Mid Course Exam Acct 3221 > Mid-Course Exam > Flashcards
Mid-Course Exam Flashcards
Where does the Federal tax legislation generally originate?
The House Ways and Means Committee
In the citation Notice 90–20, 1990–1 C.B. 328, to what do the 20 and the 328 refer?
20 refers to the notice number and 328 refers to the page number of the Code Bulletin.
Where can private letter rulings be found?
IRS letter rulings report (CCH), BNA daily tax reports, Tax Notes (Tax analysts), Private Letter Rulings (RIA)
Can a taxpayer get a jury trial in the U.S. Court of Federal Claims?
The taxpayer can not obtain a jury trial in the Court of Federal Claims.
Does a tentative tax deficiency have to be paid only after the trial in the court of federal claims?
No must be paid before.
When considering the use of the U.S. Court of Federal Claims as the trial court for Federal tax litigation, indicate whether the following is “True” or “False”.
The taxpayer can not obtain a jury trial in the Court of Federal Claims. True
• The tentative tax deficiency does not have to be paid until after the trial.False
• Each state has at least one U.S. Court of Federal Claims; therefore, choosing the U.S. Court of Federal Claims usually minimizes the inconvenience and expense of traveling for the taxpayer and his or her counsel. False
• The Court of Federal Claims hear only Federal tax cases and, therefore, have more expertise in tax matters. False
When using the U.S. Tax Court for Federal tax litigation, indicate whether the following are “True” or “False”.
The U.S. Tax Court hears only tax cases.
True
• Tax Court has more expertise in tax matters.
True
• A taxpayer does not have to pay the tax deficiency assessed by the IRS before trial, but a taxpayer may deposit a cash bond to stop the running of interest.
True
• A taxpayer may obtain a jury trial in the U.S. Tax Court.
False
• Appeals from the Tax Court go to the Court of Appeals for the Federal Circuit.
False
Is this example included or excluded from gross income:
Taxpayer sells his Super Bowl tickets for three times what he paid for them.
Included
Personal exemptions included or excluded from gross income:
b. Damages award received by the taxpayer for personal physical injury—none were for punitive damages.
e. Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy.
h. Stolen funds the taxpayer had collected for a local food bank drive.
i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer’s former employer for tax evasion.
b. excluded
e. excluded
h. included
i. included
Dependency Exemptions: Heather, age 12, lives in the same household with her mother, grandmother, and uncle.
a. Who is eligible to claim Heather as a dependent?
All Three
Filing Status: Indicate whether the head-of-household filing status is available or not available for 2016 in each of the following independent situations:
d. Taxpayer, a single parent, maintains a home in which she and her unmarried son live. The son, age 19, earns $5,000 from a part-time job.
Head of Household status not available.
Capital Gains and Losses from Property:
c. Gain on the sale of a houseboat owned for 2 years and used for family vacations.
d. Loss on the sale of a reconditioned motorcycle owned for 3 years and used for recreational purposes.
c. LT Capital Gain
d. Non-deductible personal use asset
Identify whether this item is deductible or not:
Amount lost in football office pool
Not deductible
Identify whether this item is taxable or not:
Gift from parents
Not taxable
Accounting income is not recognized until it’s …
realised.
Gross income from partnership for individual if 30% interest and partnership generated £400K of taxable income?
£120K. Not treated as a separate taxable entity.
Taxpayer’s gross income in this situation:
Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert.
$600 - market value of both tickets at the time she received them.
Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year (which he receives in January of the following year). Determine the tax consequences of the following events to the corporation and to Troy:
a. On December 31, 2016, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2016. Troy did not deliver the check to the corporation until January 2017.
The corporation recognizes the income in:
2016
Troy recognizes the bonus related to this collection in:
2017
Assume Eagle Corporation is an accrual basis taxpayer. On December 31, 2016, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2016. Troy deposited the check on December 31, but the bank did not add the deposit to the corporation’s account until January 2017.
The corporation recognizes the income in:
2016
Troy recognizes the bonus related to this collection in:
2017
The facts are the same as in (a), except that the customer told Troy to hold the check until January 2017 when the customer could make a bank deposit that would cover the check.
The corporation recognizes the income in:
2017
Troy recognizes the bonus related to this collection in:
2017
Liz and Doug were divorced on December 31 of the current year after 10 years of marriage. Their current year’s income received before the divorce was as follows:
Doug’s salary $41,000
Liz’s salary $55,000
Rent on apartments purchased by Liz 15 years ago $8,000
Dividends on stock Doug inherited from his mother 4 years ago $1,900
Interest on a savings account in Liz’s name funded with her salary $2,400
Allocate the income to Liz and Doug assuming that they live in:
a. California.
Doug: $
51,100
Liz: $
57,200
California Doug Salary $48 Rent Dividends $1.9 Interest $1.2 Total: $51,100
Liz Salary $48 Rent $8 Dividends Interest $1.2 Total: $57,200
Jacob was awarded the Nobel Peace Prize. When he was presented the check for $1,400,000, Jacob said, “I do not need the money. Give it to the United Nations to use toward the goal of world peace.” Jacob is required to include $
of the prizes received in his gross income.
0
Linda won the Craig County Fair beauty pageant. She received a $10,000 scholarship that paid her $6,000 for tuition and $4,000 for meals and housing for the academic year. Linda is required to include $
of the scholarship in her gross income.
4000
In 2016, Alva received dividends on her stocks as follows:
Amur Corporation (a French corporation whose stock is traded on
an established U.S. securities market) $60,000
Blaze, Inc., a Delaware corporation 40,000
Grape, Inc., a Virginia corporation 22,000
If an amount is zero, enter “0”.
a. Alva purchased the Grape stock three years ago, and she purchased the Amur stock two years ago. She purchased the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at a $5,000 loss. Alva had no other capital gains and losses for the year. She is in the 35% marginal tax bracket.
.
The amount of her tax on qualifying dividends is
$12,300.
(35% tax bracket pays 15% on dividends as long as fulfilling the 60/121 day holding rule. If not satisfying rule it’s ordinary income tax rates so would be 35% in this example).
Holly was injured while working in a factory and received $12,000 as workers’ compensation as she was unable to work because of the injury. Jill, who was self-employed, was also injured and unable to work. Jill collected $12,000 on an insurance policy she had purchased to replace her loss of income while she was unable to work.
How much are Holly and Jill each required to include in their gross income?
If an amount is zero, enter “0”.
