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business
taxation of individuals

Questions and Answers of Taxation of Individuals

AMP Corporation (calendar-year-end) has 2016 taxable income of $900,000 before the §179 expense. During 2016, AMP acquired the following assets:Asset Placed in Service Basis Machinery September 12
Carl purchased an apartment complex for $1.1 million on March 17 of year 1.$300,000 of the purchase price was attributable to the land the complex sits on.He also installed new furniture into half of
On November 10 of year 1 Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was$1,200,000; $300,000 was allocated to the basis of
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 2016 depreciation
Parley needs a new truck to help him expand Parley’s Plumbing Palace. Business has been booming and Parley would like to accelerate his tax deductions as much as possible (ignore §179 expense and
Harris Corp. is a technology start-up and is in its second year of operations.The company didn’t purchase any assets this year but purchased the following assets in the prior year:Asset Placed in
Convers Corporation (June 30 year-end) acquired the following assets during the current tax year (ignore §179 expense and bonus depreciation for this problem):Asset Placed in Service Date Original
Evergreen Corporation (calendar-year-end) acquired the following assets during the current year (ignore §179 expense and bonus depreciation for this problem):Asset Placed in Service Date Original
At the beginning of the year, Dee began a calendar-year business and placed in service the following assets during the year:Asset Date Acquired Cost Basis Computer equipment 3/23 $ 5,000 Furniture
DLW Corporation acquired and placed in service the following assets during the year:Asset Date Acquired Cost Basis Computer equipment 2/17 $ 10,000 Furniture 5/12 17,000 Commercial building 11/1
At the beginning of the year, Poplock began a calendar-year dog boarding business called Griff’s Palace. Poplock bought and placed in service the following assets during the year:Asset Date
Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the
Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1950 and built the cabin at a cost of $10,000 in 1965. His
Meg O’Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used for personal purposes for many years. Her father originally purchased the equipment for
Brittany started a law practice as a sole proprietor. She owned a computer, printer, desk, and file cabinet she purchased during law school (several years ago) that she is planning to use in her
Dennis contributed business assets to a new business in exchange for stock in the company. The exchange did not qualify as a nontaxable exchange. The fair market value of these assets was $287,000 on
In January, Prahbu purchases a new machine for use in an existing production line of his manufacturing business for $90,000. Assume that the machine is a unit of property and is not a material or
Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $2,000
Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping
Explain why percentage depletion has been referred to as a government subsidy.
Compare and contrast the cost and percentage depletion methods for recovering the costs of natural resources. What are the similarities and differences between the two methods?
Compare and contrast the recovery periods of §197 intangibles, organizational expenditures, start-up costs, and research and experimentation expenses.
Explain the amortization convention applicable to intangible assets.
Discuss the method used to determine the amount of organizational expenditures or start-up costs that may be immediately expensed in the year a taxpayer begins business.
Compare and contrast the similarities and differences between organizational expenditures and start-up costs for tax purposes.
Compare and contrast the tax and financial accounting treatment of goodwill.Are taxpayers allowed to deduct amounts associated with self-created goodwill?
What is a §197 intangible? How do taxpayers recover the costs of these intangibles?How do taxpayers recover the cost of a §197 intangible that expires(such as a covenant not to compete)?
Compare and contrast how a Land Rover SUV and a Mercedes Benz sedan are treated under the luxury auto rules. Also include a discussion of the similarities and differences in available §179 expense.
Discuss why Congress limits the amount of depreciation expense businesses may claim on certain automobiles.
Are taxpayers allowed to claim depreciation expense on assets they use for both business and personal purposes? What are the tax consequences if the business use drops from above 50 percent in one
Describe assets that are considered to be listed property. Why do you think the Internal Revenue Service requires them to be “listed”?
Why might a business elect only the §179 expense it can deduct in the current year rather than claiming the full amount available?
What strategies will help a business maximize its current depreciation deductions(including §179)? Why might a taxpayer choose not to maximize its current depreciation deductions?
Compare and contrast the types of businesses that would benefit from and those that would not benefit from the §179 expense.
Explain the two limitations placed on the §179 deduction. How are they similar?How are they different?
Discuss why a small business might be able to deduct a greater percentage of the assets it places in service during the year than a larger business.
Compare and contrast the differences between computing depreciation expense for tangible personal property and depreciation expense for real property under both the regular tax and alternative tax
If a taxpayer has owned a building for 10 years and decides that it should make significant improvements to the building, what is the recovery period for the improvements?
Discuss why Congress has instructed taxpayers that real property be depreciated using the mid-month convention as opposed to the half-year or mid-quarter conventions used for tangible personal
There are two recovery period classifications for real property. What reasons might Congress have to allow residential real estate a shorter recovery period than nonresidential real property?
AAA Inc. acquired a machine in year 1. In May of year 3, it sold the asset. Can AAA find its year 3 depreciation percentage for the machine on the MACRS table? If not, what adjustment must AAA make
A business buys two identical tangible personal property assets for the same identical price. It buys one at the beginning of the year and one at the end of the year. Under what conditions would the
What are the two depreciation conventions that apply to tangible personal property under MACRS? Explain why Congress provides two methods.
Compare and contrast the recovery periods used by MACRS and those used under generally accepted accounting principles (GAAP).
Describe how you would determine the MACRS recovery period for an asset if you did not already know it.
If a business places several different assets in service during the year, must it use the same depreciation method for all assets? If not, what restrictions apply to the business’s choices of
