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business
taxation of individuals

Questions and Answers of Taxation of Individuals

From an employer perspective, how are ISOs treated differently than NQOs for tax purposes? In general, for a given number of options, which type of stock option should employers prefer?
From an employee perspective, how are ISOs treated differently than NQOs for tax purposes? In general, for a given number of options, which type of stock option should employees prefer?
Lea is a highly paid executive with MCC Inc., a publicly traded corporation.What are the circumstances under which MCC will be able to deduct more than$1 million of compensation paid to Lea during
What are tax reasons why a corporation may choose to cap its executives’ salaries at $1 million?
What are nontax reasons for why a corporation may choose to cap its executives’ salaries at $1 million?
Holding all else equal, does an employer with a higher marginal tax rate or lower marginal tax rate have a lower after-tax cost of paying a particular employee’s salary? Explain.
Nicole and Braxton are each 50 percent shareholders of NB Corporation.Nicole is also an employee of the corporation. NB is a calendar-year taxpayer and uses the accrual method of accounting. The
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 2012
WAR (We Are Rich) has been in business since 1983. WAR is an accrual method sole proprietorship that deals in the manufacturing and wholesaling of various types of golf equipment. Hack & Hack CPAs
Vertovec Inc., a large local consulting firm in Utah, hired several new consultants from out of state last year to help service their expanding list of clients. To aid in relocating the consultants,
Moab Inc. manufactures and distributes high-tech biking gadgets. It has decided to streamline some of its operations so that it will be able to be more productive and efficient. Because of this
Fontenot Corporation sold some machinery to its majority owner Gray (an individual who owns 60 percent of Fontenot). Fontenot purchased the machinery for $100,000 and has claimed a total of $40,000
Hauswirth Corporation sold (or exchanged) some manufacturing equipment in year 0. Hauswirth bought the machinery several years ago for $65,000 and it has claimed $23,000 of depreciation expense
Two years ago, Bethesda Corporation bought a delivery truck for $30,000 (not subject to the luxury auto depreciation limits). Bethesda used MACRS 200 percent declining balance and the half-year
Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre purchased the stock several years ago for $3,000.a) What gain or loss does Deirdre recognize on the sale?b) What amount of
Hillary is in the leasing business and faces a marginal tax rate of 35 percent. She has leased equipment to Whitewater Corporation for several years. Hillary bought the equipment for $50,000 and
Ken sold a rental property for $500,000. He received $100,000 in the current year and $100,000 each year for the next four years. $400,000 of the sales price was allocated to the building and the
In year 0, Javens Inc. sold machinery with a fair market value of $400,000 to Chris. The machinery’s original basis was $317,000 and Javens’s accumulated depreciation on the machinery was
Russell Corporation sold a parcel of land valued at $400,000. Its basis in the land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a note providing that Russell will
Baker Corporation owned a building located in Kansas. Baker used the building for its business operations. Last year a tornado hit the property and completely destroyed it. This year, Baker received
Prater Inc. enters into an exchange in which it gives up its warehouse on 10 acres of land and receives a tract of land. A summary of the exchange is as follows:Accumulated Transferred FMV Original
Metro Corp. traded machine A for machine B. Metro originally purchased machine A for $50,000 and machine A’s adjusted basis was $25,000 at the time of the exchange. What is Metro’s realized gain
Woodley Park Corporation currently owns two parcels of land (parcel 1 and parcel 2). It owns a warehouse facility on parcel 1. Woodley needs to acquire a new and larger manufacturing facility.
