Questions and Answers of Concepts In Federal Taxation

LO3 Which entity(ies) is/are subject to double taxation?
LO3 Why is it important for an owner to also be classified as an employee of the business for tax purposes?
LO3 Which entity form(s) recognize owners as employees of the business?
LO3What is the tax treatment for a guaranteed payment?
LO4 Is all compensation that is paid to an employee deductible?Discuss the circumstances in which employee compensation cannot be deducted.
LO4 What is the tax treatment of health insurance premiums paid on behalf ofa. A sole proprietor?b. A partner?c. An owner-employee of a corporation?d. An owner-employee of an S corporation?
LO5 What is the rationale for not taxing transfers of property in exchange for an ownership interest?
LO5 What are the tax consequences of receiving an ownership interest in an entity in exchange for services rendered to the entity?
LO5 Compare the requirements for a tax-free exchange of property for an ownership interest in a partnership with the requirements for a corporation.
LO5 How do liabilities affect the basis of a partner’s interest in a partnership?
LO5 Explain the difference between a recourse debt and a nonrecourse debt.
LO5 Why are partners allowed to add their share of partnership debts to their bases?
LO5 What is the tax effect of a corporation’s assuming the debt of a shareholder on property that is exchanged for an ownership interest in the corporation?
LO5 How do S corporation liabilities affect the basis of an S corporation shareholder’s stock?
LO7 What is the difference between a calendar year and a fiscal year?
LO7 Why are restrictions placed on the selection of a tax year by partnerships and S corporations?
LO7 Which types of tax entities generally cannot elect to use the cash method of accounting?
LO2 Herman, who is unmarried and has 2 dependent children, owns and operates a Communication Skills used car lot as a sole proprietorship. The net income from the business is consistently$120,000
LO3 Return to the facts of problem37. Upon giving your tax calculation results to Polly, Communication Skills you learn that CopyEdit’s primary business is the provision of copyediting services to
LO3 Kelly, Gwen, and Tuoi incorporated their accounting business and own all its outstanding stock. During the current year, the corporation’s taxable income is $300,000 after deducting salaries of
LO3 Drew is the sole owner of Morris, Inc., a corporation. Morris’s net income for the current year is $150,000 before considering Drew’s $85,000 salary. Assume Drew is single and has income from
LO3 Antonio and Michaela are equal partners in A&M Booking Services. Antonio manages the business and receives $40,000 per year for his management services. He and Michaela each withdraw $30,000 in
LO3 Estel and Raymond own the GoalLine Partnership. Estel owns 70% of the business.She provided the capital for it and consults with Raymond on overall business strategy. Raymond is responsible for
LO3,4 Colleen, Rosemary, and Suzanne own a software development firm. Colleen owns 45% of the business, Rosemary 30%, and Suzanne 25%. The net operating income from the business is $220,000. Assume
LO5 Myron, Al, and Janda make the following transfers from their sole proprietorships to a newly formed business, each receiving a 1/3 ownership interest.In addition, the business borrows $60,000
LO7 Which accounting method must each of the following taxpayers use?a. Fax, Inc., is an S corporation wholly owned by Helena. She uses a calendar year to report her income.b. Assume the same facts
A former clergyman with a degree in counseling decides to go into business for himself.He contracts with four large corporations to provide alcohol, drug, and psychological analysis for their
Raquel is an employee of Jones Company and owns a 30% interest in the company.Her salary is $44,000. She also receives a $10,000 cash distribution from Jones.During the current year, Jones’s
Rolf owns 20% of Chaminade Corporation. During the current year, Chaminade reports operating income of $240,000 and pays $60,000 in cash dividends.
Miriam is a self-employed computer consultant. Her business nets $120,000 annually and she takes $85,000 of the earnings in salary. Miriam is considering incorporating her computer consulting
Robbie is the vice president of Mailer Corporation. He owns 40% of Mailer, which is organized as an S corporation. Robbie’s salary is $75,000, and he receives group-term life insurance and health
Rikki and Rhonda are equal owners of LilMark Corporation. To expand their operations, Marsha will contribute a building worth $80,000 for which she will receive a onethird ownership interest in the
Ben and Pete form a corporation to run a real estate investment management company.Ben contributes cash of $40,000 to the corporation in exchange for 50% of its stock. Pete obtains his 50% ownership
Ariel and Mia agree to combine their business assets to form the A&M corporation.Ariel’s business assets are worth $135,000 and have a basis of $80,000. Mia’s business assets are worth $200,000,
The IRS has established procedures to simplify taxpayers’ choice of entity for tax Internet Skills purposes. The procedures are referred to as the ‘‘check-the-box’’ regulations. Use the
Recently, there has been a lot of discussion about what is commonly referred to as‘‘corporate tax shelters’’ as a means of corporations’ avoiding paying income tax. Discussions in Congress
Assume that you are a CPA and a tax specialist. Your clients include Ale and Grains, Communication Skills Inc., an S corporation, and Gustav and Heidi Lager, a married couple who are shareholders and
LO1 What is is the difference between a personal exemption and a dependency exemption? Are all taxpayers allowed a personal exemption?
