Questions and Answers of Taxation of Business Entities

How do self-employed taxpayers report home office deductions on their tax returns?
Are real property taxes subject to any deduction limitations? Explain.
Consider the settlement statement in Appendix A to this chapter.What amounts on the statement are the Jeffersons allowed to deduct on their 2018 tax return?Indicate the settlement statement line
With recent tax law changes, are taxpayers likely to receive more or less tax savings from home mortgage interest deductions?
Is it possible for a taxpayer to have more than one loan that is treated as acquisition indebtedness for tax purposes? Explain
For purposes of determining a taxpayer's deductible home mortgage interest, does it matter when the taxpayer incurred the debt to acquire the home? Explain.
Gerry (age 56) and Elaine (age 54) have been married for 12 years and file a joint tax return.The couple lives in an apartment in downtown Manhattan.Gerry’s father, Mortey, recently retired from
Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice-president of the brakes division.Tommy’s 2018 salary is
Alex is 31 years old and has lived in Los Alamos, New Mexico, for the last four years where he works at the Los Alamos National Laboratory (LANL). LANL provides employees with a 401(k) plan and for
Ian retired in June of 2017 at the age of 69 (he turned 70 in August of 2017).Ian’s retirement account was valued at $490,000 at the end of 2016 and $500,000 at the end of 2017. He has had all of
Jacquiline is unmarried and age 32. Even though she participates in an employer-sponsored retirement plan, Jacquiline contributed $3,000 to a traditional IRA during the year. Jacquiline files as a
Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2018). In 2018, his net Schedule C income was $300,000.This was his only source of income.This year, Reggie is
Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2018). During 2018, her net Schedule C income was $300,000.This was her only source of income.This year, Rita is
Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2018).In2018, her net Schedule C income was $130,000.This was her only source of income.This year, Hope is considering
Elvira is a self-employed taxpayer who turns 42 years old at the end of the year (2018). In 2018, her net Schedule C income was $130,000. This was her only source of income.This year, Elvira is
Sarah was contemplating making a contribution to her traditional individual retirement account for 2018. She determined that she would contribute $5,500 to her IRA and she deducted $5,500 for the
Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and her IRA is now worth $50,000. She is trying to decide whether she should roll over
Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account.The current value of the Roth IRA is $9,000.In the current, year Halle withdraws $8,000 of the account balance to
Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to a Roth IRA ($4,000 a year).The current value of the Roth IRA is $16,300.In the current
George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $25,000.He is planning on transferring (or rolling over) the
Jackson and Ashley Turner (both 45 years old) are married and want to contribute to a Roth IRA for Ashley.In 2018, their AGI is $191,000. Jackson and Ashley each earned half of the income.a. How much
In 2018, Rashaun (62 years old) retired and planned on immediately receiving distributions (making withdrawals) from his traditional IRA account.The balance of his IRA account is $160,000 (before
In 2018, Susan (44 years old) is a highly successful architect and is covered by an employee-sponsored plan.Her husband, Dan (47 years old), however, is a Ph.D. student and is unemployed.Compute the
William is a single writer (age 35) who recently decided that he needs to save more for retirement. His 2018 AGI before the IRA contribution deduction is $66,000 (all earned income).a. If he does not
XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 40 percent of their salary for five years.(For purposes of this problem, ignore payroll taxes
Leslie participates in IBO’s non-qualified deferred compensation plan.For 2018, she is deferring 10 percent of her $300,000 annual salary.Based on her deemed investment choice, Leslie expects to
Paris participates in her employer’s non-qualified deferred compensation plan. For 2018, she is deferring 10 percent of her $320,000 annual salary.Assuming this is her only source of income and her
Marissa participates in her employer’s non-qualified deferred compensation plan. For 2018, she is deferring 10 percent of her $320,000 annual salary.Assuming this is her only source of income and
In 2018, Nitai (age 40) contributes 10 percent of his $100,000 annual salary to a Roth 401(k) account sponsored by his employer, AY Inc.AY Inc., matches employee contributions to the employee’s
Kathleen, age 56, works for MH, Inc. in Dallas, TX.Kathleen contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf.Kathleen has contributed $30,000 to her Roth 401(k)
In 2018, Nina contributes 10 percent of her $100,000 annual salary to her 401(k) account.She expects to earn a 7 percent before-tax rate of return. Assuming she leaves this (and any employer
In 2018, Maggy (34 years old)is an employee of YBU Corp. YBU provides a 401(k) plan for all its employees.According to the terms of the plan, YBU contributes 50 cents for every dollar the employee
Matthew (48 at year-end) develops cutting-edge technology for SV, Inc. located in Silicon Valley.In 2018, Matthew participates in SV’s money purchase pension plan (a defined contribution plan) and
Tim has worked for one employer his entire career.While he was working, he participated in the employer’s defined contribution plan [traditional 401(k)].At the end of 2018, Tim retires. The balance
Alicia has been working for JMM Corp. for 32 years.Alicia participates in JMM’s defined benefit plan.Under the plan, for every year of service for JMM she is to receive 2 percent of the average
Deductions for traditional IRAs and contributions to Roth IRAs are phased out based on modified AGI (MAGI). In general terms how does MAGI for purposes of determining the traditional IRA deduction
From a tax perspective, what issues does an employee need to consider in deciding whether to defer compensation under a non-qualified deferred compensation plan or to receive it immediately?