Twinbrook Corporation needed to upgrade to a larger manufacturing facility.Twinbrook first acquired a new manufacturing facility for $2,100,000 cash, and then transferred the facility it was using
Longhaul Trucking traded two small trucks (each had a 10,000-pound gross weight) for one large truck (18,000-pound gross weight). Do the trucks qualify as like-kind property? (Hint: Because the
Kase, an individual, purchased some property in Potomac, Maryland, for$150,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a
Independence Corporation needs to replace some of the assets used in its trade or business and is contemplating the following exchanges:Asset Given Up Asset Received by Exchange by Independence
Hans runs a sole proprietorship. Hans reported the following net §1231 gains and losses since he began business:Year Net §1231 Gains/(Losses)Year 1 ($65,000)Year 2 15,000 Year 3 0 Year 4 0 Year 5
Morgan’s Water World (MWW), an LLC, opened several years ago and reports the following net §1231 gains and losses since it began business.Year Net §1231 Gains/(Losses)Year 1 ($11,000)Year 2 5,000
Tonya Jefferson, a sole proprietor, runs a successful lobbying business in Washington, DC. She doesn’t sell many business assets, but she is planning on retiring and selling her historic townhouse,
Bourne Guitars, a corporation, reported a $157,000 net §1231 gain for year 6.a) Assuming Bourne reported $50,000 of nonrecaptured net §1231 losses during years 1–5, what amount of Bourne’s net
Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $10,000 §1231 loss on
Shimmer Inc. is a calendar-year-end, accrual-method corporation. This year, it sells the following long-term assets:Accumulated Asset Sales Price Cost Depreciation Building $650,000 $642,000 $37,000
Lily Tucker (single) owns and operates a bike shop as a sole proprietorship.This year, she sells the following long-term assets used in her business:Accumulated Asset Sales Price Cost Depreciation
Buckley, an individual, began business two years ago and has never sold a§1231 asset. Buckley owned each of the assets since he began the business.In the current year, Buckley sold the following
Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp. at fair market value. The fair market value of the building was determined to be
Hart, an individual, bought an asset for $500,000 and has claimed $100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of 30 percent.Answer the questions presented in
Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by$32,000. What is the amount and character of the
Rayburn Corporation has a building that it bought during year 0 for $850,000.It sold the building in year 5. During the time it held the building Rayburn depreciated it by $100,000. What is the
On August 1 of year 0, Dirksen purchased a machine for $20,000 to use in its business. On December 4 of year 0, Dirksen sold the machine for $18,000.a) What is the amount and character of the gain or
In year 0, Longworth Partnership purchased a machine for $40,000 to use in its business. In year 3, Longworth sold the machine for $35,000. Between the date of the purchase and the date of the sale,
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated
Identify each of White Corporation’s following assets as an ordinary, capital, or§1231 asset.a) Two years ago, White used its excess cash to purchase a piece of land as an investment.b) Two years
Franco converted a building from personal to business use in May 2014 when the fair market value was $55,000. He purchased the building in July 2011 for$80,000. On December 15 of this year, Franco
On September 30 of last year, Rex received some investment land from Holly as a gift. Holly’s adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired
Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market
Lassen Corporation sold a machine to a machine dealer for $25,000. Lassen bought the machine for $55,000 and has claimed $15,000 of depreciation expense on the machine. What gain or loss does Lassen
Shasta Corporation sold a piece of land to Bill for $45,000. Shasta bought the land two years ago for $30,600. What gain or loss does Shasta realize on the transaction?
Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted$27,000 of cost recovery on the hotel
Rafael sold an asset to Jamal. What is Rafael’s amount realized on the sale in each of the following alternative scenarios?a) Rafael received $80,000 of cash and a vehicle worth $10,000. Rafael
Mr. Kyle owns stock in a local publicly traded company. Although the stock price has declined since he purchased it two years ago, he likes the long-term prospects for the company. If Kyle sells the
What is an installment sale? How do the tax laws ensure that taxpayers recognize all the gain they realize on an installment sale? How is depreciation recapture treated in an installment sale?
Compare and contrast the similarities and differences between like-kind exchanges and involuntary conversions for tax purposes.
Olympia Corporation, of Kittery, Maine, wants to exchange its manufacturing machinery for Bangor Company’s machinery. Both parties agree that Olympia’s machinery is worth $100,000 and that
Minuteman wants to enter into a like-kind exchange by exchanging its old New England manufacturing facility for a ranch in Wyoming. Minuteman is using a third-party intermediary to facilitate the
Salazar Inc., a Colorado company, is relocating to a nearby town. It would like to trade its real property for some real property in the new location. While Salazar has found several prospective
Compare and contrast the like-kind property requirements for real property and for personal property for purposes of qualifying for a like-kind exchange.Explain whether a car held by a corporation
Why does the tax code allow taxpayers to defer gains on like-kind exchanges?How do the tax laws ensure that the gains (or losses) are deferred and not permanently excluded from a taxpayer’s income?
Rocky and Bullwinkle Partnership sold a parcel of land during the current year and realized a gain of $250,000. Rocky and Bullwinkle did not recognize gain related to the sale of the land on its tax
Describe the circumstances in which an individual taxpayer with a net §1231 gain will have different portions of the gain taxed at different rates.
Does a taxpayer apply the §1231 look-back rule in a year when the taxpayer recognizes a net §1231 loss? Explain.
Explain the purpose behind the §1231 look-back rule.
Jeraldine believes that when the §1231 look-back rule applies, the taxpayer deducts a §1231 loss in a previous year against §1231 gains in the current year. Explain whether Jeraldine’s
Bingaman Resources sold two depreciable §1231 assets during the year. One asset resulted in a large gain (the asset was sold for more than it was purchased for)and the other in a small loss.
