Questions and Answers of Taxation of Business Entities

Assume that in problem 77, Stan sells the machinery in 2023 for $28,500. Determine the effect of the sale on Stan's regular taxable income and his alternative minimum taxable income in 2023.Data from
Stan purchases machinery costing $100,000 for use in his business in 2017. The machinery is 7-year MACRS property and has an ADS life of 12 years. Prepare a depreciation schedule using the regular
Return to the facts of problem 72. Assume that Lavinia sells the building in April 2020.a. How much of the older buildings tax credit must Lavinia recapture?b. Assuming the building qualified for
Lavinia owns an advertising agency. In February 2017, Lavinia purchases for $32,000 a building that was originally placed in service in 1922. Lavinia spends $65,000 rehabilitating the building for
Sonya owns 60% and her sister Karen owns 40% of the Tanglewood Group. They inherited their ownership from their mother who died in 2016. Sonya is the president and CFO of the corporation and receives
On July 1, 2017, Howard is granted the right to acquire 500 shares of the Matoney Corporation for $15 per share. The option qualifies under the company’s incentive stock option plan. The current
On May 10, 2017, Somerton Inc., grants Louise a nonqualified stock option to acquire 700 shares of the company’s stock for $11 per share. The fair market value of the stock on the date of grant is
On September 1, 2017, Beaconsfield Corporation grants Albert a nonqualified stock option to acquire 500 shares of the company’s stock for $8 per share. The fair market value of the stock on the
Glenna is retired from the Cherry Hills Corporation. When she retired at 68, she decided to take her pension as a lump-sum distribution and roll over the proceeds tax free into her IRA. On January 1,
Ross is single and maintains an IRA. During a trip to Las Vegas in 2017, he wins $14,000 at the roulette wheel. He decides to put half his earnings in his IRA account and spend the other half on a
Lacy Corporation sells equipment and a building during the current year. The equipment, which cost $14,000 in 2014, is sold for $9,000. The equipment was expensed using the Section 179 election in
Powell owns a 20% interest in Cooke Partnership. At the beginning of 2016, Powell's basis is $22,000. Cooke reports a $90,000 operating loss in 2016, and Powell withdraws $10,000 from the
In addition to the federal income tax, a corporation is subject to the laws of the state in which it is incorporated, including state income tax. Use the Internet to locate sources of tax law that
Ruiz and his two brothers founded a social club called the Last Snake Inn in 1996. They want to take advantage of a new state law that lets them serve beer, liquor, and wine to their patrons on
Gary and Gertrude are married on April 8, 2016. They use Gertrude’s home as their residence. Gertrude purchased the home on November 14, 2014, for $60,000. On February 19, 2017,
Kerri and John are married. On May 12, 2017, they sell their home for $190,000 and purchase another residence costing $225,000. What is Kerri and John’s realized and recognized gain in each of the
Aretha sells her house on June 9, 2017, for $220,000 and pays commissions of $10,000 on the sale. She had purchased the house for $60,000 and made capital improvements costing $15,000. What are
Grant Industries' warehouse is condemned by the city on August 18, 2017. Because of widespread publicity leading up to the condemnation, Grant anticipates it and purchases a replacement warehouse on
On July 8, 2017, Cynthia and her daughter Constance agree to exchange land they held for investment. Both tracts are worth $18,000. Cynthia acquired her land 4 years earlier for $9,000. Constance
Eva and Mario are married on June 14, 2016. They use Eva’s home as their principal residence. Eva purchased the home for $97,000 in 2013. On January 13, 2017, Eva and Mario are divorced. As part of
Harvey sells his personal residence on March 18, 2017, for $78,000. He paid $86,000 for it on April 22, 2015.
