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business
federal taxation

Questions and Answers of Federal Taxation

LO.3 Burt, the CFO of Amber, Inc., is granted stock options in 2012 that qualify as incentive stock options. In 2017, the rights in the stock become freely transferable and not subject to a
LO.3 Josepi’s construction company uses the completed contract method. During the three-year period 2012–2014, Josepi recognized the following income on his two construction contracts:Year
LO.3, 8 In 2012, Geoff incurred $900,000 of mining and exploration expenditures. He elects to deduct the expenditures as quickly as the tax law allows for regular income tax purposes.a. How will
LO.3, 8 In March 2012, Helen Carlon acquired used equipment for her business at a cost of $300,000. The equipment is five-year class property for regular income tax purposes and for AMT purposes.a.
LO.3 Lonzo owns two apartment buildings. He acquired Forsythia Acres on February 21, 1998, for $300,000 ($90,000 allocated to the land) and Square One on November 12, 2012, for $800,000 ($100,000
LO.2, 3 Vito owns and operates a news agency (as a sole proprietorship). During 2012, he incurred expenses of $600,000 to increase circulation of newspapers and magazines that his agency distributes.
LO.2, 3, 8 Angela, who is single, incurs circulation expenditures of $153,000 during 2012. She is in the process of deciding whether to expense the $153,000 or to capitalize it and elect to deduct it
LO.2 Leona has nonrefundable credits of $70,000 for 2012. None of these nonrefundable credits are personal credits that qualify for special treatment. Her regular income tax liability before credits
LO.2 Calculate the exemption amount for the following cases in 2012 for a single taxpayer, a married taxpayer filing jointly, and a married taxpayer filing separately.Case AMTI 1 $155,000 2 290,000 3
LO.2 Calculate the AMT for the following cases in 2012. The taxpayer has regular taxable income of $450,000 and does not have any credits.Tentative AMT Filing Status Case 1 Case 2 Single $200,000
LO.2 Arthur Wesson, an unmarried individual who is age 68, has taxable income of$160,000 in 2012. He has AMT positive adjustments of $40,000 and tax preferences of$35,000.a. What is Arthur’s AMT?b.
LO.2 Use the following data to calculate Martina’s AMT base in 2012:Taxable income $170,000 Positive AMT adjustments 75,000 Negative AMT adjustments 60,000 AMT preferences 30,000 Martina will file
LO.2, 8 Rose, Inc.’s regular income tax liability is $114,000, and its tentative AMT is$120,000 for the current year. Under what, if any, circumstances would Rose want to accelerate $20,000 of
LO.7 Some observers believe that the ACE adjustment causes corporations to change some of the methods they use for financial accounting and tax accounting purposes.Comment.
LO.2, 7 Discuss the similarities and differences between the individual and the corporate AMT.
LO.6 What is the purpose of the AMT credit? Briefly describe how the credit is computed.
LO.4 During the year, Fran earned $18,000 of interest income on private activity bonds that she had purchased in 2008. She also incurred interest expense of $7,000 in connection with amounts borrowed
LO.4 Kevin owns a mineral deposit that qualifies for percentage depletion. In 2012, he deducts $90,000 for regular income tax purposes. Cost depletion for the year would have been $55,000.a. Does the
LO.3 When converting taxable income to AMTI, what is the reason for a positive adjustment as to personal and dependency exemptions?
LO.3 In computing the AMT itemized deduction for interest, it is possible that some interest allowed for regular income tax purposes will not be allowed. Explain.
LO.3 How does the treatment of medical expenses differ for AMT and regular income tax purposes?
LO.3, 4, 8 Matt, who is single, has always elected to itemize deductions rather than take the standard deduction. In prior years, his itemized deductions always exceeded the standard deduction by a
LO.3, 4 What effect do adjustments and preferences have on the calculation of the ATNOLD?
LO.3 Passive activity losses are not deductible in computing either taxable income or AMTI. Explain why an adjustment for passive activity losses may be required for AMT purposes.
LO.3, 8 Celine is going to be subject to the AMT in 2012. She owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the building’s
LO.3 In 1998, Desiree purchased an office building for $500,000 to be used in her business.She sells the building in the current tax year. Explain why her recognized gain or loss for regular income
LO.3 Megan, a corporate executive, plans to exercise an incentive stock option (ISO)granted by her employer to purchase 200 shares of the corporation’s stock for an option price of $25 per share.
LO.3 Both Janice and April own and operate construction companies. Janice uses the completed contract method, while April uses the percentage of completion method.Why does Janice have to be concerned
LO.3, 8 How can an individual taxpayer avoid having an AMT adjustment for mining exploration and development costs?
LO.3 Nell recently purchased a weekly newspaper that has been generating losses. Nell is convinced she can turn the newspaper around with a new editorial style and increased circulation expenditures.
LO.3 In 1997, Andy placed a warehouse in service in his business. For both regular income tax and AMT purposes, he calculates the cost recovery using the straight-line method. Andy concludes that
LO.2 Can any nonrefundable credits, other than the foreign tax credit, reduce the regular income tax liability below the amount of the tentative AMT?