LO1 What are the five tests that must be met for an individual to be considered a dependent as a qualifying child? as a qualifying relative? Briefly explain each test.
LO1 Which parent is entitled to claim the dependency exemption for a child when the parents are divorced? Can the other parent ever claim the dependency exemption?
LO1 What is a multiple support agreement? When is a multiple support agreement necessary?
LO2 Why is a taxpayer’s filing status important?
LO2 What is a surviving spouse? Explain the tax benefit available to a surviving spouse.
LO2 Under what circumstances can a married person file as a head of household?
LO3 What is (are) the main difference(s) between deductions for AGI and deductions from AGI?
LO3 What is the standard deduction? Explain its relationship to a taxpayer’s itemized deductions.
LO3 One general requirement for deduction is that the expense be the taxpayer’s, not that of another. Is this always true? Explain.
LO4 Explain the limitations placed on deductions for medical expenses.
LO4 What is an ad valorem tax? What is the significance of an ad valorem tax?
LO4 Which types of interest are deductible as itemized deductions? What limitations (if any) are imposed on the deduction?
LO4 In what year(s) are points paid to acquire a loan deductible? Explain.
LO4 Why is interest paid on a loan used to purchase municipal bonds not deductible?
LO4 What limits are placed on deductions for charitable contributions?
LO4 Explain how the deduction allowed for a charitable contribution of ordinary income property is different from the deduction for a donation of long-term capital gain property.
LO4 What limitations are placed on miscellaneous itemized deductions?
LO5 The itemized deduction and exemption phaseouts are an example of what concept? Explain.
LO5 Explain the operation of the itemized deduction phase-out. What stops a taxpayer from losing all itemized deductions under the phase-out?
LO6 What is the standard deduction amount for a dependent?Underwhat conditions can a dependent claim the same standard deduction as a single individual who is not a dependent?
LO6 Why did Congress enact the ‘‘kiddie tax’’?
LO7 Can all taxpayers who claim a child as a dependent receive a child tax credit for that child? Explain.
LO7 What are the general criteria for eligibility for the earned income credit?
LO7 Is the child credit refundable? Explain.
LO7 Does the child-care credit help promote a progressive tax rate structure? Explain.
LO7 Compare and contrast the American Opportunity Tax Credit with the Lifetime Learning Tax Credit.
LO8 What determines who must file a tax return?
LO3 Determine the maximum deduction from AGI for 2010 for each of the following taxpayers:a. Pedro is single and maintains a household for his father. His father is not a dependent of Pedro’s.