Laurie bought a home in 2014 for $65,000. On November 2, 2017, she sells it for $114,000. Laurie uses the proceeds to purchase a duplex costing $200,000. She uses one unit in the duplex as her
Inez is a freelance artist. She purchased 10 acres of land in 2012 for $5,000. On July 15, 2017, the land is condemned by the county government to build a new courthouse and jail facility. The county
Claude is a CPA and a partner with SKH and Associates, a regional public accounting firm. In September 2015, Brokaw Technologies approached one of his clients, Walter Fenner, about acquiring 100
In October 2017, fire completely destroys the principal residence of Olaf, who is 63 and single, and lives in Bemidji, Minnesota. He owned the home for 16 years; his adjusted basis is $58,000. Olaf
On July 8, 2015, Joe and Jill sell their principal residence for $650,000. Their adjusted basis in the property is $275,000. To complete the sale, Joe and Jill have to take back a second mortgage for
Will owns residential rental property that is destroyed by a tornado in March 2016. He files a claim with his insurance company and receives $90,000 for the property. The building is fully
Bonnie wants to trade her Snow Bird, Utah, condominium, which she has held for investment, for investment property in Steamboat Springs or Crested Butte, Colo. On April 20, 2017, she transfers title
They buys a rental house in 2010 for $75,000. In 2017, she sells it for $86,000. They properly deducted $22,000 in depreciation on the house before its sale.a. What is the amount and character of the
Anton purchases a building on May 4, 2000, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2017, for $270,000. What is the character
Avalon Inc., buys equipment costing $150,000 in 2014 and sells it in 2017. Avalon deducts $94,000 in depreciation on the equipment before the sale. What is the character of the gain or loss on the
The Gladys Corporation buys equipment (7-year MACRS property) costing $658,000 on May 12, 2017. In 2020, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment
Dawn started her own rock band on January 2, 2015. She acquired all her equipment on January 2, 2015, and did not dispose of any of it before 2017. On April 15, 2017, the band’s amplifier,
In 2017, Sondra Corporation recognizes $18,000 in Section 1231 gains and $10,000 in Section 1231 losses. In 2012, Sondra reported $12,000 in Section 1231 losses and no Section 1231 gains. No other
Fred's Foam Foundations (FFF) is a sole proprietorship that Fred started in 2012. Before the current year, FFF had not disposed of any property it owned. During the current year, FFF has the
Opal's neighbor, Jillian, persuades her to invest in Schaake Corporation, a new venture, on March 4, 2016. Opal pays $15,000 for 3,000 shares of common stock. On February 6, 2017, Schaake Corporation
Ansel sells 400 shares of Sharpe, Inc., common stock on October 12, 2017 for $11,800 and pays $600 in commissions on the sale. He acquired the stock for $18,400 plus $800 in commissions on July 8,
Marnie buys 500 shares of qualified small business stock in H.R. Pizza, Inc., on September 10, 2008 for $20,000. She sells the 500 shares for $120,000 on October 2, 2017. Marnie's other capital asset
In 2010, RAD Partnership was organized by three equal partners: 2 individuals (Rachael and Adam) and Depesh Corporation. On January 10, 2010, RAD Partnership purchases 18,000 shares of qualified
During August 2012, Madeline invests $400,000 in Qual Company, Inc., buying 100,000 shares of stock. Her broker tells her this will be an excellent investment because the securities are qualified
Return to the facts of problem 50. How would your answer change if Yorgi purchased the qualified small business stock in Gnu Company, Inc. on September 15, 2011, and sells the shares for $400,000 on
Assume that Yorgi purchased the qualified small business stock in Gnu Company, Inc., on September 15, 2009, and sells the shares for $400,000 on December 30, 2017. a. Determine the amount of
Spencer purchases 100 shares of Reality Virtual Corporation common stock for $1,200 on July 30, 2017. He sells 75 shares of this stock for $525 on December 27, 2017. On January 12, 2018, Spencer
Tawana purchased real property in 2015 at a cost of $200,000. In 2017, she is experiencing cash-flow problems and sells the property for $220,000. The adjusted basis of the property is $185,000.
