Questions and Answers of Essentials Federal Taxation

Are taxpayers allowed to claim depreciation on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one year to
Discuss the method used to determine the amount of organizational expenditures or start-up costs that may be immediately expensed in the year a taxpayer begins business.
Emily purchased a building to store inventory for her business. The purchase price was $760,000. Emily also paid legal fees of $300 to acquire the building. In March, Emily incurred $2,000 to repair
Brittany started a law practice as a sole proprietor. She owned a computer, printer, desk, and file cabinet she purchased during law school (several years ago) that she is planning to use in her
Way Corporation disposed of the following tangible personal property assets in the current year. Assume that the delivery truck is not a luxury auto. Calculate Way Corporation€™s 2018
On November 10 of year 1 Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,200,000; $300,000 was allocated to the basis
Evergreen Corporation (calendar-year end) acquired the following assets during the current year:*The delivery truck is not a luxury automobile.a. What is the allowable MACRS depreciation on
Convers Corporation (calendar-yearend) acquired the following assets during the current tax year:*The delivery truck is not a luxury automobile. In addition to these assets, Convers installed new
AMP Corporation (calendar-year-end) has 2018 taxable income of $900,000 for purposes of computing the §179 expense. During 2018, AMP acquired the following assets:a. What is the maximum amount
Assume that TDW Corporation (calendar-year-end) has 2018 taxable income of $650,000 for purposes of computing the §179 expense. The company acquired the following assets during 2018:a. What is
Assume that Timberline Corporation has 2018 taxable income of $240,000 for purposes of computing the §179 expense. It acquired the following assets in 2018:a. What is the maximum amount of
Dain€™s Diamond Bit Drilling purchased the following assets this year. Assume its taxable income for the year was $53,000 for purposes of computing the§179 expense (assume no bonus
Assume that ACW Corporation has 2018 taxable income of $1,000,000 for purposes of computing the §179 expense. The company acquired the following assets during 2018 (assume no bonus
Chaz Corporation has taxable income in 2018 of $312,000 for purposes of computing the §179 expense and acquired the following assets during the year:What is the maximum total depreciation that
Woolard Supplies (a sole proprietorship) has taxable income in 2018 of $240,000 before any depreciation deductions (§179, bonus, or MACRS) and placed some office furniture into service during
Assume that Sivart Corporation has 2018 taxable income of $1,750,000 for purposes of computing the §179 expense and acquired several assets during the year. The delivery truck was acquired in a
Acorn Construction (calendar-year-end C corporation) has had rapid expansion during the last half of the current year due to the housing market€™s recovery. The company has record income
Lina purchased a new car for use in her business during 2018. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum
Tater Meer purchased a new car for use in her business during 2018 for $75,000. The auto was the only business asset she purchased during the year and her business was very profitable. Calculate
Compare and contrast §1245 recapture and §1250 recapture.
Describe the like-kind property requirements for real property for purposes of qualifying for a like-kind exchange. Explain whether land held for investment by a corporation will qualify as like-kind
Franco converted a building from personal to business use in May 2016 when the fair market value was $55,000. He purchased the building in July 2013 for $80,000. On December 15 of this year, Franco
Hart, an individual, bought an asset for $500,000 and has claimed $100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of 32 percent. Answer the questions presented in
Buckley, an individual, began business two years ago and has never sold a §1231 asset. Buckley has owned each of the assets since he began the business. In the current year, Buckley sold the
Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $10,000 §1231 loss on
Independence Corporation needs to replace some of the assets used in its trade or business and is contemplating the following exchanges:Determine whether each exchange qualifies as a like-kind
Longhaul Real Estate exchanged a parcel of land it held for sale in Bryan, Texas, for a warehouse in College Station, Texas. Will the exchange qualify for like-kind treatment?
Metro Corp. traded Land A for Land B. Metro originally purchased Land A for $50,000 and Land A’s adjusted basis was $25,000 at the time of the exchange.What is Metro’s realized gain or loss,
Ken sold a rental property for $500,000. He received $100,000 in the current year and $100,000 each year for the next four years. Of the sales price, $400,000 was allocated to the building and the
Hill Corporation is in the leasing business and faces a marginal tax rate of 21 percent. It has leased a building to Whitewater Corporation for several years. Hill bought the building for $150,000
Two years ago, Bethesda Corporation bought a delivery truck for $30,000 (not subject to the luxury auto depreciation limits). Bethesda used MACRS 200 percent declining balance and the half-year
Hauswirth Corporation sold (or exchanged) a warehouse in year 0. Hauswirth bought the warehouse several years ago for $65,000 and it has claimed $23,000 of depreciation expense against the
WAR (We Are Rich) has been in business since 1985. WAR is an accrual method sole proprietorship that deals in the manufacturing and wholesaling of various types of golf equipment. Hack & Hack
Fizbo Corporation is in the business of breeding and racing horses. Fizbo has taxable income of $5,000,000 other than from these transactions. It has nonrecaptured §1231 losses of $10,000 from 2014
What types of business entities does the U.S. tax system recognize?