Holly: $
0
Jill: $
0
Several of Egret Company’s employees have asked the company to create a hiking trail that employees could use during their lunch hours. The company owns vacant land that is being held for future expansion but would have to spend approximately $50,000 if it were to make a trail. Nonemployees would be allowed to use the facility as part of the company’s effort to build strong community support.
Regarding the following items, help Egret employees by identifying each as either “Yes, a tax issue” or “No, not a tax issue”.
Is the benefit a no-additional-cost service?
Yes, a tax issue
Select either “Yes” or “No” to indicate which of the following items can probably be found in the Internal Revenue Bulletin.
a. Action on Decision.
b. Small Cases Division of the U.S. Tax Court decision.
c. Letter ruling.
d. Revenue Procedure.
e. Finalized Regulation.
f. U.S. Court of Federal Claims decision.
g. Acquiescences to Tax Court decisions.
h. U.S. Circuit Court of Appeals decision.
a. Action on Decision. Yes b. Small Cases Division of the U.S. Tax Court decision. No c. Letter ruling. No d. Revenue Procedure. Yes e. Finalized Regulation. Yes f. U.S. Court of Federal Claims decision. No g. Acquiescences to Tax Court decisions. Yes h. U.S. Circuit Court of Appeals decision. No
Margie is 15 and claimed as a dependent by her parents. She receives $800 in dividends income and $1,400 in wages from a part-time job.
$1,750. When filing her own tax return, Margie’s standard deduction is limited to the greater of $1,050 or $1,750 (the sum of the earned income for the year plus $350).
The following information applies to Emily for 2016. Her filing status is single.
Salary $85,000
Interest income from bonds issued by Xerox 1,100
Alimony payments received 6,000
Contribution to traditional IRA 5,500
Gift from parents 25,000
Short-term capital gain from stock investment 2,000
Amount lost in football office pool 500
Number of potential dependents (two cousins, who live in Canada) ?
Age 40
Salary $85,000 Interest on bonds 1,100 Alimony received 6,000 Capital gain 2,000 IRA contribution (5,500) AGI $88,600 Standard deduction (6,300) Personal and dependency exemptions (1 × $4,050) (4,050) Taxable income $78,250
Taylor, age 18, is claimed as a dependent by her parents. For 2016, she has the following income: $4,000 wages from a summer job, $1,800 interest from a money market account, and $2,000 interest from City of Boston bonds.
If an amount is zero, enter “0”.
Taylor’s standard deduction for 2016 is $
Taylor’s personal exemption for 2016 is $
Taylor’s taxable income for 2016 is $
Wages $4,000
Money market interest 1,800
Bond interest (City of Boston bond interest is tax-exempt) –0–
Gross income $5,800
Less: Standard deduction* (4,350)
Personal exemption** (–0–)
Taxable income $1,450
- A dependent’s standard deduction is limited to the greater of $1,050 or the sum of his or her earned income plus $350. In this case it is $4,000 + $350 = $4,350.
- *A dependent may not claim a personal exemption on his or her return.
harlotte (age 40) is a surviving spouse and provides all of the support of her four minor children who live with her. She also maintains the household in which her parents live and furnished 60% of their support. Besides interest on City of Miami bonds in the amount of $5,500, Charlotte’s father received $2,400 from a part-time job. Charlotte has a salary of $80,000, a short-term capital loss of $2,000, a cash prize of $4,000 from a church raffle, and itemized deductions of $10,500.
The personal exemption is $4,050 for 2016. Click here to access the standard deduction table to use, if required.
a. Is the cash prize taxable to Charlotte?
b. Charlotte does not have any capital gains. How much of the short-term capital loss can Charlotte deduct this year?
c. Should Charlotte itemize her deductions or take the standard deduction?
d. Can Charlotte claim her parents as dependents?
e. Compute Charlotte’s taxable income.
f. Using the Tax Rate Schedules (click here), tax liability for Charlotte is ___ for 2016. (If required, round your answer to the nearest whole dollar.)
a. Is the cash prize taxable to Charlotte?
Yes
b. Charlotte does not have any capital gains. How much of the short-term capital loss can Charlotte deduct this year?
$2000
c. Should Charlotte itemize her deductions or take the standard deduction?
Take the standard deduction
d. Can Charlotte claim her parents as dependents?
Both of her parents qualify as dependents.
e. Compute Charlotte’s taxable income.
$41050
Salary $80,000 Short-term capital loss (2,000) Cash prize 4,000 AGI $82,000 Less: Personal and dependency exemptions (7 × $4,050) (28,350) Standard deduction (12,600) Taxable income $41,050
f. Using the Tax Rate Schedules (click here), tax liability for Charlotte is $5230 for 2016. (If required, round your answer to the nearest whole dollar.)
Tax on $41,050 using surviving spouse rate schedule: $1,855 + 15%($41,050 - $18,550) = $5,230.
Paige, age 17, is claimed as a dependent on her parents’ 2016 return, on which they report taxable income of $120,000 (no qualified dividends or capital gains). Paige earned $3,900 pet sitting and $4,100 in interest on a savings account.
What are Paige’s taxable income and tax liability for 2016?
If an amount is zero, enter “0”.
a. Paige’s standard deduction is $.
b. Paige’s personal exemption is $.
c. Paige’s total taxable income is $; however, only $ will be taxed at her rate.
d. Compute Paige’s “net unearned income” for the purpose of the kiddie tax.
e. Assuming that her parents are in the 25% tax bracket and Paige is in the 10% tax bracket, compute her tax liability.
a. Paige’s standard deduction is $4250 .
b. Paige’s personal exemption is $0 .
c. Paige’s total taxable income is $3750 ; however, only $1750 will be taxed at her rate.
d. Compute Paige’s “net unearned income” for the purpose of the kiddie tax. $2000
e. Assuming that her parents are in the 25% tax bracket and Paige is in the 10% tax bracket, compute her tax liability. $675
Earned income $3,900 Interest income 4,100 Gross income $8,000 Less: Personal exemption (–0–) Less: Standard deduction [greater of $1,050 or $3,900 (earned income) + $350] (4,250) Taxable income $3,750 Less: Unearned income taxed at parents' rate (2,000) Income taxed at Paige's rate $1,750 Paige's tax rate × 10% Tax at Paige's rate $175
Paige’s total tax: $500 (unearned income taxed at parents’ rate) + $175 (taxed at Paige’s rate) = $675.