LO3 Determine the maximum deduction from AGI for 2010 for each of the following taxpayers:a. Selen is single and has itemized deductions for the year of $5,800, of which$1,000 are for real estate
LO3,6 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$12,300.a. What is Hongtao’s taxable income
LO3,6 Arthur and Cora are married and have 2 dependent children. For 2010, they have a gross income of $95,000. Their allowable deductions for adjusted gross income total $4,000, and they have total
LO4 Rebecca and Irving incur the following medical expenses during the current year:They receive $4,000 in reimbursements from their insurance company of which $300 is for the cosmetic surgery. What
LO4 Lian is injured in an automobile accident this year. She is hospitalized for 4 weeks and misses 3 months of work after getting out of the hospital. The costs related to her accident areLian’s
LO4 Paula is single and lives in South Carolina, which imposes a state income tax.During 2009, she pays the following taxes:a. If Paula’s adjusted gross income is $35,000, what is her allowable
LO4 Jesse is a resident of New Jersey who works in New York City. He also owns rental property in South Carolina. During 2010, he pays the following taxes:During 2010, Jesse’s 2008 New York State
LO4 Simon is single and a stockbroker for a large investment bank. During 2010, he has withheld from his paycheck $2,250 for state taxes and $400 for city taxes. In June 2011, Simon receives a state
LO4 Frank and Liz are married. During 2010, Frank has $2,800 in state income taxes withheld from his paycheck, and Liz makes estimated tax payments totaling$2,200. In May 2010, they receive a state
LO4 Rocco owns a piece of land as investment property. He acquired the land in 1987 for $18,000. On June 1, 2010, he sells the land for $80,000. As part of the sale, the buyer agrees to pay all of
LO4 Marjorie is single and has the following investment income:She pays investment interest expense of $15,000. The interest expense relates to all the assets in her portfolio.a. What is Marjorie’s
LO4 Stoycho and Selen are married and have the following investment income for 2009 and 2010:Their adjusted gross income before considering the investment income is $84,000 in 2009 and $73,500 in
LO4Miguel is a successful businessman who has been approached by St. Kilda Uni-versity to make a donation to its capital campaign. He agrees to contribute $75,000, but he is unsure which of the
LO4 Kweisi incurs the following employment-related expenses during the year:His employer maintains an accountable reimbursement plan and reimburses him $4,500 for his expenses. He also has $1,600 of
LO4 Trevor is an English professor at Clayton College. His adjusted gross income for the year is $58,000, including $5,000 he won at the racetrack. Trevor incurs the following during the year:What is
LO5 Orley is a single individual with no dependents who has an adjusted gross income of $184,300 in 2010. Orley’s itemized deductions total $19,400, which includes $1,200 in deductible medical
LO5 Jeff and Marion are married with 3 dependents. Their adjusted gross income in 2010 is $191,300. Their itemized deductions total $34,600, including $4,900 in investment interest.a. What is their
LO6 For each of the dependents in problem 63, calculate the income tax on their taxable income. In each case, assume that their parents’ taxable income is$128,000.
LO8 Determine whether each of the following taxpayers must file a return for 2010:a. Jamie is a dependent who has wages of $3,650.b. Joel is a dependent who has interest income of $1,200.c. Martin is
Kahn is 21 years old and a full-time student. He lives at home with his parents and pays less than half of his support. During the year, he earns $5,900 working as a sales clerk in a department store.
Lois is single. She provides more than 50% of the support for her mother, who lives in a nursing home. Her mother receives $4,000 from Social Security and $7,000 in dividends.
Hector is 66 years of age. During the year, his wife dies.
Myrth is 67, single, and has poor hearing. She pays $300 for special equipment attached to her phones to amplify a caller’s voice.
Jacqueline is single. In June 2010, she receives a refund of $250 from her 2009 state tax return. Her 2009 itemized deductions were $8,000. In October 2010, her 2008 state tax return is audited, and
Dwight purchases a new home costing $100,000 in the current year. He pays$15,000 down and borrows the remaining $85,000 by securing a mortgage on the home. He also pays $2,000 in closing costs and
Donna bought her home several years ago for $200,000. She paid $20,000 down on the purchase and borrowed the remaining $180,000. When the home is worth$280,000 and the balance on the mortgage is
Deidre is single and has dividend income of $7,500 and a $6,000 long-term capital gain. She pays $9,000 of investment interest expense. The interest expense relates to all the assets in her
Jose donates stock worth $20,000 to the United Way. He purchased the stock several years ago for $8,000. His adjusted gross income is $60,000.
Royce received an antique watch as a gift from his grandfather. The fair market value of the watch is $1,250. The watch has been missing all year and is not covered by insurance.
Casandra and Gene are married and have a daughter who is a junior at State University.Their adjusted gross income for the year is $78,000, and they are in the 25%marginal tax bracket. They paid their
With the recent changes in the tax law definition of a dependent, it is interesting to compare how the United States definition of a dependent differs from others throughout the world. Go to the
The Internet is a useful resource for tax planning. One useful tax planning tool can be found at the Bloomberg personal finance Web site (http://www.bloomberg.com/invest/calculators/tax1040.html). At
Using the information below, prepare a spreadsheet calculating the taxable income and tax liability for all taxpayers with adjusted gross income below $100,000.The spreadsheet should be flexible
Joe and Sharon Racca are married and have two children. Joe works as a sales man- Tax Form ager for a national pharmaceutical company and Sharon is a nurse. They own a vacation home in New Hampshire

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