LO.2 Alfred is single, and his AMTI of $350,000 consists of the following:Ordinary income $250,000 Long-term capital gains 70,000 Qualified dividends 30,000 What tax rates are applicable in
LO.2 Andrew and Mabel, unrelated individuals, have the same filing status (head of household).However, Mabel’s AMT exemption amount is $48,450, while Andrew’s is $0. Explain.
LO.2 An AMT results if the tentative AMT exceeds the regular income tax liability. But what happens if the regular income tax liability exceeds the tentative AMT? Does a negative AMT develop to the
LO.2 Describe the tax formula for the AMT.
LO.2, 4 Identify which of the following are tax preferences:a. Exclusion for qualified employee discount provided by employer.b. Exclusion to employee on the employer’s contribution to the
LO.2, 4 Identify which of the following are tax preferences:a. Seven percent of the exclusion associated with gains on the sale of certain small business stock.b. Exclusion on the receipt of property
LO.2 Both AMT adjustments and AMT preferences can cause AMTI to increase. Both AMT adjustments and AMT preferences can cause AMTI to decrease. Evaluate these statements.
LO.2 How can the AMT be calculated without using taxable income (as determined for purposes of the regular income tax) as a starting point?
LO.1 Priscilla was recently promoted and received a substantial raise. She talks to her tax adviser about the potential tax ramifications. After making some projections, her adviser welcomes her to
LO.10 Helen borrowed $100,000 to acquire a parcel of land to be held for investment purposes. During 2012, she paid interest of $11,000 on the loan. She had AGI of $75,000 for the year. Other items
LO.9 In 2011, Nina gave her son a passive activity (adjusted basis of $100,000, fair market value of $180,000, and suspended losses of $25,000). In 2012, the son realizes income of $12,000 from the
LO.3, 8 During the current year, Gene, a CPA, performs services as follows: 1,800 hours in his tax practice and 50 hours in an apartment leasing operation in which he has a 15% interest. Because of
LO.3, 8, 11 Bonnie and Jake are married with no dependents and live in Montana(not a community property state). Because Jake has large medical expenses, they seek your advice about filing separately
LO.3, 8 This year Maria Gomez works 1,200 hours as a computer consultant, 320 hours in a real estate development business, and 400 hours in real estate rental activities. Juan, her husband, works 250
LO.3, 8 Several years ago Rachel acquired an apartment building that currently generates a loss of $35,000. She has AGI of $120,000 before considering the loss. If Rachel is not an active participant
LO.2, 3, 7 Five years ago Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2011, his amount at risk in the activity was $30,000. His shares of the income and
LO.2, 3, 5, 7 Grace acquired an activity four years ago. The loss from the activity is$50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year).Without considering the
LO.2, 3, 7 A number of years ago, Lee acquired a 20% interest in the BlueSky Partnership for $60,000. The partnership was profitable through 2011, and Lee’s amount at risk in the partnership
LO.2, 3, 7, 11 Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road
LO.3 Orange, Inc., earns $250,000 from operations in the current year. Orange also receives $18,000 in dividends and interest on various portfolio investments. During the year, Orange pays $150,000
LO.3, 11 Larry owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Celene has offered to buy Activity A this year for an
LO.1, 3 In 2007, Gene acquired an interest in a partnership in which he is not a material participant. The partnership was profitable through 2010, and Gene’s basis in this partnership interest at
LO.1, 3 Hazel has investments in two nonrental passive activities: Activity A, acquired seven years ago and profitable until the current year, and Activity B, acquired this year.Currently, Hazel’s
LO.2, 11 Heather wants to invest $40,000 in a relatively safe venture and has discovered two alternatives that would produce the following reportable ordinary income and loss over the next three
LO.2 In the current year, Lionel invests $20,000 for an interest in a partnership engaged in the wholesale distribution of plumbing supplies. Lionel is a material participant, and his share of the
LO.8, 11 Robert owns rental property that generally produces positive taxable income and cash flow. This year, however, Robert’s current loss is $5,000. Before considering the effect of the
LO.5, 8 Under the passive loss rules, what are the differences between material participation and active participation?
LO.8 Brad owns a small townhouse complex that generates a loss during the year.Under what circumstances can Brad deduct a loss from the rental activity? What limitations apply?
LO.8 Caroline owns a real estate rental activity that produces a loss of $65,000 during the current year. Under what circumstances can Caroline treat the entire loss as nonpassive?
LO.5, 6, 8 Laura owns an apartment building and a DVD rental business. She participates formore than 500 hours in the operations of each activity. Are the businesses active or passive?
LO.4, 5, 6 How is passive activity defined in the Code? What aspects of the definition have been clarified by final or Temporary Regulations?
LO.6 What are significant personal services? What role do they play in determining whether a rental activity is treated as a passive activity?
LO.5 Sean, a limited partner in Ivy Nursery, is informed that his portion of the entity’s current loss is $18,000. As a limited partner, can Sean assume that his share of the partnership loss is a
LO.5 Even though Sylvia is a full-time employee at a major software developer, she has never given up her love of pottery. For many years, she has spent evenings and weekends working to develop a
LO.5 Some types of work are counted in applying the material participation standards, and some types are not counted. Discuss and give examples of each type.