During 2016, Inez had the following transactions involving capital assets:
Gain on the sale of unimproved land (held as an investment for 3 years) $3,000
Loss on the sale of a camper (purchased 2 years ago and used for family vacations) (5,000)
Gain on the sale of ADM stock (purchased 9 months ago as an investment) 4,000
Gain on the sale of a fishing boat and trailer (acquired 18 months ago at an auction and used for recreational purposes) $1,000
Indicate the tax treatment for each item.
Gain on the sale of unimproved land
Loss on the sale of a camper
Gain on the sale of ADM stock
Gain on the sale of a fishing boat and trailer
Overall, Inez has a long-term capital gain of $
and a short-term capital gain of $
Gain on the sale of unimproved land: Long-term capital gain
Loss on the sale of a camper: Not deductible
Gain on the sale of ADM stock: Short-term capital gain
Gain on the sale of a fishing boat and trailer: Long-term capital gain
There are no long-term losses to net against the long-term gain of $4,000. There are no short-term losses to net against the short-term gain. Thus, she has a net LTCG of $4,000 and a net STCG of $4,000.
Regarding Ben’s taxable income, complete the paragraph below.
Ben lost his job when his employer moved its plant. During the year, he collected unemployment benefits for three months, a total of $1,800. While he was waiting to hear from prospective employers, he painted his house. If Ben had paid someone else to paint his house, the cost would have been $3,000. The cost of the paint Ben used was $800.
Ben must recognize $ of income from the unemployment benefits. His savings from painting his house ___ included in gross income because it ___
income __. This is because the savings ___ an amount received from another.
Answers: $1,800; are not; was not; realized; were not.
Unemployment compensation is sponsored and operated by the states and Federal government. In a series of rulings, the IRS exempted unemployment benefits from tax. However, Congress amended the Code to provide that these benefits are taxable.
For realization to occur, (1) an exchange of goods or services must take place between the accounting entity and some independent, external group and (2) in the exchange, the accounting entity must receive assets that are capable of being objectively valued.
For tax purposes, Ben must recognize this unemployment benefits. Regarding the house painting, he has no gross income because of the realization requirement. Income is not realized unless it is received in a transaction with another party. Hence, the cost savings an individual realizes from “do it yourself” activities does not result in gross income.
Rex became a partner with a 30% interest in the partnership profits when he invested $200,000. In 2016, the partnership generated $400,000 of taxable income, and Rex withdrew $100,000. In 2017, the partnership had $600,000 of taxable income, and Rex withdrew $200,000.
What is Rex’s gross income from the partnership in 2016 and 2017?
2016: $
2017: $
2016: $120000
2017: $180000
Each partner must then report his or her distributive share of the partnership’s income and deductions for the partnership’s tax year ending within or with the partner’s tax year. The income must be reported by each partner in the year it is earned, even if such amounts are not actually distributed to the partners.
Rex must include in his gross income his share of the partnership’s income, regardless of whether his share of the profits is actually distributed to him. Therefore, Rex must recognize as gross income from the partnership $120,000 ($400,000 × 30%) in 2016 and $180,000 ($600,000 × 30%) in 2017. The withdrawal of $200,000 merely reduces Rex’s basis for his partnership interest.
a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the exchange. Deb’s cost of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of the year.
b. Deb needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000. Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt.
c. Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert.
a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the exchange. Deb’s cost of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of the year. $2,000. Deb must recognize $300 interest income and $1,700 gain ($11,700* – $10,000) when she exchanged the bond for stock. Of the value of the corporate stock she received, $300 was for her accrued interest. The remaining $11,700 was in exchange for the bond whose cost was $10,000. The fact that the stock decreased in value after the exchange is not relevant because she still owns the stock and thus has not realized the loss in value.
* $12,000 - $300 = $11,700.
b. Deb needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000. Based on her broker’s advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt. $0. Deb did not realize income when she borrowed on the property. Her net worth did not increase – assets and liabilities increased by an equal amount.
c. Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her sales quota. At the time she received the tickets, each ticket had a face price of $200 and was selling on eBay for $300. On the date of the concert, the tickets were selling for $250 each. Deb and her son attended the concert. $600. Deb must recognize compensation income of $600 ($300 × 2), the fair market value of the tickets at the time she received them.
Selma operates a contractor’s supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax return. For 2016, Selma had cash receipts of $1,400,000, which included $200,000 collected on accounts receivable from 2015 sales. It also included the proceeds of a $100,000 bank loan. At the end of 2016, she had $250,000 in accounts receivable from customers, all from 2016 sales.
a. Selma’s accrual basis gross receipts for 2016 are $
Accrual basis gross receipts Cash received $1,400,000 Less: beginning accounts receivable (200,000) Less: bank loan (100,000) Add: ending accounts receivable 250,000 Gross receipts $1,350,000
n 2016, Alva received dividends on her stocks as follows:
Amur Corporation (a French corporation whose stock is traded on
an established U.S. securities market) $60,000
Blaze, Inc., a Delaware corporation 40,000
Grape, Inc., a Virginia corporation 22,000
If an amount is zero, enter “0”.
a. Alva purchased the Grape stock three years ago, and she purchased the Amur stock two years ago. She purchased the Blaze stock 18 days before it went ex-dividend and sold it 20 days later at a $5,000 loss. Alva had no other capital gains and losses for the year. She is in the 35% marginal tax bracket.
The amount of her tax on qualifying dividends is $
The amount of her tax on nonqualifying dividends is $
The total tax on all her dividend income is $
Amur dividends (Note 1) $60,000
Blaze dividends (Note 2) 40,000
Grape dividend 22,000
Total dividend income $122,000
Qualified dividends Amur dividend $60,000 Grape dividend 22,000 $82,000 Applicable rate x 15% Tax on qualified dividends $12,300
Non-qualifying dividends
Blaze dividend $40,000
Applicable rate x 35%
Tax on non-qualified dividends $14,000
Total tax on dividends $26,300
Note 1: Even though Amur is a foreign corporation, the dividend is a qualified dividend because its stock is traded on an established U.S. securities market.
Note 2: The dividend paid by Blaze is not a qualified dividend because the holding period requirement is not satisfied (i.e., must be held more than 60 days during the 121-day period beginning 60 days before the ex-dividend date).
Liz and Doug were divorced on December 31 of the current year after 10 years of marriage. Their current year’s income received before the divorce was as follows:
Doug’s salary $41,000
Liz’s salary $55,000
Rent on apartments purchased by Liz 15 years ago $8,000
Dividends on stock Doug inherited from his mother 4 years ago $1,900
Interest on a savings account in Liz’s name funded with her salary $2,400
Allocate the income to Liz and Doug assuming that they live in:
a. California.
