Questions and Answers of Essentials Federal Taxation

Research Problem 1. Don and Mary Dewey are successful professionals who have a combined AGI of approximately $400,000. Their household includes two children: Debra(age 16) and Van (age 23). Van is
50. LO.1, 3, 7 Terri, age 16, is claimed as a dependent on her parents’ 2013 return. During the year, Terri earned $5,000 in interest income and $3,000 from part-time jobs.a. What is Terri’s
49. LO.1, 3, 7 Paige, age 17, is claimed as a dependent on her parents’ 2013 return, on which they report taxable income of $120,000 (no qualified dividends or capital gains).Paige earned $3,900
48. LO.3, 4, 5 Nadia died in 2012 and is survived by her husband, Jerold (age 44); her married son, Travis (age 22); and her daughter-in-law, Macy (age 18). Jerold is the executor of his wife’s
47. LO.4, 5 Christopher died in 2011 and is survived by his wife, Chloe, and their 18-yearold son, Dylan. Chloe is the executor of Christopher’s estate and maintains the household in which she and
45. LO.5, 6, 9 Roy and Brandi are engaged and plan to get married. During 2013, Roy is a full-time student and earns $9,000 from a part-time job. With this income, student loans, savings, and
43. LO.1, 2, 3, 4, 5, 6 Morgan (age 45) is single and provides more than 50% of the support of Rosalyn (a family friend), Flo (a niece, age 18), and Jerold (a nephew, age 18).Both Rosalyn and Flo
42. LO.1, 2, 3, 4, 5, 6 Charlotte (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
41. LO.4, 9 Walter and Nancy provide 60% of the support of their daughter (age 18) and son-in-law (age 22). The son-in-law (John) is a full-time student at a local university, while the daughter
40. LO.3, 7 Taylor, age 18, is claimed as a dependent by her parents. For 2013, she has the following income: $4,000 wages from a summer job, $1,800 interest from a money market account, and $2,000
20. LO.5, 9 Paul and Sonja, who are married, had itemized deductions of $8,200 and$400, respectively, during 2013. Paul suggests that they file separately—he will itemize his deductions from AGI,
33. LO.3 Kristen, the regional manager for a national hardware chain, is based in Atlanta.During March and April of this year, she has to replace temporarily the district manager in Jackson
2. LO.1, 9 Yolanda is employed but is not reimbursed by her employer for her job-related expenses. If Yolanda always claims the standard deduction, she can never deduct any of these expenses. Do you
1. LO.1, 9 Sophia and Jacob are married and file a joint return. The return for 2012 included a Form 2106 for each of them. The return for 2013, however, included a Form 2106 and a Schedule C. In
LO.11 List and evaluate tax planning ideas related to employee business expenses.
LO.10 Apply the limitations on miscellaneous itemized deductions.
LO.9 Demonstrate the difference between accountable and nonaccountable employee plans.
LO.8 Compare various deductions for contributions to retirement accounts.
LO.7 Identify other employee expenses.
LO.6 Explain how entertainment and meal expenses are treated.
LO.5 Differentiate between deductible and nondeductible education expenses.
LO.4 Determine the moving expense deduction.
LO.3 Describe how travel expenses are treated.
LO.2 Recognize deductible transportation expenses.
LO.1 Distinguish between employee and self-employed status.
60. LO.8 Wes acquired a mineral interest during the year for $10 million. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were
59. LO.7 Martha was considering starting a new business. During her preliminary investigations, she incurred the following expenditures:Salaries $22,000 Travel 18,000 Interest on short-term note
58. LO.7 Oleander Corporation, a calendar year entity, begins business on March 1, 2013.The corporation has startup expenditures of $64,000. If Oleander elects § 195 treatment, determine the total
4. LO.1 Bernard operates a hair styling salon as a sole proprietor. Because his shop has several extra workstations that are not being used, he is considering renting them to other stylists, but he
5. LO.1, 11 In mid-2013, Madison goes to work for Knot Corporation. In January 2014, she receives a Form 1099 from Knot reflecting her classification as an independent contractor.Madison disagrees
26. LO.6, 9, 10, 11 Ava recently graduated from college and is interviewing for a position in marketing. Gull Corporation has offered her a job as a sales representative that will require extensive
24. LO.8 Regarding the tax implications of various retirement plans, comment on the following:a. The difference between Keogh (H.R. 10) and traditional deductible IRA plans.b. The difference between
13. LO.3 Dr. Werner is a full-time professor of accounting at Pelican University. During the year, he teaches continuing education programs for CPA groups in several cities. He also serves as an
12. LO.3 The lodging expense of an employee who is not away from home overnight can never be deductible. Do you agree with this statement? Explain.