LO.5, 11 John, an engineer, operates a separate business that he acquired eight years ago. If he participates 85 hours in the business and it incurs a loss of $34,000, under what circumstances can
LO.5 Doug, a high school teacher, operates four separate businesses and participates less than 500 hours in each. If all four businesses incur losses during the year, are there any circumstances
LO.5 Why did the IRS adopt the more-than-500-hour standard for material participation?
LO.4 Under what circumstances may the IRS regroup activities in a different way than the taxpayer?
LO.4 Discuss what constitutes a passive activity.
LO.4 What factors are relevant in determining whether activities constitute an appropriate economic unit?
LO.3 Silver Corporation has $100,000 of active income and a $55,000 passive loss.Under what circumstances is Silver prohibited from deducting the loss? Allowed to deduct the loss?
LO.3 Discuss whether the passive loss rules apply to the following: individuals, closely held C corporations, S corporations, partnerships, and personal service corporations.
LO.3 A passive activity that Lucile acquired several years ago has resulted in losses. How will these passive losses affect Lucile’s taxable income when she disposes of the activity?
LO.3 Kim owns an interest in an activity that produces $100,000 of income during the year. Would Kim prefer to have the activity classified as active or passive? Discuss.
LO.3 Carlos owns an interest in an activity that produces a $100,000 loss during the year. Would he prefer to have the activity classified as active or passive? Explain.
LO.3 Explain the meaning of the terms active income, portfolio income, and passive income.
LO.2, 3 In the current year, Dick invested $16,000 in a cattle-feeding operation that used nonrecourse notes to purchase $120,000 of feed, which was fed to the cattle and expensed. If his share of
LO.2 List some events that increase and decrease an investor’s at-risk amount. What are some strategies that a taxpayer can employ to increase the at-risk amount to claim a higher deduction for
LO.2 Ken invested $200,000 for a 30% interest in a partnership in which he is a material participant. The partnership borrowed $250,000 from a bank and used the proceeds to acquire equipment. What is
LO.6 On December 28, 2012, Roberta purchased four tickets to a charity ball sponsored by the city of San Diego for the benefit of underprivileged children. Each ticket cost $200 and had a fair market
LO.6 Rachel had AGI of $100,000 in 2012. She donated Bronze Corporation stock with a basis of $9,000 to a qualified charitable organization on July 5, 2012.a. What is the amount of Rachel’s
LO.5 Malcolm owns 60% and Buddy owns 40% of Magpie Corporation. On July 1, 2012, each lends the corporation $30,000 at an annual interest rate of 10%. Malcolm and Buddy are not related. Both
LO.4 Norma, who uses the cash method of accounting, lives in a state that imposes an income tax. In April 2012, she files her state income tax return for 2011 and pays an additional $1,000 in state
LO.3 In 2005, Angela purchased a personal residence from Victor. She paid $300,000 for the residence. Victor paid real estate taxes of $9,125 for the real estate property tax year, of which $5,500
LO.2 For calendar year 2012, Jean was a self-employed consultant with no employees.She had $80,000 of net profit from consulting and paid $7,000 in medical insurance premiums on a policy covering
LO.2 Pablo suffers from emphysema and severe allergies and, upon the recommendation of his physician, has a dust elimination system installed in his personal residence. In connection with the system,
LO.2 Andy had AGI of $80,000 for 2012. He was injured in a rock-climbing accident and paid $5,200 for hospital expenses and $2,800 for doctor bills. Andy also incurred medical expenses of $2,400 for
LO.2 Hunter and Cynthia are married and together have AGI of $100,000 in 2012.They have three dependents and file a joint return. They pay $3,000 for a high-deductible health insurance policy and
LO.6, 8 Nate, whose combined Federal and state income tax rates total 40% in 2012, expects to retire in 2013 and have a combined tax rate of 30%. He plans to donate$100,000 to his church. Because he
LO.6, 8 William, a high school teacher, earns about $50,000 each year. In December 2012, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you, his
LO.6 Fran traveled to San Francisco during the year to do volunteer work for one week for the Salvation Army. She normally receives $1,500 salary per week at her job and is planning to deduct the
LO.6 Paula contributed Orange Corporation common stock to the United Way, a qualified charitable organization. In addition, she contributed tables and chairs from her proprietorship’s inventory to
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 2010, $0 in 2011, and $9,000 in 2012. The IRS disallowed the deduction.
LO.5, 8 Julia owns a principal residence in California, a condo in New York City, and a houseboat in Florida. All of the properties have mortgages on which Julia pays interest.What are the
LO.3 Diego sold his personal residence to Dinah on July 1, 2012. He had paid real property taxes on March 1, 2012, the due date for property taxes for 2012.a. How will Diego’s payment affect his
LO.2 Arturo, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2012. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to
LO.2 Caroyl incurred $8,700 of medical expenses in November 2012. On December 5, the clinic where she was treated mailed her the insurance claim form it had prepared for her with a suggestion that

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