Doug: $ Liz: $
b. Texas.
Doug: $ Liz: $
California:
Doug: Salary 48K+Divs 1.9K + Interest 1.2K=51.1K
Liz: Salary 48K+Rent 8K+Interest 1.2K=57.2K
Texas:
Doug: Salary 48K+Rent 4K+ Divs 0.95K + Int 1.2K=54.15K
Liz: Salary 48K+Rent 4K+Divs 0.95K+Int 1.2K=54.15K
The LMN Partnership has a group term life insurance plan. Each partner has $150,000 of protection, and each employee has protection equal to twice his or her annual salary. Employee Alice (age 32) has $90,000 of insurance under the plan, and partner Kay (age 47) has $150,000 of coverage. Because the plan is a “group plan,” it is impossible to determine the cost of coverage for an individual employee or partner.
Round your answers to the nearest cent.
a. Assuming that the plan is nondiscriminatory, how much must Alice and Kay each include in gross income as a result of the partnership paying the insurance premiums?
Alice must include $ and Kay must include $ in gross income.
b. Assume that the partnership is incorporated. Kay becomes a shareholder and an employee who receives a $75,000 annual salary. The corporation provides Kay with $150,000 of group term life insurance coverage under a nondiscriminatory plan.
What amount is included in Kay’s gross income as a result of the corporation paying the insurance premiums?
Alice’s gross income from the excess coverage is computed as follows:
Uniform premiums for $1,000 of protection for 1 month $0.08
Coverage for 12 months (age 32) x 12
$0.96
Excess coverage: ($90,000 – $50,000) / $1,000 x 40
Includible amount for Alice $38.40
Kay is a partner (not an employee) and therefore the exclusion for group term life insurance premiums is not applicable for her. The partnership will deduct the actual premiums paid. The premiums attributable to the partners (based on the uniform table) are included in the partner’s gross income. Therefore, Kay includes $270 in her gross income.
Uniform premiums for $1,000 of protection for 1 month $.15
Coverage for 12 months x 12
$1.80
Excess coverage: ($150,000 – $0) / $1,000 x 150
Includible amount for Kay $270.00
As an employee of the incorporated business, Kay is eligible for the group term life insurance exclusion.
Uniform premiums for $1,000 of protection for 1 month $.15
Coverage for 12 months x 12
$1.80
Excess coverage: ($150,000 – $50,000) / $1,000 x 100
Includible amount for Kay $180.00
Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly abided with the customer’s request. The customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a receipt. Dolly gave the cashier $8 and pocketed the $100 bill. Dolly concludes that the customer thought that he had left a $10 bill, although the customer did not return to correct the apparent mistake. The customer had commented about how much he appreciated Dolly’s prompt service. Dolly thinks that a $2 tip would be sufficient and that the other $98 is like “found money”.
How much, if any, should Dolly include in her gross income?
Answer: $92.
The courts have defined a gift as “a voluntary transfer of property by one to another without adequate (valuable) consideration or compensation therefrom.” If the payment is intended to be for services rendered, it is not a gift, even though the payment is made without legal or moral obligation and the payor receives no economic benefit from the transfer. To qualify as a gift, the payment must be made “out of affection, respect, admiration, charity or like impulses.” Thus, the cases on this issue have been decided on the basis of the donor’s intent.
Dolly should include $92 in her gross income. Even if the funds were received as the result of a mistake, she has the free and unrestricted use of the funds, with no apparent claims against the funds. In addition, since she received the amount from a customer in her employment capacity, it is unlikely that she received a $90 gift.
Ted works for Azure Motors, an automobile dealership. All employees can buy a car at the company’s cost plus 2%. The company does not charge employees the $300 dealer preparation fee that nonemployees must pay. Ted purchased an automobile for $29,580 ($29,000 + $580). The company’s cost was $29,000. The price for a nonemployee would have been $33,900 ($33,600 + $300 preparation fee).
What is Ted’s gross income, if any, from the purchase of the automobile?
Answer: $240.
When the employer sells goods or services (other than no-additional-cost benefits) to the employee for a price that is less than the price charged regular customers, the employee realizes income equal to the discount. However, a qualified employee discount can be excluded from the gross income of the employee, subject to the following conditions and limitations:
The exclusion is not available for real property (e.g., a house) or for personal property of the type commonly held for investment (e.g., common stocks);
The property or services must be from the same line of business in which the employee works;
In the case of property, the exclusion is limited to the gross profit component of the price to customers; and,
In the case of services, the exclusion is limited to 20% of the customer price.
The discount on the price of the automobile of $4,020 ($33,600 - $29,580) is a qualified employee discount. In the case of property, the exclusion is limited to the gross profit $4,600 ($33,600 - $29,000) component of the price to customers. Therefore, the discount can be excluded from Ted’s gross income because the price he paid was above the employer’s cost.
However, since the maximum qualified employee discount that can be excluded for a service is 20%, Ted must include in gross income $240, 80% of the preparation fee ($300 x 80%).
Ed, an employee of the Natural Color Company, suffered from a rare disease that was very expensive to treat. The local media ran several stories about Ed’s problems, and the family created a website that generated more than $10,000 in gifts from individuals to help pay the medical bills. Ed’s employer provided hospital and medical insurance for its employees, but the policy did not cover Ed’s illness. When it became apparent that Ed could not pay all of his medical expenses, the hospital canceled the $25,000 Ed owed at the time of his death. After Ed’s death, his former employer, in accordance with company policy, paid Ed’s widow $12,000 in “her time of need”. Ed’s widow also collected $50,000 on a group term life insurance policy paid for by Ed’s employer.
Classify the following amounts as “Included in” or “Excluded from” the gross income of Ed and his widow.
a. $10,000 in gifts from individuals to help pay the medical bills.
b. The $25,000 debt canceled by the hospital.
c. The employer’s $12,000 payment to Ed’s widow.
d. The employer-paid $50,000 group term life insurance policy.
