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business
federal taxation

Questions and Answers of Federal Taxation

LO.2 What is the difference between a cafeteria plan and an employee flexible spending plan?
LO.2 Melba’s employer provides a flexible spending plan for medical and dental expenses not covered by insurance. Melba contributed $1,500 during 2012, but by the end of December 2012, she still
LO.2 Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and$50,000 for the loss of
LO.2 Joe is a graduate student who works as a resident adviser (RA) in the college dormitory.As compensation for serving as an RA, he is not charged the $2,200 other students pay for their dormitory
LO.2 Sarah, who has a terminal illness, cashed in her life insurance policy (cost of$24,000 and proceeds of $50,000) to go on an around-the-world cruise. Ed paid $24,000 of life insurance premiums
LO.2 Carey is a self-employed landscaper. He contracted to maintain Ted’s lawn for$150 per month. Ted was very pleased with Carey’s work and at the end of the year paid Carey an additional $500.
LO.2 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
LO.1, 2 Twenty college fraternity brothers each placed $2,500 in a mutual fund account. They agreed that upon the death of a fraternity brother, his beneficiary would receive $20,000 that was to be
LO.2 Uncle Tom promised John, “Come and take care of me, and I will leave you the farm when I die.” John took care of Uncle Tom for the five years preceding his death.When Uncle Tom died, in
LO.4 Melissa, who is 70 years old, is unmarried and has no dependents. Her annual income consists of a taxable pension of $20,000, $12,000 in Social Security benefits, and$3,000 of dividend income.
LO.4, 5 Linda and Don are married and file a joint return. In 2012, they received$12,000 in Social Security benefits and $35,000 in taxable pension benefits and interest.a. Compute the couple’s
LO.4 For each of the following, determine the amount that should be included in gross income:a. Don was selected as the most valuable player in the World Series. In recognition of this, he was
LO.4 Tess retires after 30 years of service with her employer. She is 64 years old and has contributed $39,000 to her employer’s qualified pension fund. She elects to receive her retirement
LO.4 Vito is the sole shareholder of Vito, Inc. He is also employed by the corporation.On June 30, 2012, Vito borrowed $8,000 from Vito, Inc., and on July 1, 2013, he borrowed an additional $4,000.
LO.4 Karen and Al are in the process of negotiating a divorce. They have tentatively agreed on all of the terms, and Karen is to pay Al $240,000 over a three-year period. Furthermore, the payments
LO.3 Liz and Doug were divorced on July 1 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
LO.3, 5 In 2012, Alva received dividends on her stocks as follows:Amur Corporation (a French corporation whose stock is traded on an established U.S. securities market) $55,000 Blaze, Inc., a
LO.3, 4 Fran, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The
LO.2, 5 The Bluejay Apartments is a new development and is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the
LO.2, 5 Freda is a cash basis taxpayer. In 2012, she negotiated her salary for 2013. Her employer offered to pay her $21,000 per month in 2013 for a total of $252,000. Freda countered that she would
LO.2 Marlene, a cash basis taxpayer, invests in Series EE U.S. government savings bonds and bank certificates of deposit (CDs). Determine the tax consequences of the following on her 2012 gross
LO.2 Determine the effects of the following on a cash basis taxpayer’s gross income for 2012 and 2013.a. On the morning of December 31, 2012, the taxpayer received a $1,500 check from a customer.
LO.2 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
LO.2, 5 Al is a medical doctor who conducts his practice as a sole proprietor. During 2012, he received cash of $280,000 for medical services. Of the amount collected,$40,000 was for services
LO.1, 2 Determine Amos Seagull’s gross income in each of the following cases:a. In the current year, Seagull Corporation purchased an automobile for $25,000. The company was to receive a $1,500
LO.1 Determine the taxpayer’s gross income for tax purposes in each of the following situations:a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate
LO.1, 2, 5 A taxpayer is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in
LO.1 Determine the taxpayer’s current-year (1) economic income and (2) gross income for tax purposes from the following events:a. Sam’s employment contract as chief executive of a large
LO.4 An employer provides all of his employees with life insurance protection equal to twice the employee’s annual salary. Melba, who is 45, has an annual salary of $60,000. Is Melba required to
LO.4 On July 1, 1999, when Betty was 65 years old, she purchased an annuity contract for $108,000. The annuity was to pay Betty $9,000 on June 30 each year for the remainder of her life. Betty died
Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000.What factors should Eva and Patrick consider in deciding between these two options?
LO.4, 5 Patrick and Eva are planning to divorce. Patrick has offered to pay Eva$12,000 each year until their 11-year-old daughter reaches age
LO.4 Why is a married couple’s cost of assets (adjusted basis) for appreciated assets relevant in negotiating their divorce agreement?
LO.4 What are the tax consequences if the alimony recapture rules apply to a cash payment to a former spouse?