Explain why gains from depreciable property sold to a related taxpayer are treated as ordinary income under §1239.
How is unrecaptured §1250 gain for individuals similar to depreciation recapture?How is it different?
Are both corporations and individuals subject to depreciation recapture when they sell depreciable real property at a gain? Explain.
What are the similarities and differences between the tax benefit rule and depreciation recapture?
Why is depreciation recapture not required when assets are sold at a loss?
Compare and contrast §1245 recapture and §1250 recapture.
Explain Congress’s rationale for depreciation recapture.
Lincoln has used a piece of land in her business for the past five years. The land qualifies as §1231 property. It is unclear whether Lincoln will have to recognize a gain or loss when she
Dakota Conrad owns a parcel of land he would like to sell. Describe the circumstances in which the sale of the land would generate §1231 gain or loss, ordinary gain or loss, or capital gain or loss.
Discuss the reasons why individuals generally prefer capital gains over ordinary gains. Explain why corporate taxpayers might prefer capital gains over ordinary gains.
Explain the difference between ordinary, capital, and §1231 assets.
What does it mean to characterize a gain or loss? Why is characterizing a gain or loss important?
When a taxpayer sells an asset, what is the difference between realized and recognized gain or loss on the sale?
Hawkeye sold farming equipment for $55,000. It bought the equipment four years ago for $75,000, and it has since claimed a total of $42,000 in depreciation deductions against the asset. Explain how
Montana Max sells a 2,500-acre ranch for $1,000,000 in cash, a note receivable of $1,000,000, and debt relief of $2,400,000. He also pays selling commissions of $60,000. In addition, Max agrees to
Potomac Corporation wants to sell a warehouse that it has used in its business for 10 years. Potomac is asking $450,000 for the property. The warehouse is subject to a mortgage of $125,000. If
Compare and contrast different ways in which a taxpayer triggers a realization event by disposing of an asset.
Diamond Mountain was originally thought to be one of the few places in North America to contain diamonds, so Diamond Mountain Inc. (DM) purchased the land for $1,000,000. Later, DM discovered that
While completing undergraduate school work in information systems, Dallin Bourne and Michael Banks decided to start a business called ISys Answers, which was a technology support company. During year
Back in Boston, Steve has been busy creating and managing his new company, Teton Mountaineering (TM), which is based out of a small town in Wyoming.In the process of doing so, TM has acquired various
Last Chance Mine (LC) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LC mined the coal and sold it, reporting gross receipts of $1 million,
Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July of year 1. Bethany went through a lot of trouble and spent $10,000 in legal fees to
Nicole organized a new corporation. The corporation began business on April 1 of year 1. She made the following expenditures associated with getting the corporation started:Expense Date Amount
Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not
After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000.
Paul Vote purchased the following assets this year (ignore §179 expensing and bonus depreciation when answering the questions below):Asset Purchase Date Basis Machinery May 12 $ 23,500 Computers
Burbank Corporation (calendar-year end) acquired the following property this year:Asset Placed in Service Basis Used copier February 12 $ 7,800 New computer equipment June 6 14,000 Furniture July 15
Assume that Ernesto purchased a laptop computer on July 10 of year 1 for $3,000.In year 1, 80 percent of his computer usage was for his business and 20 percent was for computer gaming with his
Phil owns a ranch business and uses four-wheelers to do much of his work.Occasionally, though, he and his boys will go for a ride together as a family activity. During year 1, Phil put 765 miles on
Acorn Construction (calendar year-end C-corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery.The company has record income and would
Assume that Sivart Corporation has 2016 taxable income of $750,000 before the §179 expense and acquired the following assets during 2016:Asset Placed in Service Basis Machinery October 12 $1,440,000
Woolard Inc. has taxable income in 2016 of $150,000 before any depreciation deductions (§179, bonus, or MACRS) and acquired the following assets during the year:Asset Placed in Service Basis Office
Assume that ACW Corporation has 2016 taxable income of $1,000,000 before the §179 expense and acquired the following assets during 2016 (assume no bonus depreciation).LO 10-3 LO 10-2 research Asset
Dain’s Diamond Bit Drilling purchased the following assets this year. Assume its taxable income for the year was $53,000 before deducting any §179 expense(assume no bonus depreciation).LO 10-3 LO
Assume that Timberline Corporation has 2016 taxable income of $240,000 before the §179 expense.Asset Purchase Date Basis Furniture (7-year) December 1 $350,000 Computer equipment (5-year) February
Assume that TDW Corporation (calendar-year-end) has 2016 taxable income of $650,000 before the §179 expense and acquired the following assets during 2016:Asset Placed in Service Basis Machinery

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