11. LO.3 Lance, who practices law in New York City, leaves his office on Tuesday at 4:00 A.M., flies to Los Angeles, makes a court appearance at 1:00 P.M., and flies back to New York that same day.a.
10. LO.2, 3 Explain the difference between travel expenses and transportation expenses.
8. LO.2 Milton is a resident of Mobile (AL) and is employed by Scaup Corporation.Because Scaup closed its Mobile office, Milton no longer has any nondeductible commuting expenses although he
7. LO.1 The IRS presumes that two types of workers should be classified as independent contractors. Who are these workers, and why is the automatic classification justified?
6. LO.1 In terms of characteristics, how are statutory employees similar to common law employees? To independent contractors?
57. LO.2, 7, 10 Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed.
56. LO.2, 5, 10 Jamie purchased $100,000 of new office furniture for her business in June of the current year. Jamie understands that if she elects to use ADS to compute her regular income tax, there
33. LO.2 Orange Corporation acquired new office furniture on August 15, 2013, for$130,000. Orange did not elect immediate expensing under § 179. Orange takes additional first-year depreciation.
32. LO.1, 2 José purchased a house for $300,000 in 2010. He used the house as his personal residence. In March 2013, when the fair market value of the house was $400,000, he converted the house to
30. LO.8 Discuss how the cost of mineral rights enters into the calculation of cost depletion.
28. LO.7 Discuss the amortization of startup expenditures.
27. LO.7 Harold and Bart own 75% of the stock of Orange Motors. The other 25% of the stock is owned by Jeb. Orange Motors entered into an agreement with Harold and Bart to acquire all of their stock
26. LO.7 Explain the amortization period of a § 197 intangible if the actual useful life is less than 15 years.
25. LO.4 Discuss the tax consequences if the business use percentage of listed property falls to 50% or lower after the year the property is placed in service.
24. LO.4 Discuss how the limits on cost recovery apply to listed property.
23. LO.3, 4 Discuss the implications of an automobile used in a trade or business having a gross vehicle weight (GVW) exceeding 6,000 pounds.
21. LO.3 Discuss the definition of taxable income as it is used in limiting the § 179 expensing amount.
20. LO.3 Discuss the treatment of a § 179 expensing carryforward.
19. LO.3 Explain how the § 179 limited expensing deduction affects the computation of MACRS cost recovery.
36. LO.2 Debra acquired the following new assets during 2013:Date Asset Cost April 11 Furniture $40,000 July 28 Trucks 40,000 November 3 Computers 70,000 Determine the cost recovery for the current
37. LO.2 On August 2, 2013, Wendy purchased a new office building for $3.8 million. On October 1, 2013, she began to rent out office space in the building. On July 15, 2017, Wendy sold the office
51. LO.2, 3, 4 On March 15, 2013, Helen purchased and placed in service a new Escalade.The purchase price was $62,000, and the vehicle had a rating of 6,500 GVW. The vehicle was used 100% for
50. LO.4 On June 5, 2013, Leo purchased and placed in service a new car that cost$20,000. The business use percentage for the car is always 100%. He does take additional first-year depreciation.
49. LO.2, 4 On October 15, 2013, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business use asset Jon acquired in 2013.He used the car 80% of the
48. LO.3, 4 John Johnson is considering acquiring an automobile at the beginning of 2013 that he will use 100% of the time as a taxi. The purchase price of the automobile is$35,000. John has heard of
47. LO.2, 3, 10 On June 5, 2013, Dan purchased and placed in service a seven-year class asset costing $550,000. Determine the maximum deduction Dan can take on this asset.
46. LO.2, 3 Olga is the proprietor of a small business. In 2013, the business income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends$600,000 on new seven-year
41. LO.2 On April 20, 2013, Ralph purchased used equipment to be used in his farming business. The cost of the equipment is $150,000. Ralph does not elect immediate expensing under § 179; nor does
40. LO.2 Janice acquired an apartment building on June 4, 2013, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2019.a. Determine Janice’s
39. LO.2 On May 5, 2013, Christy purchased and placed in service a hotel. The hotel cost$10.8 million. Calculate Christy’s cost recovery for 2013 and for 2023.
18. LO.3 Discuss when § 179 expense must be recaptured.
Research Problem 6. Recent tax reform discussions have involved proposals that would broaden the income tax base and reduce the tax rate. Other discussions have focused primarily on modifying the tax
21. LO.6, 9 William, a high school teacher, earns about $50,000 each year. In December 2013, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you,
16. LO.5 Ellen borrowed $50,000 from her parents for a down payment on the purchase of a new home. She paid interest of $3,200 in 2011, $0 in 2012, and $9,000 in 2013. The IRS disallowed the
15. LO.5 Thomas purchased a personal residence from Rachel. To sell the residence, Rachel agreed to pay $5,500 in points related to Thomas’s mortgage. Discuss the deductibility of the points.