In the current year, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her $90,000 annual salary with no qualified fringe
Sylvana is given a job offer with two alternative compensation packages to choose from. The first package offers her $250,000 annual salary with no qualified fringe benefits. The second package
Santini’snew contract for 2018 indicates the following compensation and benefits: Benefit DescriptionAmountSalary$130,000Health insurance$9,000Restricted stock granted$2,500Bonus$5,000Hawaii
LaMont works for a company in downtown Chicago. The company encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $265 per
Seiko’s current salary is $85,000. Her marginal tax rate is 32 percent and she fancies European sports cars. She purchases a new auto each year. Seiko is currently a manager for an Idaho Office
Nicole’s employer, Poe Corporation, provides her with an automobile allowance of $20,000 every other year. Her marginal tax rate is 32 percent. Poe Corporation has a marginal tax rate of 21
On January 1, year 1, Jessica received 10,000 shares of restricted stock from her employer, Rocket Corporation. On that date, the stock price was $10 per share. On receiving the restricted stock,
On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. On receiving the restricted stock, Dave made
On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the
Harmer Inc. is now a successful company. In the early days (before it became profitable), it issued incentive stock options (ISOs) to its employees. Now Harmer is trying to decide whether to issue
Antonio received 40 ISOs at the time he started working for Zorro Corporation six years ago (each option gives him the right to purchase 20 shares of Zorro stock for $3 per share). Zorro’s share
Mark received 10 ISOs at the time he started working for Hendricks Corporation five years ago when Hendricks’s price was $5 per share (each option gives him the right to purchase 10 shares of
Haven received 200 NQOs (each option gives him the right to purchase 20 shares of Barlow Corporation stock for $7 per share) at the time he started working for Barlow Corporation three years ago when
Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation (5/1/Y1) four years ago when MNL’s
Marcus is the CEO of publicly traded ABC Corporation and earns a salary of $1,500,000. Assume ABC has a 21 percent marginal tax rate.What is ABC’s after-tax cost of paying Marcus’s salary?
Lynette is the CEO of publicly traded TTT Corporation and earns a salary of $200,000 in the current year. Assume TTT is profitable.What is TTT Corporation’s after-tax cost of paying Lynette’s
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
Olympia Corporation, of Kittery, Maine, wants to exchange its manufacturing facility for Bangor Company’s warehouse. Both parties agree that that Olympia’s building is worth $100,000 and that
Burbank Corporation (calendar-year end) acquired the following property this year:Burbank acquired the copier in a nontaxable transaction when the shareholder contributed the copier to the business
Assume 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:AssetPlaced in
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 depreciation
At the beginning of the year, Dee began a calendar-year business and placed in service the following assets during the year:AssetDate AcquiredCost BasisComputer
Assume Sarah is a cash-method calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she has
Heather paid $15,000 to join a country club in order to meet potential clients. This year she paid $4,300 in greens fees when golfing with client sand an additional $5,700 paid when Heather held
Ralph operates a business that acts as a sales representative for a large firm that produces and sells precious metals to electronic manufacturers. Ralphcontacts manufacturers and convinces them to
Trey has two dependents, his two 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 in each of
During 2018, your clients, Mr. and Mrs. Howell, owned the following investment assets:Investment AssetsDate AcquiredPurchase PriceBroker’s Commission Paid at Time of Purchase300 shares of IBM
George recently received a great stock tip from his friend, Mason. George didn’t have any cash on hand to invest, so he decided to take out a $20,000 loan to facilitate the stock acquisition. The
Mickey and Jenny Porter file a joint tax return, and they itemize deductions. The Porters incur $2,000 in investment expenses. They also incur $3,000 of investment interest expense during the year.
