Questions and Answers of Concepts in Federal Taxation 2021

In 2020, Sondra Corporation recognizes $18,000 in Section 1231 gains and 10,000 in Section 1231 losses. In 2015, Sondra reported $12,000 in Section 1231 losses and no Section 1231 gains. No other
Dawn started her own rock band on January 2, 2018. She acquired all her equipment on January 2, 2018, and did not dispose of any of it before 2020. On April 15, 2020, the band’s amplifiers,
Rhinelander Corporation has the following net Section 1231 gains and losses for 2015 through 2019:2015 ........$ 8,0002016 .........(6,000)2017 .......(13,000)2018 ........11,0002019 ........15,000a.
The Gladys Corporation buys office equipment costing $1,114,000 on May 12, 2020. In 2023, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000 on
Avalon, Inc., buys equipment costing $150,000 in 2017, and sells it in 2020. Avalon deducts $94,000 in depreciation on the equipment before the sale. What is the character of the gain or loss on the
Anton purchases a building on May 4, 2002, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2020, for $270,000. What is the character
Thuy bought a rental house in 2012 for $75,000. In 2020, she sells it for $86,000. Thuy properly deducted $22,000 in depreciation on the house before its sale.a. What is the amount and character of
Marino inherits antique pottery from the estate of his grandmother on March 10, 2020. He immediately sells the pottery for $15,000 to a collector who had made the offer to the executor of the estate
Carter owns 1,200 shares of Echo Corporation stock. He purchased 400 shares of the stock on December 23, 2018, for $48,000, and the other 800 shares on October 31, 2019, for $84,000. On August 14,
Martina purchases 10,000 shares of Monrovia Corporation stock for $90,000 on November 14, 2019. On June 18, 2020, Monrovia declares bankruptcy. Because the corporation’s assets are less than its
Tawana purchased real property in 2018 at a cost of $200,000. In 2020, she is experiencing cash-flow problems and sells the property for $220,000. The adjusted basis of the property is $185,000.
In 2019, Nuts & Seeds Inc., purchased a new “high-tech” shelling machine from Soft-Core Corporation. Nuts and Seeds paid $1,000 in cash and gave Soft-Core a $29,000 note. The note is
Return to the facts of problem 48. Assume that Yorgi has a net capital loss of $80,000 from her other capital asset transactions in 2020. What is the effect of the sale of the stock on Yorgi’s tax
Yorgi purchases qualified small business stock in Gnu Company, Inc., on September 15, 2008, for $50,000. She sells the shares for $400,000 on December 30, 2020. The stock retains its qualified small
For each of the following capital asset dispositions, determine whether the taxpayer has realized a gain or loss and whether that gain or loss is short-term or long-term:a. Larry’s aunt June dies
For each of the following capital asset dispositions, determine whether the taxpayer has realized a gain or loss on the disposition and whether that gain or loss is short-term or long-term.a. Ari
Mort begins investing in stocks in 2019. Listed here are his stock transactions for 2019 and 2020. Determine Mort’s gain or loss on his stock transactions for 2019 and 2020. In addition, for each
Spencer purchases 100 shares of Reality Virtual Corporation common stock for $1,200 on July 30, 2020. He sells 75 shares of this stock for $525 on December 27, 2020. On January 12, 2021, Spencer
During the current year, James sells some land he purchased in 2015 as an investment. He had paid $4,000 in cash and borrowed $22,000 to buy the land. He had paid legal fees of $440 and commissions
Steem Advertising Corporation acquires 100 laptop computers in 2019 for its account executives to use. Steem pays $300,000 for the computers. You are the newly hired CPA and you expect to advise
Joan is interested in buying a special diagnostic machine for use in her medical practice. The machine will cost her $16,000 and will have a $2,000 salvage value at the end of its 8-year life. Joan
During 2020, Schottenheim Corporation buys laptop computers and desktop computers to use in its general sales offices. Schottenheim buys laptops for $42,000 on March 29, additional laptops for
Bailey Construction Company purchases a bulldozer on December 20, 2020. An ice storm delays delivery until December 24. Because of the holidays, the equipment is not used until January 2.