What depreciation methods are available for tangible personal property? Explain the characteristics of a business likely to adopt each method.
Can a taxpayer with very little current year income choose to not claim any depreciation expense for the current year and thus save depreciation deductions for the future when the taxpayer expects to
MACRS depreciation requires the use of a recovery period, method, and convention to depreciate tangible personal property assets. Briefly explain why each is important to the calculation.
Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement tires, oil changes, and a transmission overhaul.Which of these expenditures may be deducted
Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis.
Compare and contrast the basis of property acquired via purchase, conversion from personal use to business or rental use, a nontaxable exchange, gift, and inheritance.
Is an asset’s initial or cost basis simply its purchase price? Explain.
Explain the similarities and dissimilarities between depreciation, amortization, and depletion. Describe the cost recovery method used for each of the four asset types (personal property, real
Explain the differences and similarities between personal property, real property, intangible property, and natural resources. Also, provide an example of each type of asset.
Explain why the tax laws require the cost of certain assets to be capitalized and recovered over time rather than immediately expensed.
Hank started a new business in June of last year, Hank’s Donut World (HW for short). He has requested your advice on the following specific tax matters associated with HW’s first year of
Bryan followed in his father’s footsteps and entered into the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue,
Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients and he believed that
Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories
Erin is considering switching her business from the cash method to the accrual method at the beginning of next year (year 1). Determine the amount and timing of her §481 adjustment assuming the IRS
Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of
Dustin has a contract to provide services to Dado Enterprises. In November of year 0, Dustin billed Dado $10,000 for the services he rendered during the year.Dado is an accrual-method proprietorship
This year William provided $4,200 of services to a large client on credit. Unfortunately, this client has recently encountered financial difficulties and has been unable to pay William for the
BCS Corporation is a calendar-year, accrual-method taxpayer. BCS was formed and started its business activities on January 1, year 0. It reported the following information for year 0. Indicate
Rebecca is a calendar-year taxpayer who operates a business. She made the following business-related expenditures in December of year 0. Indicate the amount of these payments that she may deduct in
Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize in year 0 for the following transactions?a) Adam guarantees that he will refund the cost
Travis is a professional landscaper. He provides his clients with a one-year(12-month) warranty for retaining walls he installs. In June of year 1, Travis installed a wall for an important client,
This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting
Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer.CC manufactures and sells electronic circuitry. On November 15, year 0, CC enters into a contract with Equip Corp (EC) that
Matt hired Apex Services to repair his business equipment. On November 1 of year 0, Matt paid $2,000 for the repairs that he expects to begin in early March of year 1.a) What amount of the cost of
Suppose that David adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).Widget Purchase Date Direct Cost Other Costs Total Cost #1
This year Amber opened a factory to process and package landscape mulch. At the end of the year, Amber’s accountant prepared the following schedule for allocating manufacturing costs to the mulch
Nicole’s business uses the accrual method of accounting and accounts for inventory with specific identification. In year 0, Nicole received a $4,500 payment with an order for inventory to be
In October of year 0, Janine received a $6,000 payment from a client for 25 months of security services she will provide starting on November 1 of year 0.This amounts to $240 per month.a) When must
On April 1 of year 0 Stephanie received a $9,000 payment for full payment on a three-year service contract (under the contract Stephanie is obligated to provide advisory services for the next three
Ben teaches golf lessons at a country club under a business called Ben’s Pure Swings (BPS). He operates this business as a sole proprietorship on the accrual basis of accounting. Ben’s trusty
In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of
Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year.
Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are
Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are
In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting and Stephen has produced the following financial
This year Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because
Andrew is considering starting a business of constructing and selling prefabricated greenhouses. There are three very different methods to constructing these greenhouses, and each method results in
Renee manufactured and sold a “gadget,” a specialized asset used by auto manufacturers that qualifies for the domestic production activities deduction.Renee incurred $15,000 in direct expenses in
Assume Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the aftertax 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 clients. Under what circumstances, if any, can Heather deduct
Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming he has a 30
Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $1,500 for gasoline on these trips. His depreciation on the car if he was using it fully for
Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios?a) Her trip was
Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses:$250 fee to register for the conference,
Ralph invited a potential client to dinner and the theater. Ralph paid $250 for the dinner and $220 for the theater tickets in advance. They first went to dinner and then they went to the theater.a)
Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.a) Josh borrowed $50,000 from the First
Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.a) From time to time, Michael rents a
Manny hired his brother’s firm to provide accounting services to his business.During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to
What is a §481 adjustment and what is its purpose?
Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose.
Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.
What are the relative advantages of the cash and accrual methods of accounting?
Describe the related-party limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?

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