What are Ed’s and his widow’s gross income from these items?
a. $10,000 in gifts from individuals to help pay the medical bills. Excluded. The $10,000 received from the general public is an excludible gift.
b. The $25,000 debt canceled by the hospital. Excluded. Generally, the income realized by the debtor from the forgiveness of a debt is taxable. However, Ed should be allowed a medical expense deduction that is subject to the 10% of AGI nondeductible amount. The debt attributable to the nondeductible portion should be excluded from gross income under the tax benefit rule, because the recovery of the expense is excluded from gross income to the extent the expense did not yield a tax benefit. Therefore, the $25,000 debt canceled by the hospital that would be excluded in gross income.
c. The employer’s $12,000 payment to Ed’s widow. Excluded. The $12,000 that Ed’s widow received in her “time of need” may be excluded from gross income if the company has a general policy of making such payments. Otherwise, the IRS may challenge the payment as a taxable payment for Ed’s prior services.
d. The employer-paid $50,000 group term life insurance policy. Excluded. The life insurance proceeds are excluded from gross income, since they were paid to the beneficiary of the life insurance policy.
$0
Ray and Carin are partners in an accounting firm. The partners have entered into an arm’s length agreement requiring Ray to purchase Carin’s partnership interest from Carin’s estate if she dies before Ray. The price is set at 120% of the book value of Carin’s partnership interest at the time of her death. Ray purchased an insurance policy on Carin’s life to fund this agreement. After Ray had paid $45,000 in premiums, Carin was killed in an automobile accident and Ray collected $800,000 of life insurance proceeds. Ray used the life insurance proceeds to purchase Carin’s partnership interest.
a. Ray must include $ in his gross income from receiving the life insurance proceeds.
b. The insurance company paid Ray $16,000 interest on the life insurance proceeds during the period Carin’s estate was in administration. During this period, Ray had left the insurance proceeds with the insurance company. Is this interest taxable?
c. When Ray paid $800,000 for Carin’s partnership interest, priced as specified in the agreement, the fair market value of Carin’s interest was $1,000,000. Indicate whether the following statements are “True” or “False” regarding how much, if any, Ray would include in his gross income from this bargain purchase.
- Since Ray did not recognize a gain on the purchase, Ray would include nothing from the transaction in his gross income.
- Ray would include the difference between the purchase price and what he paid in his gross income.
Answer: $0.
Life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax. Ray is the beneficiary of the life insurance policy and can exclude the proceeds of $800,000 from his gross income.
Answer: Yes.
Although life insurance proceeds paid to the beneficiary because of the death of the insured are exempt from income tax, any interest earned and paid on the proceeds is fully taxable. The $16,000 of interest earned on the life insurance proceeds left with the insurance company is included in Ray’s gross income.
Answers: True; False.
Ray did not recognize a gain on the bargain purchase. Ray simply got a good price on the purchase under an arm’s length contract.
Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2017:
- Hospitalization insurance premiums for Rex and his dependents. The cost of the coverage for Rex is $2,900 per year, and the additional cost for his dependents is $3,800 per year. The plan has a $2,000 deductible, but his employer contributed $1,500 to Rex’s Health Savings Account (HSA). Rex withdrew only $800 from the HSA, and the account earned $50 of interest during the year.
- Insurance premiums of $840 for salary continuation payments. Under the plan, Rex will receive his regular salary in the event he is unable to work due to illness. Rex collected $4,500 on the policy to replace lost wages while he was ill during the year.
- Rex is a part-time student working on his bachelor’s degree in engineering. His employer reimbursed his $5,200 tuition under a plan available to all full-time employees.
a. Hospitalization insurance premiums for Rex and his dependents. $0. Section 105(b) generally excludes payments received for medical care of the employee, spouse, and dependents. The premiums are deductible by the employer and excluded from the employee’s income.
b. Insurance premiums of $840 for salary continuation payments. $0. The premiums for accident and health benefits, disability insurance, and long-term care plans are deductible by the employer and excluded from the employee’s income.
c. The $4,500 Rex collected on the salary continuation policy to replace lost wages while he was ill during the year. $4,500. Rex is required to include in gross income the $4,500 received from the wage continuation policy while he was ill. This amount is included in gross income only because the employer paid for the policy.
d. Tuition reimbursement under a plan available to all full-time employees. $0. Qualified employer-provided educational assistance (tuition, fees, books, and supplies) at the undergraduate and graduate level is excludible from gross income. The exclusion is subject to an annual employee statutory ceiling of $5,250.
George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2016, George began working in London (for a total of 214 days in 2016). He worked there until January 31, 2017, when he transferred to Paris. He worked in Paris the remainder of 2017. His salary for the first five months of 2016 was $100,000, and it was earned in the United States. His salary for the remainder of 2016 was $175,000, and it was earned in London. George’s 2017 salary from Hawk was $300,000, with part being earned in London and part being earned in Paris.
Assume the 2017 indexed statutory amount is the same as the 2016 indexed amount.
However, since 2016 is a leap year, assume 366 days in a year and 365 days for 2017 in your computations.
a. Is George eligible for the foreign income exclusion for 2016?
b. Is George eligible for the foreign income exclusion for 2017?
Carry any fractions out to four decimal places. Round your final answers to the nearest dollar.
c. George may exclude $ from his gross income in 2016.
d. George may exclude $ in his gross income for 2017.
Answers: Yes; Yes.
For the 12-month period ending May 31, 2017, George satisfies the 330-day requirement (i.e., was in London and Paris for 365 days). Therefore, he qualifies for the foreign earned income exclusion treatment for this period which includes 214* days in 2016.
(214 days = June 30 days + July 31 days + August 31 days + September 30 days + October 31 days + November 30 days + December 31 days)
for 2016:
George can exclude the following amount from his gross income:
Computation: 214/366 = .5847 (rounded) x $101,300 = $59,230.11 rounded to $59,230.
Lower of earned income of $275,000 or indexed statutory ceiling of $101,300 for 2016.
Therfore, George must include $215,770 ($275,000 – $59,230) in his gross income for 2016.
For 2017:
George can exclude the following amount from his gross income:
Computation: 365/365 = 1.00 x $101,300 = $101,300.
*Lower of earned income of $300,000 or indexed statutory ceiling of $101,300 for 2017
Therefore, George must include $198,700 ($300,000 – $101,300) in his 2017 gross income.
Vic, who was experiencing financial difficulties, was able to adjust his debts as follows:
a. Vic is an attorney. Vic owed his uncle $25,000. The uncle told Vic that if he serves as the executor of the uncle’s estate, Vic’s debt will be canceled in the uncle’s will.
The $25,000 debt cancellation is x Vic’s gross income when the uncle dies.
b. Vic borrowed $80,000 from First Bank. The debt was secured by land that Vic purchased for $100,000. Vic was unable to pay, and the bank foreclosed when the liability was $80,000, which was also the fair market value of the property.