On April 18, 2020, Petros buys all the assets of Brigid’s Muffler Shop. Included in the purchase price of $295,000 is a payment of $20,000 to Brigid not to open a competing shop in the state for a
On June 2, 2020, Lokar Corporation purchases a patent for $68,000 from the inventor of a new extrusion process. The patent has 12 years remaining on its legal life. Also, Lokar purchases
On May 15, 2020, Lurlene buys a used automobile for $20,000. She drives it 9,000 miles for business and 3,000 miles for personal trips during the year. What is Lurlene’s maximum cost recovery for
On June 1, 2020, Kirsten buys an automobile for $60,000. Her mileage log for the year reveals the following: 20,000 miles for business purposes; 7,000 miles for personal reasons; and 3,000 miles
On March 1, 2020, Babar Inc., pays $1,200,000 for a store building, moves into the building, and begins business on April 1. Babar properly allocates $1,000,000 of its cost to the building and
Anton purchases a building on May 4, 2003, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2020, for $270,000. What is his gain or
Stan purchases machinery costing $100,000 for use in his business in 2020. The machinery is 7-year MACRS property and has an ADS life of 12 years. Complete a depreciation schedule using the regular
In July 2020, Surecut Sawmills buys office furniture for $1,100,000. Assume that Surecut elects not to claim bonus depreciation.a. Compare cost-recovery deductions using maximum, minimum, and
In June 2020, Copper Kettle, Inc., purchases duplicating equipment for $541,000.a. Compare cost-recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the
The Gladys Corporation buys office equipment costing $1,114,000 on May 12, 2020. In 2023, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000 on
Baker, Inc., purchases office furniture (7-year MACRS property) costing $1,051,000 and a computer system (5-year MACRS property) costing $1,051,000 in 2020. Assuming that Baker elects not to claim
Dikembe purchases 1,000 breeding hogs for $1,124,000 in April 2020.a. What is his maximum 2020 cost-recovery deduction for the hogs?b. Dikembe’s farming operation incurs a net loss this year and
Kris starts a new business in 2020. She purchases 7-year MACRS property costing $12,000. Her business income before any cost-recovery deductions is $8,000. Kris does not want to claim bonus
Larry purchases machinery for his business (7-year MACRS property) on April 1 at a cost of $1,057,000. On June 1, he spends $84,000 for equipment (5-year MACRS property). Larry does not want to claim
For each of the dependents in problem 44, calculate the income tax on their taxable income. The parents’ marginal tax rate is 24% in each part.Data from Problem 44Determine the taxable income of
Mona works for Leonardo Corporation as a sales representative. Leonardo gives her a travel allowance of $350 per month. During 2020, she spends the following amounts on valid travel
Simon is single and a stockbroker for a large investment bank. During 2020, he has withheld from his paycheck $2,250 for state taxes and $400 for city taxes. In June 2021, Simon receives a state tax
Frank and Liz are married. During 2020, Frank has $2,800 in state income taxes withheld from his paycheck, and Liz makes estimated tax payments totaling $2,200. In May 2021, they receive a state tax
Rocco owns a piece of land as investment property. He acquired the land in 1995 for $18,000. On June 1, 2020, he sells the land for $80,000. As part of the sale, the buyer agrees to pay all of the
Robin is single and purchases a new home for $80,000 in 2020. She pays $8,000 down and borrows the remaining $72,000 by securing a mortgage on the home. Robin pays $1,750 in closing costs, $1,600 in
Astrid originally borrowed $600,000 to acquire her home in 2012. When the balance on the original mortgage is $540,000, she purchases a ski chalet by borrowing $500,000, which is secured by a
Determine the taxable income of each of the following dependents for 2020:a. Louis is 12 and receives $1,250 in interest income.b. Jackson is 16. He earns $2,050 from his newspaper route and receives
Calculate the 2020 tax liability and the tax or refund due for each situation:a. Mark is single with no dependents and has a taxable income of $60,000. He has $9,200 withheld from his salary for the
Determine the total allowable 2019 earned income credit in each of the following situations:a. Judy is single and earns $6,500 in salary for the year. In addition, she receives $3,500 in unemployment
Determine the total allowable 2019 earned income credit in each of the following situations:a. Rina is single and earns $6,800 in salary for the year. In addition, she receives $2,200 in unemployment
Determine whether each of the following taxpayers must file a return for 2020:a. Jamie is a dependent who has wages of $4,150.b. Joel is a dependent who has interest income of $1,200.c. Martin is