Martina purchases 10,000 shares of Monrovia Corporation stock for $90,000 on November 14, 2016. On June 18, 2017, Monrovia declares bankruptcy. Because the corporation’s assets are less
Carter owns 1,200 shares of Echo Corporation stock. He purchased 400 shares of the stock on December 23, 2015 for $48,000, and the other 800 shares on October 31, 2016, for $84,000. On August 14,
Marino inherits antique pottery from the estate of his grandmother on March 10, 2017. He immediately sells the pottery for $15,000 to a collector who had made the offer to the executor of the estate
Jeremiah owns farm land that he paid $20,000 for in 2005. In 2016, he planted a winter wheat crop on the land, incurring $35,000 of expenses. Jeremiah deducted the $20,000 of planting expenses that
As a gift for her granddaughter Ella's 13th birthday, Melanie bought 500 shares of Soft'n Sales Corporation stock on September 25, 2012. Melanie bought the stock directly from the underwriter for
On April 3, 2016, Arlene sells land that she holds as an investment to a construction company. The deed conveying the land to the construction company contains a covenant restricting construction on
You are a CPA who works for a local accounting firm. While having lunch at Willie's Diner last Thursday, you overheard Beth Murray describe how Bart (her spouse) was able to get a $2,000 business
On April 18, 2017, Petros buys all the assets of Brigid's Muffler Shop. Included in the purchase price of $295,000 is a payment of $20,000 to Brigid not to open a competing shop in the state for a
On May 15, 2016, Lurlene buys a used automobile for $17,000. She drives it, 9,000 miles for business and 3,000 miles for personal trips during the year. What is Lurlene’s maximum cost recovery for
On June 1, 2016, Kirsten buys an automobile for $60,000. Her mileage log for the year reveals the following: 20,000 miles for business purposes; 7,000 miles for personal reasons; and 3,000 miles
On March 1, 2017, Babar Inc., pays $1,200,000 for a store building, moves into the building and begins business on April 1. Babar properly allocates $1,000,000 of its cost to the building and
Stan purchases machinery costing $100,000 for use in his business in 2017. The machinery is 7-year MACRS property and has an ADS life of 12 years. Complete a depreciation schedule using the regular
In July 2017, Surecut Sawmills buys office furniture for $570,000. Assume that Surecut elects not to claim bonus depreciation.a. Compare cost-recovery deductions using maximum, minimum, and
In June 2017, Copper Kettle, Inc., purchases duplicating equipment for $541,000. a. Compare cost recovery deductions using maximum, minimum, and intermediate methods over the recovery period of
The Gladys Corporation buys office equipment costing $658,000 on May 12, 2017. In 2020, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000 on
Dikembe purchases 1,000 breeding hogs for $1,084,000 in April 2017. a. What is his maximum 2017 cost-recovery deduction for the hogs?b. Dikembe's farming operation incurs a net loss this year
The Browser Company purchases a computer in December 2017 for $12,000. This is the only depreciable personal property acquired during the year. Browser elects not to claim bonus depreciation and does
The Browser Company purchases a computer in August 2017 for $12,000. Browser elects not to claim bonus depreciation and does not elect to expense the asset but wants to claim the maximum
Brad is a shareholder and full-time employee of an S corporation. During 2017, he earns a $50,000 salary from the S corporation and is allocated $12,000 as his share of its net operating loss. In
During 2017, Belk Corporation purchases $70,000-worth of equipment for use in its business. Belk's current taxable income before considering the Section 179 deduction is $26,000. Assume that Belk
In 2017, Theo purchases $16,000 of Section 179 property for use in his delivery business. During 2017, he has $12,000 in taxable income from his business. Assume that Theo elects not to claim bonus
In 2017, Terrell, Inc., purchases machinery costing $2,058,000. Its 2017 taxable income before considering the Section 179 deduction is $490,000. Assume that Terrell elects not to claim bonus
GM Corporation purchases equipment costing $18,000 and wants to claim the maximum deduction possible for this expenditure.
During 2017, Schottenheim Corporation buys laptop computers and desktop computers to use in its general sales offices. Schottenheim buys laptops for $42,000 on March 29, additional laptops for
Steem Advertising Corporation acquires 100 laptop computers in 2016 for its account executives to use. Steem pays $300,000 for the computers and bundled software. You are the newly hired CPA and
Bailey Construction Company purchases a bulldozer on December 20, 2017. An ice storm delays delivery until December 24. Because of the holidays, the equipment is not used until January 2.
On November 14, 2017, Noel sells 2,000 shares of Marker, Inc., stock for $6,000. He had purchased the stock 2 years earlier for $10,000. Because the price of the stock continued to drop, Noel
On January 5, 2017, Henry purchases 500 shares of Wichmann, Inc., common stock at a cost of $24,700. On April 1, 2017, he purchases an additional 300 shares for $19,500. On November 13, 2017,
On October 1, 2017, Mitzo Realty Partnership purchases a lot for future development for $60,000 from the Elm Trust. The trust's adjusted basis in the lot is $20,000. Real estate taxes attributable to
Carl Corporation acquires a business use warehouse for $200,000 on January 2, 2010. From 2010 through 2015, Carl Corporation properly deducts a total of $30,000 in depreciation. Carl incurs a net
Terry purchased stock in Yippee Corporation for $10,000 in May 1983. He bought stock in Zapper Corporation for $20,000 in June 1986. The Yippee Corporation stock is currently worth $90,000, and the
Calculate the 2017 tax liability and the tax or refund due for each situation:a. Mark is single with no dependents and has a taxable income of $60,000. He has $10,700 withheld from his salary for the
Determine the taxable income of each of the following dependents in 2017:a. Louis is 12 and receives $1,250 in interest income.b. Jackson is 16. He earns $2,050 from his newspaper route and receives
Explain the operation of the itemized deduction phase-out. What stops a taxpayer from losing all itemized deductions under the phase-out?