Vic has a $ x x as a result of the foreclosure.
c. The Land Company, which had sold land to Vic for $80,000, reduced the mortgage on the land by $12,000.
The $12,000 reduction in the debt is x Vic’s gross income because the debt reduction was made by the seller of the property.
Answer: included in.
A transfer of appreciated property (fair market value is greater than adjusted basis) in satisfaction of a debt is an event that triggers the realization of income. The transaction is treated as a sale of the appreciated property followed by payment of the debt. Foreclosure by a creditor is also treated as a sale or exchange of the property.
When the debt is cancelled, Vic’s debt will be cancelled in consideration of Vic’s services to the estate. Therefore, the $25,000 debt cancellation must be included in Vic’s gross income when the uncle dies and Vic fulfills his obligation
Answers: $20,000; loss.
Generally, when a creditor forgives or cancels debt, the debtor realizes income from discharge of indebtedness.
Vic’s debt was not cancelled. Rather, Vic transferred property in satisfaction of the debt and Vic will have $20,000 loss ($80,000 – $100,000 basis in the property).
Answer: excluded from.
Instead of realizing income from the discharge of debt by the seller, the Code allows the debtor to reduce the basis in the specific assets financed by the seller. Thus, the realized gain is merely deferred until the assets are sold.
The $12,000 reduction in the debt is not included in Vic’s gross income because the debt reduction was made by the seller of the property. Vic must reduce his basis in the property by $12,000.
Classify each of the following expenditures as a deduction for AGI, partially deductible for AGI, a deduction from AGI, partially deductible from AGI, or not deductible:
a. Amos contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual).
b. Keith pays child support to his former wife, Renee, for the support of their son, Chris.
c. Judy pays professional dues that are reimbursed by her employer. Assume an accountable plan is in place and adequate reporting is made.
d. Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment.
e. Lynn pays a moving company for moving her household goods (a qualified moving expense) to Detroit, where she is starting a new job. She is not reimbursed by her employer.
f. Ralph pays property taxes on his personal residence.
a. Amos contributes to his H.R. 10 plan (i.e., a retirement plan for a self-employed individual). For AGI. Contributions to retirement plans by self-employed taxpayers are deductible for AGI.
b. Keith pays child support to his former wife, Renee, for the support of their son, Chris. Not deductible. Alimony, not child support, is deductible.
c. Judy pays professional dues that are reimbursed by her employer. Assume an accountable plan is in place and adequate reporting is made. For AGI. Assuming that adequate reporting is made, the reimbursed employee expenses are deductible for AGI.
d. Ted pays $500 as the monthly mortgage payment on his personal residence. Of this amount, $100 represents a payment on principal, and $400 represents an interest payment. Partially deductible from AGI. The $400 mortgage interest is deductible from AGI as an itemized deduction. However, the $100 principal payment is not deductible.
e. Lynn pays a moving company for moving her household goods (a qualified moving expense) to Detroit, where she is starting a new job. She is not reimbursed by her employer. For AGI. The moving expenses (whether reimbursed or not) are deductible for AGI.
f. Ralph pays property taxes on his personal residence. From AGI. Property tax is deductible from AGI as an itemized deduction.
Gordon anticipates that being positively perceived by the individual who is elected mayor will be beneficial for his business. Therefore, he contributes to the campaigns of both the Democratic and the Republican candidates. The Republican candidate is elected mayor.
Can Gordon deduct any of the political contributions he made?
Answer: No.
Generally, no business deduction is permitted for direct or indirect payments for political purposes. Historically, the government has been reluctant to accord favorable tax treatment to business expenditures for political purposes. Allowing deductions might encourage abuses and enable businesses to have undue influence on the political process.
Therefore, Gordon is not permitted a deduction for political contributions.
Daniel, age 38, is single and has the following income and expenses in 2016:
Salary income $60,000 Net rent income 6,000 Dividend income 3,500 Payment of alimony 12,000 Mortgage interest on residence 4,900 Property tax on residence 1,200 Contribution to traditional IRA (assume the amount is fully deductible) 5,000 Contribution to United Church 2,100 Loss on the sale of real estate (held for investment) 2,000 Medical expenses 3,250 State income tax 300 Federal income tax 7,000
Daniel’s standard deduction for 2016 is $6,300 and his personal exemption is $4,050.
a. Classify the following expenses as either “Deductible for AGI”, “Deductible from AGI”, or “Not deductible”.
Payment of alimony Mortgage interest on residence Property tax on residence Contribution to traditional IRA (assume the amount is fully deductible) Contribution to United Church Loss on the sale of real estate (held for investment) Medical expenses State income tax Federal income tax
b. ) Daniel’s gross income and AGI income?
c. Calculate Daniel’s total itemized deductions (after any limitations).
Payment of alimony Deductible for AGI. The deduction for the payment of alimony is specifically listed in §62, thus a deduction for AGI.
Mortgage interest on residence Deductible from AGI. Listed under certain personal interest, mortgage interest is a personal expenditure incurred in a taxpayer’s life taken as a deduction from AGI.
Property tax on residence Deductible from AGI. Listed under certain state and local taxes, property tax on a residence is a personal expenditure incurred in a taxpayer’s life taken as a deduction from AGI.
Contribution to traditional IRA (assume the amount is fully deductible) Deductible for AGI. The deduction for certain retirement savings allowed by §219 (e.g., traditional IRAs) is specifically listed in §62, thus a deduction for AGI.
Contribution to United Church Deductible from AGI. Listed as contributions to qualified charitable organizations, the contribution to United Church is a personal expenditure incurred in a taxpayer’s life taken as a deduction from AGI.
Loss on the sale of real estate (held for investment) Deductible for AGI. The deduction that results from losses on the sale or exchange or property by the taxpayer is specifically listed in §62, thus a deduction for AGI.
Medical expenses Deductible from AGI. Medical expenses is a personal expenditure incurred in a taxpayer’s life taken as a deduction from AGI. These amounts must be reduce by 10% or 7.5% of AGI, depending on taxpayer’s age.
State income tax Deductible from AGI. Listed under certain state and local taxes, property tax on a residence is a personal expenditure incurred in a taxpayer’s life taken as a deduction from AGI.