Shaun bought 300 shares of Dental Equipment, Inc. several years ago for $10,000. Currently the stock is worth $8,000. Shaun’s marginal tax rate this year is 24 percent, and he has no other capital
Christopher sold 100 shares of Cisco stock for $5,500 in the current year. He purchased the shares several years ago for $2,200. Assuming his marginal ordinary income tax rate is 24 percent, and he
For 2018, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750.a. How much loss can Sherri deduct in 2018?b. How much loss will Sherri carryover to 2019 and what is the character of
In 2018, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events:a. On May 12, 2018, they sold a painting (art) for $110,000 that was
During the current year, Ron and Anne sold the following assets:Capital AssetMarket ValueTaxBasisHolding Period L stock$50,000$41,000> 1 year M stock28,00039,000> 1 year N
George bought the following amounts of Stock A over the years:Date PurchasedNumber of SharesAdjusted BasisStock A11/21/19921,000$24,000Stock A3/18/19985009,000Stock A5/22/200775027,000On October 12,
Grayson is in the 24 percent tax rate bracket and has the sold the following stocks in 2018:Date PurchasedBasisDate SoldAmount RealizedStock A1/23/1994$7,2507/22/2018$4,500Stock
Matt and Meg Comer are married and file a joint tax return. They do not have any children. Matt works as a history professor at a local university and earns a salary of $64,000. Meg works part-time
Dahlia is in the 32 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years:Microsoft common stockDate
John bought 1,000 shares of Intel stock on October 18, 2014 for $30 per share plus a $750 commission he paid to his broker. On December 12, 2018, he sells the shares for $42.50 per share. He also
Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 24 percent. Every
Hayley recently invested $50,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much
At the beginning of his current tax year David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350
Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 22 percent for the next 10
Discuss the treatment of suspended passive losses upon the sale of a passive activity?
Joe and Jessie are married and have one dependent child, Lizzie. Lizzie is currently in college at State University. Joe works as a design engineer for a manufacturing firm while Jessie runs a craft
Read the following letter and help Shady Slim with his tax situation. Please assume that gross income is $172,900 (which consists only of salary) for purposes of this problem.December 31, 2018To the
This year Evan graduated from college, and took a job as a deliveryman in the city. Evan was paid a salary of $67,300 and he received $700 in hourly pay for part-time work over the weekends. Evan
Tammy teaches elementary school history for the Metro School District. In 2018 she has incurred the following expenses associated with her job:Noncredit correspondence course on history
This year Jack intends to file a married-joint return. Jack received $167,500 of salary, and paid $5,000 of interest on loans used to pay qualified tuition costs for his dependent daughter, Deb. This
Fred currently earns $9,000 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $10,000 per month if he
A. and Paula file as married taxpayers. In August of this year they received a $5,200 refund of state income taxes that they paid last year. How much of the refund, if any, must L. A. and Paula
How was the income tax formula for individuals changed for 2018 by the Tax Cuts and Jobs Act?
Dennis is currently considering investing in municipal bonds that earn 6 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 8 percent. If Dennis’ tax rate is 22 percent,
Ernie's Farm and Garden Implement Store sells, repairs, and services farm and garden equipment. In 2016, the state attorney general began to investigate customers' complaints that Ernie's was adding
Ghon is a married taxpayer who retired from his job at Smithfield Printing in 2016. During 2017, he turns 70 1/2 and begins withdrawing the $215,000 (balance December 31, 2016) in assets in his
Labrador Corporation has total capital gains of $18,000 and total capital losses of $35,000 in 2017. Randy owns 25% of Labrador's outstanding stock. What is the effect on Labrador's and Randy's 2017
Tomiko owns the copyright to several classic Motown songs. In 2015, he became aware that Tinseltown Records was selling several of his songs without his permission. He sues Tinseltown seeking
Marjorie is a software systems engineer for Hacker Corporation. In November 2014, she inherited two parcels of land in Brower Township from her grandfather. Her grandfather's estate valued the
Dagwood has come to you with a pressing problem. In November 2006, he purchased an office building that he has rented out to various businesses. On May 2 of the current year, a fire swept through the
How many chapters are within Subtitle A?
Henry invests $50,000 in an entity called Forward Investments on January 20, 2016. Under the terms of the investment agreement, the $50,000 is considered a loan that Forward will use to invest in
Adrian is a salesperson who represents several wholesale companies. On January 2, 2017, she receives by mail a commission check from Ace Distributors in the amount of $10,000 and dated December 30,
Gary is an internal auditor for Bodine Information Systems (BIF). In 2014, BIF opened a large production plant in Las Vegas, Nevada. Subsequently, Gary has had to spend several months each year at

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