Determine whether each of the following taxpayers must file a return for 2020:a. Felicia is a dependent who has wages of $6,350 and interest income of $225.b. Jason is a dependent who has interest
Jacqueline is single. In June 2020, she receives a refund of $250 from her 2019 state tax return. Her 2019 itemized deductions were $8,000. In October 2020, her 2018 state tax return is audited, and
Troy’s 2018 tax return is audited. The auditor determines that Troy inadvertently understated his ending inventory in calculating his business income. The error creates an additional tax liability
Tom, an executive for a large corporation, enjoys the challenge of preparing his tax return. He is aggressive in preparing his return and searches through all the available publications to reduce his
Determine the adjusted basis of each of the following assets:a. André purchased a parcel of land 3 years ago for $17,000. In the current year, the adjoining property owner sues him, claiming that
Carl Corporation acquires a business use warehouse for $200,000 on January 2, 2013. From 2013 through 2018, Carl Corporation properly deducts a total of $30,000 in depreciation. Carl incurs a net
Hannibal owns a farm. He purchases a tractor in 2016 at a cost of $25,000. Because 2016 is a bad year, he does not deduct any depreciation on the tractor in 2016. He sells the tractor in 2020 for
Erin purchases 2 acres of land in 2020 by paying $4,000 in cash at closing and borrowing $40,000 to be repaid at $8,000 per year for the next 5 years with interest on the unpaid balance at 10
On October 1, 2020, Mitzo Realty Partnership purchases a lot for future development for $60,000 from the Elm Trust. The trust’s adjusted basis in the lot is $20,000. Real estate taxes attributable
On January 5, 2020, Henry purchases 500 shares of Wichmann, Inc., common stock at a cost of $24,700. On April 1, 2020, he purchases an additional 300 shares for $19,500. On November 13, 2020,
Eric owns 600 shares of Razor, Inc., stock for which he paid $3,500 in 2016. On December 14, 2020, he sells the 600 shares for $4 per share and pays a commission of $200 on the sale. On January 3,
On November 14, 2020, Noel sells 2,000 shares of Marker, Inc., stock for $6,000. He had purchased the stock 2 years earlier for $10,000. Because the price of the stock continued to drop, Noel
Harry and Freddi, a married couple, purchased 100 shares of Opaque Mutual Fund in 2005 for $2,800 as joint tenants with the right of survivorship. Freddi dies during the current year. The fair market
What is the purpose of the acquisition-and disposition-year convention?
Firefly, Inc., acquires business equipment in July 2020 for $2,605,000. Assume that Firefly elects not to claim bonus depreciation.a. What is Firefly’s maximum Section 179 deduction for 2020?
In 2020, Terrell, Inc., purchases machinery costing $2,618,000. Its 2020 taxable income before considering the Section 179 deduction is $1,100,000. Assume that Terrell elects not to claim bonus
In 2020, Theo purchases $16,000 of Section 179 property for use in his delivery business. During 2020, he has $12,000 in taxable income from his business. Assume that Theo elects not to claim bonus
During 2020, Belk Corporation purchases $70,000 worth of equipment for use in its business. Belk’s current taxable income before considering the Section 179 deduction is $26,000. Assume that Belk
Brad is a shareholder and full-time employee of an S corporation. During 2020, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In
The Browser Company purchases a computer in August 2020 for $12,000. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim the maximum
The Browser Company purchases a computer in December 2020 for $12,000. This is the only depreciable personal property acquired during the year. Browser elects not to claim bonus depreciation and does
Jesse is a resident of New Jersey who works in New York City. He also owns rental property in South Carolina. During 2020, he pays the following taxes:New Jersey state estimated tax payments
Paula lives in Arkansas, which imposes a state income tax. During 2020, she pays the following taxes:Federal tax withheld .........................5,125State income tax withheld
Hongtao is single and has a gross income of $89,000. His allowable deductions for adjusted gross income are $4,200, and his itemized deductions are $19,000.a. What is Hongtao’s taxable income and
Determine the maximum deduction from AGI for 2020 for each of the following taxpayers:a. Selen is single and has itemized deductions for the year of $12,900. In addition, Selen’s mother lives with
Determine the 2020 filing status in each of the following situations:a. Michaela and Harrison decide to separate on October 12, 2020. Before filing their 2020 tax return on February 18, 2021,
Why is a taxpayer’s filing status important?