LO.3, 5 Mark and Del were residents of Texas. In 2012, Del left Mark, and he has been unable to find her even though he hired a private investigator to do so. Mark and Del are still married at
LO.3 Rex became a partner with a 30% interest in the partnership profits when he invested $200,000. In 2012, the partnership generated $400,000 of taxable income, and Rex withdrew $100,000. In 2013,
LO.3, 5 Wade paid $7,000 for an automobile that needed substantial repairs. He worked nights and weekends to restore the car and spent $2,400 on parts for it. He knows he can sell the car for
LO.2 In 2012, Sandra, a cash basis taxpayer, purchased a certificate of deposit for $943 that will be redeemed in 2014 for $1,000. Is Sandra required to recognize any income from the certificate in
LO.2 How does the hybrid method of accounting differ from the cash method and the accrual method?
LO.2 Why does the constructive receipt doctrine apply to cash basis taxpayers but not to accrual basis taxpayers?
LO.2, 3 On December 29, 2012, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until
LO.1 Ben works full-time, and his hobby is gardening. He spent $1,400 on seeds and fertilizer to grow enough vegetables to last him the entire year. Should Ben be required to recognize income equal
LO.1 Compare and contrast the economist’s concept used to recognize income with the concept employed in measuring taxable income.
LO.1 According to the Supreme Court, would it be good tax policy to use income as computed by financial accounting principles as the correct measure of income for Federal income tax purposes?
The Dapper-Dons Partnership was formed ten years ago as a general partnership to custom tailor men’s clothing. Dapper-Dons is located at 123 Flamingo Drive in City, ST, 54321. Bob Dapper manages
Lavanya, a single taxpayer, is a practicing accountant. She obtains permission to change her tax year from the calendar year to a year ending July 31. Her practice income for the seven months ending
Chauvin Housing Corporation operates primarily in the United States and owns a large houseboat that can provide sleeping accommodations for as many as ninety individuals. Chauvin is considering a
John and Karen are unrelated individuals. John sold land that is Sec. 1231 property held for three years and recognized a $50,000 gain. Karen sold a building that is Sec. 1231 property held for three
General Corporation owns equipment which cost $70,000 and has a $44,000 adjusted basis. General exchanges the equipment in June of 2022 for other equipment ($52,000 FMV) and marketable securities
If Congress is considering a tax credit or deduction as an incentive to encourage certain activities, is a $40 tax credit more valuable than a $200 tax deduction for a taxpayer with a 12% marginal
Caroline, age 66 and filing single as a dependent of another, received the following income items for the current year:Caroline’s tax liability (before credits) is $540.a. What is Caroline’s
Sarah, a married taxpayer who files a joint return, is considering a foreign assignment for two years. In 2022, she will earn $120,000 in the foreign country. Sarah has no other income. She will be
Laser Corporation, a U.S. corporation, has a foreign office that conducts business in France. Laser pays foreign taxes of $74,000 on foreign-source taxable income of $185,000. Its U.S.-source taxable
Randall and Dianne Wall live in St. Louis, Missouri. Randall and Dianne are each 30 years old, neither smokes, and they have no children or other dependents Randall is attending law school full time
Federal Corporation realizes the following net capital losses in 2022:NLTCGs were incurred in the three preceding years as follows:a. What are the amount and character of any capital loss carryback
Why are controlled groups of corporations required to apportion among group members tax attributes such as the Sec. 179 expense limitation and accumulated earnings credit?
During the current year, Florida Corporation reports the following results:a. What is the amount of Florida’s dividends-received deduction?b. How would your answer to Part a change if Florida
North Corporation has $200,000 of accumulated E&P at the beginning of the current year. North distributed $300,000 cash during the current year to its shareholders. The company’s operating results
Gertrude, age 67 and widowed, owns 50 acres of land on the Chattahoochee River that she and her husband purchased for $10,000 when they were newlyweds in 1980. The land is near Atlanta and is now
In 2019, Peter purchased 150 shares of Able Manufacturing Corporation stock for $75,000. Able is a C corporation that has 40 shareholders. None of the other 39 shareholders own more than 5% of the
Erin Brinson founded BCD Corporation in 1992 with a contribution of $50,000 cash. The entity has always been a C corporation and Erin has not made any other capital contributions nor has BCD made any
Anne has a $10,000 basis in her S corporation stock on January 1 of the current year. On March 1 of the current year, Anne lends the corporation $8,000. Her share of the S corporation’s ordinary
Charlene is an equal partner in the CD Partnership. The partnership does not qualify as a small business under the $27 million gross receipts test. The partnership incurred the following items for
Rita, a calendar year taxpayer, is an employee of the RST Partnership, which has a June 30 year-end. The partnership pays Rita a salary of $2,500 per month for the period January 1 through June 30,
Charles is a 60% partner in CD Partnership, a calendar year partnership. For 2022,In addition, Charles and his wife, Charlene, had the following items relating to activities outside the
Joann and Bob, both single taxpayers in their mid-40s, own an employment business. The firm finds temporary employment for students in the college town of Gainesville, Florida. They have operated the
The XYZ Partnership reports the following items during 2021:Calculate ordinary income (or loss) by completing page 1 of Form 1065, and complete Schedule K (Partners’ Shares of Income, Credits,
Steve and Erin started a general partnership to do landscaping and sell gardening supplies. Both will work in the business full time and need to withdraw approximately $40,000 a year each to live on.