The itemized deduction and exemption phase-outs are an example of what concepts?
Rocco owns a piece of land as investment property. He acquired the land in 1994 for $18,000. On June 1, 2017, he sells the land for $80,000. As part of the sale, the buyer agrees to pay all of the
Frank and Liz are married. During 2017, Frank has $2,800 in state income taxes withheld from his paycheck, and Liz makes estimated tax payments totaling $2,200. In May 2018, they receive a state tax
Troy’s 2015 tax return is audited. The auditor determines that Troy inadvertently understated his ending inventory in calculating his business income. The error creates an additional tax liability
Determine the maximum deduction from AGI in 2017 for each of the following taxpayers:a. Pedro is single and maintains a household for his father. His father is not a dependent of Pedro’s. Pedro’s
Jacqueline is single. In June 2017, she receives a refund of $250 from her 2016 state tax return. Her 2016 itemized deductions were $8,000. In October 2017, her 2015 state tax return is audited, and
Return to the facts of problem 37. At the end of 2018, Mason sells the passive activity that generated the losses for $16,000. What is the effect on his taxable income if his basis in the activity
On January 1, 2017, Brenda acquires 200 shares of Disney stock for $8,000. She sells 200 shares of the stock on September 2, 2017, for $30 per share. On September 23, 2017, Brenda acquires 400 shares
Zoriana sells stock that she acquired in 2013 for $7,500. Her basis in the stock is $14,000. She has a $2,000 long-term capital loss carryover from 2016.
Orlando owns a passive activity with a basis of $13,000 and a $6,000 suspended loss. He dies when the passive activity has a fair market value of $17,000.
Suzanne is married and the sole owner of Laidlaw Corporation. When the corporation was established in 2006, she received 10,000 shares of qualified small business stock in exchange for her $100,000
Anthony owned a 2015 Luxuro automobile that had a fair market value of $18,000. His son James, who is 19, borrows the car without his father's knowledge and totals it in 2016. James has been involved
The Readyhough Corporation was incorporated in 2009. During 2016, the corporation had operating income of $80,000. Because of a strike at its major supplier, the corporation had an operating loss of
Diane and Peter were divorced in 2017. The divorce agreement states that Peter is to have custody of their son, Stewart, and that Peter will be entitled to the dependency exemption. In addition,
Jake loaned his cousin, Arnold, $10,000 in March 2015 to open a cybercafe in Santa Barbara. Arnold signed a loan agreement to pay Jake 7% interest annually, with the principal due in 2018. Jake
In 2015, Samantha loaned her friend Lo Ping $15,000. The loan required Lo Ping to pay interest at 8% per year and to pay back the $15,000 loan principal on July 31, 2017. Lo Ping used the loan to
Lonnie owns 100% of Quality Company's common stock. Lonnie, the president of Quality, is a cash basis taxpayer. Quality is short of cash as of December 31, 2017, the close of its tax year. As a
Kai, a cash basis taxpayer, is a 75% owner and president of Finnigan Fish Market. Finnigan, an S corporation, uses the accrual method of accounting. On December 28, 2017, Finnigan accrues a bonus of
The Parr Corporation incurs the following expenses. When can it deduct the expenses if it uses the accrual method of accounting? the cash method?a. Parr Corporation mails a check for $5,000 to the
On July 1, 2017, Andaria borrows $30,000 from the First Financial Bank. The loan is for 1-year at an annual interest rate of 10%. How much interest can Andaria deduct under each of the following
Fran and Tom purchase a home in 2011 for $1,500,000. To finance the purchase, they borrow $1,450,000 from Buttars Mortgage Brokers. In 2012 they borrow an additional $100,000 from Buttars, secured by
Daryl purchases land in 2013 at a cost of $65,000. In 2017, he sells the land for $100,000.a. How much gain or loss does Daryl realize on the sale of the land?b. Assume that the sales

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