Federal income tax Not deductible. Federal income taxes paid is not allowed as a deduction either for or from AGI.
b.) Gross income: Salary income $60,000 Net rent income $6,000 Dividend income $3,500 $69,500 Deductions for AGI: Alimony paid $12,000 Contribution to traditional IRA $5,000 Loss on sale of real estate $2,000 ($19,000) $50,500
c.) Itemized deductions: Mortgage interest on residence $4,900 Property tax on residence 1,200 Contribution to church 2,100 State income tax 300 Medical expenses [$3,250 – ($50,500 x 10%)] 0 Total itemized deductions $8,500
Doug incurred and paid the following expenses during the year:
Classify the following expenses as “Deductible” or “Not deductible”.
a. $50 for a ticket for running a red light while he was commuting to work.
b. $100 for a ticket for parking in a handicapped parking space.
c. $200 to an attorney to represent him in traffic court as to the two tickets.
d. $500 to an attorney to draft an agreement with a tenant for a one-year lease on an apartment that Doug owns.
e. $1,000 to an attorney to negotiate a reduction in his child support payments.
f. $2,500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse.
a. $50 for a ticket for running a red light while he was commuting to work. Not Deductible. The ticket is not deductible because it is personal in nature. Even if related to the conduct of a trade or business or the production of income, it would be disallowed as a deduction because it violates public policy.
b. $100 for a ticket for parking in a handicapped parking space. Not Deductible. See explanation in part (a) above.
c. $200 to an attorney to represent him in traffic court as to the two tickets. Not Deductible. The legal expenses are not deductible because they are personal in nature.
d. $500 to an attorney to draft an agreement with a tenant for a one-year lease on an apartment that Doug owns. Deductible. This expense is an ordinary and necessary expense incurred in connection with rental property held for the production of income.
e. $1,000 to an attorney to negotiate a reduction in his child support payments. Not Deductible. This expense is personal in nature.
f. $2,500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse. Deductible. This expense is an ordinary and necessary expense incurred in connection with deductible alimony.
Sarah owns a vacation cabin in the Tennessee mountains. Without considering the cabin, she has gross income of $65,000. During the year, she rents the cabin for two weeks for $2,500 and uses it herself for four weeks. The total expenses for the year are $10,000 mortgage interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance; and $3,200 depreciation.
If an amount is zero, enter “0”.
a. What effect does the rental of the vacation cabin have on Sarah’s AGI?
Sarah reports rental income of $ and rental expenses of $ for AGI.
b. What expenses can Sarah deduct, and how are they classified (i.e., for or from AGI)?
Note: Assume that she itemizes her deductions.
a. Utilities
b. Insurance
c. Property Taxes
d. Mortgage interest
e. Maintenance expenses
Answers: $0; $0.
Answers:$0; Not deducted; $0; Not deducted; $1,500; From AGI; $10,000; From AGI; $0; Not deducted.
As mentioned above, the only expenses that Sarah can deduct are those she normally would deduct as itemized deductions. This includes the following:
Mortgage interest $10,000
Property tax 1,500
Total $11,500
Sarah cannot deduct the rental expenses of utilities, insurance, and maintenance expenses or the depreciation. None of the expenses are deductible for AGI.
Chee, single, age 40, had the following income and expenses during 2016:
Income
Salary $43,000
Rental of vacation home (rented 60 days, used 4,000
personally 60 days, vacant 245 days)
Municipal bond interest 2,000
Dividend from General Electric 400
Expenses
Interest on home mortgage 8,400
Interest on vacation home 4,758
Interest on loan used to buy municipal bonds 3,100
Property tax on home 2,200
Property tax on vacation home 1,098
State income tax 3,300
State sales tax 900
Charitable contributions 1,100
Tax return preparation fee 300
Utilities and maintenance on vacation home 2,600
Depreciation on rental 50% of vacation home 3,500
Calculate Chee’s net income from the vacation home, itemized deductions and taxable income for the year before personal exemptions. Assume the court’s approach is used in allocating real estate taxes and mortgage interest.
In your computations, round any fractions to four decimal places. Then, round any amounts to the nearest dollar. If an amount is zero, enter “0”. Assume 365 days in a year.
a. Net income from vacation home: $
b. Itemized deductions: $
c. Taxable income before personal exemptions: $
Income Salary $43,000 Dividend 400 Rental of vacation home (Note 2) 0 Adjusted gross income $43,400
Itemized deductions:
State income taxes (greater than sales tax) $3,300
Property tax on home 2,200
Interest on home mortgage 8,400
Interest and property taxes on vacation home (Note 2) 4,893
Charitable contributions 1,100
Tax return preparation fee (Note 3) 0 (19,893)
Taxable income before personal exemption $23,507
Note 2. Determination of net income from vacation home:
Rental income $4,000
Less: Taxes and interest (60/365 x $5,856) (963)
Remainder $3,037
Less: Utilities and maintenance (1/2 x $2,600) (1,300)
Remainder $1,737
Less: Depreciation ($3,500, limited to $1,737) (1,737)
Net income from vacation home $0
Note 3. Tax preparation fees are reduced by 2% of AGI (in this case, 2% of AGI exceeds $300).
Monty loaned his friend Ned $20,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $11,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $11,000 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $4,000 and taxable income of $20,000. During the current year, Ned paid Monty $10,000 in satisfaction of the debt.
Determine Monty’s tax treatment for the $10,000 received in the current year.
The nonbusiness bad debt of $11,000 would have been reported as a x and $x would be included in Monty’s gross income.
Answers: short-term capital loss; $7,000.
A nonbusiness bad debt is always treated as a short-term capital loss. Capital loss may be used to offset capital gain. Any excess capital loss is referred to as a net capital loss. The maximum amount of a net short-term capital loss that an individual can deduct against ordinary income in any one year is $3,000. If a debt has been written off as uncollectible in one year and the collection of the debt occurs in a later tax year, the taxpayer will have income if there was a tax benefit in the year the deduction was taken.
Monty must include up to $10,000 in gross income but only to the extent of a tax benefit in a prior year. Because the debt is a nonbusiness bad debt, the $11,000 would have been reported as a short-term capital loss. Last year, Monty had $4,000 capital gains and taxable income of $20,000. Therefore, $7,000 ($4,000 offset gains + $3,000 overall limit) of the $11,000 loss produced a tax benefit. Hence, only $7,000 would be included in Monty’s gross income this year.
Mable and Jack file a joint return. For the current year, they had the following items:
Salaries $120,000
Loss on sale of § 1244 stock acquired two years ago 105,000
Gain on sale of § 1244 stock acquired six months ago 20,000
Nonbusiness bad debt 19,000
Determine their AGI for the current year.