For flow-through entities with individual owners, how many times is flow through entity income taxed, who pays the tax, and what is the tax rate?
What is the qualified business income deduction and how does it affect the tax rate on flow-through entity income?
Doug is considering investing in one of two partnerships that will build, own, and operate a hotel. One is located in Canada and one is located in Arizona. Assuming both investments will generate the
Is business income allocated from a flow-through entity to its owner’s self-employment income? Explain.
Assume Congress increases the dividend tax rate to the ordinary tax rate while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income?
Lauren is 17 years old. She reports earned income of $3,000 and unearned income of $6,200. Is it likely that she is subject to the kiddie tax? Explain.
Whitney received $75,000 of taxable income in 2018. All of the income was salary from her employer. What is her income tax liability in each of the following alternative situations?a. She files under
In 2018, Lisa and Fred, a married couple, had taxable income of $300,000. If they were to file separate tax returns, Lisa would have reported taxable income of $125,000 and Fred would have reported
In 2018, Jasmine and Thomas, a married couple, had taxable income of $150,000. If they were to file separate tax returns, Jasmine would have reported taxable income of $140,000 and Thomas would have
Lacy is a single taxpayer. In 2018, her taxable income is $40,000. What is her tax liability in each of the following alternative situations?a. All of her income is salary from her employer.b. Her
Henrich is a single taxpayer. In 2018, his taxable income is $450,000. What is his income tax and net investment income tax liability in each of the following alternative scenarios?a. All of his
In 2018, Sheryl is claimed as a dependent on her parents’ tax return. Sheryl did not provide more than half her own support. What is Sheryl’s tax liability for the year in each of the following
In 2018, Carson is claimed as a dependent on his parents’ tax return. Carson’s parents provided most of his support. What is Carson’s tax liability for the year in each of the following
This year Amber purchased a factory to process and package landscape mulch. Approximately 20 percent of management time, space, and expenses are spent on this manufacturing process.a. At the end of
Brooklyn files as a head of household for 2018. She claimed the standard deduction of $18,000 for regular tax purposes. Her regular taxable income was $80,000. What is Brooklyn’s AMTI?
Sylvester files as a single taxpayer during 2018. He itemizes deductions for regular tax purposes. He paid charitable contributions of $7,000, real estate taxes of $1,000, state income taxes of
In 2018, Nadia has $100,000 of regular taxable income. She itemizes her deductions as follows: real property taxes of $1,500, state income taxes of $2,000, and mortgage interest expense of $10,000
In 2018, Sven is single and has $120,000 of regular taxable income. He itemizes his deductions as follows: real property tax of $2,000, state income tax of $4,000, and mortgage interest expense of
Olga is married and files a joint tax return with her husband. What amount of AMT exemption may she deduct under each of the following alternative circumstances?a. Her AMTI is $390,000.b. Her
Corbett’s AMTI is $600,000. What is his AMT exemption under the following alternative circumstances?a. He is married and files a joint return.b. He is married and files a separate return.c. His
In 2018, Juanita is married and files a joint tax return with her husband. What is her tentative minimum tax in each of the following alternative circumstances?a. Her AMT base is $100,000, all
Steve’s tentative minimum tax for 2018 is $245,000. What is his AMT ifa. His regular tax is $230,000?b. His regular tax is $250,000?
In 2018, Janet and Ray are married filing jointly. They have five dependent children under 18 years of age. Janet and Ray’s taxable income is $2,400,000, and they itemize their deductions as
In 2018, Deon and NeNe are married filing jointly. Deon and NeNe’s taxable income is $1,090,000, and they itemize their deductions as follows: real property taxes of $10,000, charitable
Brooke, a single taxpayer, works for Company A for all of 2018, earning a salary of $50,000.a. What is her FICA tax obligation for the year?b. Assume Brooke works for Company A for half of 2018,
Rasheed works for Company A, earning $350,000 in salary during 2018. Assuming he is single and has no other sources of income, what amount of FICA tax will Rasheed pay for the year?
Alice is single and self-employed in 2018. Her net business profit on her Schedule C for the year is $140,000. What is her self-employment tax liability and additional Medicare tax liability for 2018?