14. LO.5 Commercial Bank has initiated an advertising campaign that encourages customers to take out home equity loans to pay for purchases of automobiles. Are there any tax advantages related to
31. LO.3 Alicia sold her personal residence to Rick on June 30 for $300,000. Before the sale, Alicia paid the real estate tax of $4,380 for the calendar year. For income tax purposes, the deduction
Research Problem 5. Marcia, a shareholder in a corporation with stores in five states, donated stock with a basis of $10,000 to a qualified charitable organization in 2012.Although the stock of the
Research Problem 4. Tom and Mary Smith, whose son was found murdered in a parking garage, offered a $100,000 reward for the city police to use to obtain information leading to the arrest and
Research Problem 3. In January, Ron, a firefighter, was injured in the line of duty as a result of interference by a homeowner. He incurred medical expenses of $6,500 related to his injuries. Ron
Research Problem 2. Ken and Mary Jane Blough, your neighbors, have asked you for advice after receiving correspondence in the mail from the IRS. You learn that the IRS is asking for documentation in
46. Paul and Donna Decker are married taxpayers, ages 44 and 42, respectively, who file a joint return for 2013. The Deckers live at 1121 College Avenue, Carmel, IN 46032. Paul is an assistant
42. LO.2, 3, 4, 5, 7, 9 Bart and Susan Forrest, both age 47, are married and have no dependents. They have asked you to advise them whether they should file jointly or separately in 2013. They
12. LO.5, 9 Diane owns a principal residence in Georgia, a townhouse in San Francisco, and a yacht in Cape Cod. All of the properties have mortgages on which Diane pays interest.What are the
51. LO.5, 7, 10 B. J. and Carolyn Grace are full-time employees. B. J. is an elementary school teacher, and Carolyn is a registered nurse at a hospital. During the year, they incur the following
48. LO.3, 6, 9 Charles has AGI of $94,000 during the year and the following expenses related to his employment:Lodging while in travel status $5,000 Meals during travel 4,000 Business transportation
46. LO.7 Melanie is employed full-time as an accountant for a national hardware chain.She also has a private consulting practice, which provides tax advice and financial planning to the general
36. LO.3 On Thursday, Justin flies from Baltimore (his home office) to Cadiz (Spain). He conducts business on Friday and Tuesday; vacations on Saturday, Sunday, and Monday(a legal holiday in Spain);
54. Addison Parker, single and age 32, lives at 3218 Columbia Drive, Spokane, WA 99210.She is employed as regional sales manager by VITA Corporation, a manufacturer and distributor of vitamins and
LO.1 Distinguish between deductible and nondeductible personal expenses.
9. LO.2 Hubert, a self-employed taxpayer, is married and has two children. He has asked you to explain the tax and nontax advantages of creating a Health Savings Account(HSA) for him and his family.
4. LO.2, 9 Jerry and Ernie are comparing their tax situations. Both are paying all of the nursing home expenses of their parents. Jerry can include the expenses in computing his medical expense
LO.9 Identify tax planning strategies that can maximize the benefit of itemized deductions.
LO.8 Recognize the limitation on certain itemized deductions applicable to high-income taxpayers.
LO.7 List the business and personal expenditures that are deductible either as miscellaneous itemized deductions or as other itemized deductions.
LO.6 Recognize charitable contributions and identify their related measurement problems and percentage limitations.
LO.5 Distinguish between deductible and nondeductible interest and apply the appropriate limitations to deductible interest.
LO.4 Explain the Federal income tax treatment of state and local income taxes and sales taxes.
LO.3 Contrast deductible taxes with nondeductible fees, licenses, and other charges.
LO.2 Define medical expenses and compute the medical expense deduction.
LO.1 Determine the amount, classification, and timing of the bad debt deduction.
Research Problem 8. The $1 million maximum compensation deduction does not seem to have deterred large corporations from remunerating their executives at very high levels.What techniques are being
Research Problem 7. Locate and read a recent judicial or administrative ruling regarding the deductibility of hobby losses. Look for rulings that deal with horse breeding, professional sports teams,
Research Problem 6. Sam Adams is a CPA who is also an aspiring actor. In 2011, his AGI(before any deductions for performing arts expenses) was $42,000 and was from the following sources:CPA practice
Research Problem 5. Altrice viewed herself as a creative individual who had chosen to go to law school for economic reasons. Altrice’s undergraduate majors were creative writing and American Indian
Research Problem 4. In early 2010, Walter Hodges began investigating the real estate market with the intention of acquiring real estate for investment or rental. He had not previously been involved

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