. None of the answers are correct.
C. $0 – any gain is limited to the amount of bad debt.
D. $1,000 – the gain less the bad debt.
$3,000 – the entire gain.
A bad debt deduction is allowed only for a bona fide debt arising from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. If the bad debt deduction increased a net operating loss (NOL) or results in the increase of a net operating loss carryover that had not expired before the beginning of the tax year during which the recovery takes place, the taxpayer treats the deduction as having reduced his or her tax. The bad debt issue has no effect on the treatment of the capital gains transaction. Walter must report the entire gain from the sale. He may reduce his income by the NOL, if one exists.
In Year 1, Kathy Hood, the sole proprietor of Hood’s Basket Shop, had gross income of $245,000, a bad debt deduction of $5,000 and other expense of $75,940. The business reported on the accrual method of accounting and used the specific charge off method for bad debts. In Year 2, she recovered $4,500 of the $5,000 deducted in Year 1. How much will she claim as income and in which year?
A. $5,000, Year 2.
B. None of the answers are correct.
C. $4,500, amended Year 1.
D. $4,500, Year 2.
$4,500, Year 2.
The recovery of an amount previously deducted as a bad debt is included in gross income to the extent that the prior deduction reduced taxes (Sec. 111). Since the prior deduction reduced taxable income by $5,000, the full amount of the $4,500 recovery is included in gross income for Year 2.
William Jay, a cash-basis taxpayer, was the sole proprietor of an electronics business. He recovered $6,000 of bad debt in Year 3 that he had written off in Year 2. This Year 2 deduction reduced his taxes by $1,560 (his marginal tax rate was 26%). He shipped $8,000 of goods on consignment, but they had not been sold by year end. Late in Year 3, Mr. Jay sold his business for $40,000 cash (but the sale did not include the goods on consignment) when his basis in the business assets was $20,000. Mr. Jay also signed an agreement not to compete with the buyer, for which he was paid $9,000 in Year 3. Mr. Jay’s Year 3 gross income from these transactions is
A. $43,000
B. $63,000
C. $35,000
D. $30,560
$35,000
If a taxpayer takes a deduction for an item that reduces taxes in one year and the taxpayer later recovers all or a portion of the prior deduction, the recovery is included in gross income in the year the recovered amount is received [Sec. 111 and Reg. 1.111-1(c)(2)]. The sale of the business is income to the extent that the sales price exceeds the basis of the business assets. Amounts received as compensation for a non-compete covenant are also included in income. William’s Year 3 gross income is $35,000 ($6,000 recovery + $20,000 sale + $9,000 covenant not to compete).
Maury, a cash-basis taxpayer, leased property on June 1 of the current year to Phil at $325 a month. Phil paid Maury $325 as a security deposit that will be returned at the end of the lease. In addition, Phil paid $650 in advance rent, which is to be applied as rent to the last 2 months in the lease term, plus seven regular monthly payments of $325 each. The lease is to run for a 2-year period. What is Maury’s rental income for the current year?
A. $3,250
B. $2,600
C. $2,925
D. $2,275
$2,925
Section 451(a) provides that any item of gross income is included in income in the year of receipt, unless properly accounted for otherwise. Regulation 1.451-1(a) states that, under the cash method of accounting, an amount is includible in gross income when actually or constructively received. Regulation 1.61-8(b) requires advance rent payments to be included in gross income in the year of receipt regardless of the accounting method used. The security deposit is not income, since Maury is obligated to return it and does not have an unrestricted right to it. Maury’s rental income for the current year is Advance rental payments $650 Current rent ($325 × 7 months) $2,275 Rental income for the current year $2,925
On April 1, Year 1, Ms. G, a calendar-year, cash-basis taxpayer, entered into a 3-year lease for a building to be used in her business. The lease is for the period July 1, Year 1 through June 30, Year 4, and provides for annual payments of $6,000. On April 1, Year 1, G paid $18,000 in advance. What is the amount of G’s deductible rental expense for Year 1?
A. $3,000
B. $18,000
C. $4,500
D. $6,000
$3,000
The prepaid rent must be amortized over the period to which it applies. Ms. G’s rent expense is $3,000 [($18,000 ÷ 36 months) × 6 months].