Anthony owned a 2018 Luxuro automobile that had a fair market value of $78,000. He uses the car 90% for business. His son James, who is 19, borrows the car without his father’s knowledge and totals
Suzanne is married and is the sole owner of Laidlaw Corporation. When the corporation was established in 2009, she received 10,000 shares of qualified small business stock in exchange for her
Alicia, Bob, and Carol are equal partners in Dunning Law Associates. In 2014, Alicia, in an attempt to maximize the firm’s return on its investment portfolio, encourages her partners to acquire
On January 1, 2020, Brenda acquires 200 shares of Disney stock for $8,000. She sells the 200 shares on September 2, 2020, for $30 per share. On September 23, 2020, Brenda acquires 400 shares of
Zoriana sells stock that she acquired in 2016 for $7,500. Her basis in the stock is $14,000. She has a $2,000 long-term capital loss carryover from 2019.
The Readyhough Corporation was incorporated in 2012. During 2019, the corporation had operating income of $80,000. Because of a strike at its major supplier, the corporation had an operating loss of
Leona owns 300 shares of Ross Industries. She acquired the shares on February 17, 2018, for $6,500. On September 17, 2020, she acquires another 200 shares of Ross for $4,800. Two weeks later, a
Katelyn purchased 300 shares of Condine, Inc., stock in 2018 for $9,000. During 2020, she sells 200 shares of Condine to her brother, Jon, for $3,600 and the remaining 100 shares to an unrelated
Sonya, who is single, owns 20,000 shares of Malthouse Corporation stock. She acquired the stock in 2017 for $75,000. On August 12, 2020, Sonya’s father tells her of a rumor that Malthouse will file
Newcastle Corporation was incorporated in 2019. For the years 2019 through 2021, Newcastle has the following net capital gain or loss.If Newcastle is in the 21 percent marginal tax bracket for each
Bongo Corporation was incorporated in 2018. It had no capital asset transactions in 2018. From 2019 through 2022, Bongo has the following capital gains and losses:Assuming that Bongo’s marginal tax
Labrador Corporation has total capital gains of $18,000 and total capital losses of $35,000 in 2020. Randy owns 25 percent of Labrador’s outstanding stock. What is the effect on Labrador’s and
Goldie sells 600 shares of Bear Corporation stock for $9,000 on December 14, 2020. She paid $27,000 for the stock in February 2017.a. Assuming that Goldie has no other capital asset transactions in
During 2020, Yoko has total capital gains of $8,000 and total capital losses of $16,000.a. What is the effect of the capital gains and losses on Yoko’s 2020 taxable income? Explain.b. Assume that
Return to the facts of problem 36. At the end of 2021, Mason sells the passive activity that generated the losses for $16,000. What is the effect on his taxable income if his basis in the activity
Mason owns a passive activity that generates a loss of $14,000 in 2019, $12,000 in 2020, and income of $4,000 in 2021. In 2020, Mason purchases a second passive activity that has passive income of
Katrina is the sole owner of rental real estate that produces a net loss of $18,000 in 2019 and $22,000 in 2020 and income of $9,000 in 2021. Her adjusted gross income, before considering the rental
Mort is the sole owner of rental real estate that produces a net loss of $18,000 in 2019 and $20,000 in 2020 and income of $6,000 in 2021. His adjusted gross income, before considering the rental
Habiby, Inc., began operations in 2019 and has the following income and expenses for 2019 through 2022.a. What is the amount of tax that Habiby should pay each year?b. How much would Hadley
The Graves Corporation was incorporated in 2019 and incurred a net operating loss of $35,000. The company’s operating income in 2020 was $47,000. Because of a downturn in the local economy, the
How are the new net operating loss rules different than the old rules? Are the rules better or worse for the taxpayer?
In 2018, Samantha loaned her friend Lo Ping $15,000. The loan required Lo Ping to pay interest at 8 percent per year and to pay back the $15,000 loan principal on July 31, 2020. Lo Ping used the loan
Brad graduated from law school in Detroit in May 2019. He had lived in the area for 5 years before enrolling in law school. Following his graduation, he prepared for the Michigan bar exam, which he
Scott is single and wants to maximize his retirement income. He contributes the maximum allowable to his company’s qualified pension plan. His adjusted gross income for the year is $80,000.Identify

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