Salary $120,000
§ 1244 ordinary loss (limit of $100,000) (100,000)
Short-term capital gain on § 1244 stock $20,000
Short-term capital loss (nonbusiness bad debt) (19,000)
Net short-term capital gain $1,000
Net long-term capital loss (remaining § 1244 loss) (5,000)
Net capital loss (limited to $3,000; $1,000 LTCL carryover) (3,000)
Adjusted gross income $17,000
Ugh just read it.
Sell all of the stock in the current year:
Current year’s AGI
Salary $80,000
Less: ordinary loss (§ 1244 limit) (50,000)
Long-term capital gain $8,000
Less: long-term capital loss
[the balance of the § 1244 loss ($80,000 – $50,000)] (30,000)
Equals: net long-term capital loss before limitation (22,000)
Less: long-term capital loss deduction (limited to $3,000; $19,000 LTCL carryover) ($3,000)
Adjusted gross income $27,000
Net long-term capital loss carryover ($22,000 - $3,000) ($19,000)
Next year’s AGI
Salary $90,000
Long-term capital gain $10,000
Less: net long-term capital loss carryover ($22,000 – $3,000) (19,000)
Equals: net long-term capital loss (before limitation) (9,000)
Less: deductible long-term capital loss (limited to $3,000; $6,000 LTCL carryover) (3,000)
Adjusted gross income $87,000
Total AGI
Current year $27,000
Next year 87,000
Total $114,000
Sell half of the stock this year and half next year:
Current year’s AGI
Salary $80,000
Less: ordinary loss (§ 1244 stock) (40,000)
Long-term capital gain $8,000
Less: no capital loss (There is no balance of § 1244 stock loss) 0
Equals: taxable net long-term capital gain 8,000
Adjusted gross income $48,000
Next year’s AGI
Salary $90,000
Less: ordinary loss (§ 1244 stock) (40,000)
Long-term capital gain $10,000
Less: no capital loss (There is no balance of § 1244 stock loss) 0
Equals: taxable net long-term capital gain 10,000
Adjusted gross income $60,000
Total AGI
Current year $48,000
Next year 60,000
Total $108,000
Heather owns a two-story building. The building is used 40% for business use and 60% for personal use. During 2016, a fire caused major damage to the building and its contents. Heather purchased the building for $800,000 and has taken depreciation of $100,000 on the business portion. At the time of the fire, the building had a fair market value of $900,000. Immediately after the fire, the fair market value was $200,000. The insurance recovery on the building was $600,000. The contents of the building were insured for any loss at fair market value. The business assets had an adjusted basis of $220,000 and a fair market value of $175,000. These assets were totally destroyed. The personal use assets had an adjusted basis of $50,000 and a fair market value of $65,000. These assets were also totally destroyed.
If an amount is zero, enter “0”.
Determine the business and personal gain or loss in regard to the building and its contents.
Total Business
Portion (40%) Personal
Portion (60%)
Cost of building $800,000 $320,000
($800,000 x 40%)
$480,000
($800,000 x 60%)
Less: Depreciation 100,000 100,000 (given) 0*
Adjusted basis $700,000 $220,000
($320,000 – $100,000)
$480,000
($480,000 – 0)
Loss on building:
Loss ($900,000 – $200,000) $700,000 $220,000** $420,000
Less: Insurance reimbursement $600,000 (240,000) (360,000)
Equals: (Loss) or gain $20,000 ($60,000)
Business contents loss $220,000
Less: Insurance recovery (175,000)
Loss $45,000
Personal casualty gain*** $15,000
Personal casualty loss—building ($60,000)
Decline in fair market value $700,000 $280,000a $420,000b
* No depreciation is allowed on the personal-use part of the building.
** Adjusted basis is less than the decline in FMV of $280,000 ($700,000 x 40%).
***$15,000 = $65,000 insurance proceeds – $50,000 adjusted basis.
a ($700,000 x 40%)
b ($700,000 x 60%)
Business Portion Personal Portion Loss on building is the lesser of the adjusted basis or decline in FMV $220,000 ($220,000 versus $280,000) $420,000 ($480,000 versus $420,000) Less: Insurance reimbursement 240,000 ($600,000 x 40%) 360,000 ($600,000 x 60%) Gain on business portion $20,000 Loss on personal portion $60,000 Loss on business contents $220,000 Less: Insurance recovery (175,000) Loss on business contents $45,000 Loss on personal contents $50,000 Less: Insurance recovery 65,000 Gain on personal contents $15,000
Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2016, the proprietorship has QPAI of $400,000. Sarah’s modified AGI was $350,000. The W–2 wages paid by the proprietorship to employees engaged in the qualified domestic production activity were $60,000.
Sarah’s domestic production activities deduction (DPAD) for the year 2016 is $
Answer: $30,000.
The domestic production activities deduction (DPAD) is based on the following formula: 9% x lesser of qualified production activities income (QPAI) or taxable (or modified adjusted gross) income. Taxable income is determined without regard to the DPAD. In the case of an individual (a sole proprietorship or an owner of a flow-through entity), modified adjusted gross income is substituted for taxable income.
An important limitation is that the amount of the DPAD cannot exceed 50% of certain W–2 wages paid by the taxpayer during the tax year. The purpose of this limitation is to preserve U.S. manufacturing jobs and to discourage their outsourcing. An employer previously included wages paid to all workers during a tax year, and not just the wages of the employees engaged in qualified production activities. However, as a result of a recent statutory change, an employer is permitted to include only those W–2 wages paid to employees engaged in qualified production activities.
Sarah’s DPAD is $30,000 [9% x $350,000 (the smaller of $350,000 modified AGI or $400,000 QPAI)] [not to exceed $30,000 (50% x $60,000 of W–2 wages)].
Sam, age 45, is single. For 2016, he has the following items:
Business income $70,000 Business expenses 75,000 Alimony paid 12,000 Interest income 3,000 Itemized deductions 8,000
If required, use the minus sign to indicate a negative AGI or a loss.
a. Determine Sam’s taxable income (or loss) for 2016.
Adjusted gross income/loss $
-14,000
Less: Itemized deductions
8,000 Less: Personal exemption 4,050 Loss $ -26,050 Sam's NOL for 2016 is $
Taxable income ($26,050)
Add: Personal exemption 4,050
Excess of nonbusiness deductions over nonbusiness income [($8,000 + $12,000) – $3,000] 17,000
NOL ($5,000)