Kyle, a single taxpayer, worked as a free-lance software engineer for the first three months of 2018. During that time,he earned $44,000 of self-employment income. On April 1, 2018, Kyle took a job
Eva received $60,000 in compensation payments from JAZZ Corp. during 2018. Eva incurred $5,000 in business expenses relating to her work for JAZZ Corp. JAZZ did not reimburse Eva for any of these
Trey has two dependents, his daughters, ages 14 and 17, at year-end. Trey files a joint return with his wife. What amount of child credit will Trey be able to claim for his daughters under each of
In 2018, Elaine paid $2,800 of tuition and $600 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband. What is the
In 2018, Laureen is currently single. She paid $2,800 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,800 each for a
In 2018, Amanda and Jaxon Stuart have a daughter who is 1 year old. The Stuarts are full-time students and they are both 23 years old. Their only sources of income are gains from stock they held for
In 2018, Zach is single with no dependents. He is not claimed as a dependent on another’s return. All of his income is from salary and he does nothave any for AGI deductions. What is his earned
For the following taxpayers, determine if they are required to file a tax return in 2018.a. Ricko, single taxpayer, with gross income of $15,000.b. Fantasia, head of household, with gross income of
Reba Dixon is a fifth-grade school teacher who earned a salary of $38,000 in 2018. She is 45 years old and has been divorced for four years. She received $1,200 of alimony payments each month from
John and Sandy Ferguson got married eight years ago and have a seven-year-old daughter, Samantha. In 2018, John worked as a computer technician at a local university earning a salary of $152,000, and
Explain how cost of goods is treated when a business sells inventory.
Whether a business expense is “reasonable in amount” is often a difficult question. Explain why determining reasonableness is difficult, and describe a circumstance where reasonableness is likely
Peggy is a rodeo clown, and this year she expended $1,000 on special “funny” clothes and outfits. Peggy would like to deduct the cost of these clothes as workrelated because she refuses to wear
Troy operates an editorial service that employs two editors. These editors often entertain authors to encourage them to use Troy’s service. This year Troy reimbursed the editors $3,000 for the cost
Describe the record-keeping requirements for deducting business expenses, including mixed-motive expenditures.
Describe the computation of the limit placed on the business interest deduction. Is the disallowed interest ever deductible?
How do casualty loss deductions differ when a business asset, as opposed to a personal-use asset, is completely destroyed?
Compare and contrast when taxpayers are allowed to deduct the cost of warranties provided by others to the taxpayer (i.e., purchased by the taxpayer) and when taxpayers are allowed to deduct the
Michelle operates a food truck. Indicate the amount (if any) that she can deduct as an ordinary and necessary business deduction in each of the following situations and explain your solution.a.
Describe the related-person limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?
Ralph operates a business that acts as a sales representative for a large firm that produces and sells business metals to electronic manufacturers. Ralph contactsmanufacturers and convinces them to
Nicole’s business uses the accrual method of accounting and accounts for inventory with specific identification. In year 0, Nicole received a $4,500 payment with an order for inventory to be
In 2018, Jack is single and has two children, ages 10 and 12. Jack works full-time and earns an annual salary of $195,000 as a consultant.. Jack files as a head of household and does not itemize his
Christopher is a cash-method, calendar year taxpayer, and he made the following cash payments related to his business this year. Calculate the aftertax cost of each payment assuming Christopher has a
Renee operates a proprietorship selling collectibles over the web, and last year she purchased a building for $24 million for her business. This year, Renee’s proprietorship reported revenue of $85
In 2018, for a taxpayer with $50,000 of taxable income, without doing any actual computations, which filing status do you expect to provide the lowest tax liability? Which filing status provides the
Shauna Coleman is single. She is employed as an architectural designer for Streamline Design (SD). Shauna wanted to determine her taxable income for this year. She correctly calculated her AGI.
Read the following letter and help Shady Slim with his tax situation. Assume that his gross income is $172,900 (which consists only of salary) for purposes of this problem.December 31, 2018To the
Felipe, a single taxpayer, is a technology consultant, who operates as a sole proprietorship. Felipe’s net business income is $600,000, he pays wages of $100,000 to his employees, and he has
Katie, a single taxpayer, is a shareholder in Engineers One, a civil engineering company. This year, Katie’s share of net business income from Engineers One is $200,000. Assume that Katie’s
Roquan, a single taxpayer, is an attorney and practices as a sole proprietor. This year, Roquan had net business income of $90,000 from his law practice. Assume that Roquan pays $40,000 wages to his
Amelie, a retired physician, is 66 years old. Determine her standard deduction under the following scenarios.a. Amelie is married to Roget, age 52, and they file married joint.b. Amelie is single.c.
Jackson is 18 years old and has a dog sitting business. Calculate the 2018 standard deduction Jackson will claim under the following independent circumstances.a. Jackson reported $2,000 of earnings
Stephanie is 12 years old and often assists neighbors on weekends by babysitting their children. Calculate the 2018 standard deduction Stephanie will claim under the following independent
Trevor is a single individual who is a cash-method, calendar-year taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $8,000 to charity,
Juanita paid $50,000 of interest on a mortgage on her home (loan of $1,000,000 at 5% interest rate to buy the residence in 2018; $1,200,000 original purchase price and value at purchase) and $6,500
This year, Major Healy paid $40,000 of interest on a mortgage on his home (he borrowed $800,000 to buy the residence in 2015; $900,000 original purchase price and value at purchase), $6,000 of
Jack, who files married separate, has AGI of $45,000 and paid the following taxes this year. Calculate how much Jack can deduct for taxes as an itemized deduction this year.State income tax

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