Eagle Corporation, an S corporation, reports the following items during 2021:Calculate ordinary income (or loss) by completing page 1 of Form 1120-S, and complete Schedule K (Shareholders’ Shares
Five years ago, Abigail invested $400,000 for a 25% interest in Crab Tree Partnership. The partnership has incurred losses every year and by the beginning of this year, her outside basis in Crab Tree
In January 2021, Joey contributed investment land he had held two years with a FMV of $6,000 and an adjusted basis of $10,000, and Rachel contributed $6,000 cash to form the Green Partnership as
Under what conditions are the Exempt Model and Pension Model equivalent? Under what conditions would one model perform better than the other? How does the $6,000 limitation on deductible and Roth IRA
What is a key factor that drives the decision to convert from a traditional IRA to a Roth IRA?
What are some key factors that affect the decision to operate as a pass-through entity versus a C corporation?
Brenda has $6,000 of before-tax dollars available for a one-time investment. She is in the 25% bracket and expects to remain in this bracket indefinitely. She can invest directly in a taxable bond
Given the following facts and assumptions, determine what investment strategy Karen should follow to maximize accumulations and how much she will have accumulated at the beginning of Year 10
Harry wants to contribute either $6,000 (BT$) to a traditional deductible IRA or $6,000 (AT$) to a Roth IRA. His current tax rate is 30% for ordinary income and 15% for capital gains. He expects his
Beth wants to contribute to either a traditional deductible IRA or a Roth IRA. However, she can afford to contribute only $5,400 after-tax dollars to a Roth IRA even though the maximum contribution
Myron has $10,000 to invest in a business. He can either (1) Operate as a sole proprietor (2) Form a regular C corporation by contributing the $10,000 in exchange for corporate stock. In either case,
Consider the following facts:Other information:• The corporation is formed with a $10,000 contribution.• The corporation pays no dividends.• The entities reinvest their after-tax earnings.Using
Latesha, a single taxpayer, had the following income and deductions for the tax year 2022:a. Compute Latesha’s taxable income and federal tax liability for 2022 (round to dollars and ignore the
Jill and George are married and file a joint return. They expect to have $450,000 of taxable income in the next year and are considering whether to purchase a personal residence that would provide
The following information relates to two married couples:Compute the 2022 tax due or refund due for each couple. Assume that any restrictions on itemized deductions have been applied. Ignore credits.
John and Carole file a joint return and have three children: Jack, David, and Kristen. All three children live at home the entire year. Below is information about each of the children for 2022:•
John and Georgia are married, file jointly, and have three dependents (qualifying children ages 13, 16, and 18). They have salaries of $130,000, a capital loss of $8,000, and tax-exempt interest
Tracy M. Kidwell (SSN 433-33-3333) is single, 12 years old, and a dependent of her parents. She resides at 600 S. Maestri Place, New Orleans, LA 70130. Tracy’s only income is $9,000 of taxable
In March 2022, Otter Corporation sends people to the state capital to lobby the legislature to build a proposed highway that is planned to run through the area where its business is located.a. If
Rachel Schurtz is a high school English teacher. In her spare time, she likes to make her own body lotion, lip gloss, and bath and shower gel. She uses the bath products herself and gives them to her
Emily is an interior decorator who does consulting work for several furniture stores. Additionally, she has been designing and creating rubber stamps for the past several years. She sells the stamps
For AGI deductions of individual taxpayers that are connected with either a trade or business or a rental activity are reported differently than other for AGI deductions reported as Adjustments to
Latoya is an independent contractor and operates her own successful consulting business in Milwaukee. She has just signed a large contract with a new client that will require her to spend nine months
Wayne and Maria file a joint tax return on which they itemize their deductions and report AGI of $50,000. During the year they incurred $3,500 of medical expenses when Maria broke her leg.
The LM Partnership has two equal partners, Liam and Martin. In the current year, the partnership earns $400,000 of ordinary income (all business) and recognizes a $15,000 long-term capital gain. Liam
During the current year, Marilyn earned $115,000 as an accounting consultant.a. If she has no other income besides a $20,000 capital gain, how much can she claim as a QBI deduction (please ignore the
What is the first day that an individual could sell a capital asset purchased on March 31, 2018 and have a holding period of more than one year?
Using the following facts, determine Jaron's 2018 taxable income.1. In November 2016, when his wife died, Jaron left the CPA firm he was working for and started his own practice so he could have more
Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows: • Drs. Bailey and Firth
Use the information shown below to prepare a 2017 gift tax return (Form 709) for Joel Bruton. Pages 4 and 5 of the form are not applicable. Joel and his wife Janis, both U.S. citizens, want to elect
Cortez, Inc., reports $600,000 of pretax book net income in 2019. Cortez’s book depreciation exceeds tax depreciation that year by $20,000. The corporation reports no other temporary or permanent
Assume in Problem 34 that Julio takes a capital loss carryover of $50,000 into the current tax year. Julio records no other capital gain transactions during the year. What amount of the capital loss

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