Here is the tax assignment. Your help will be highly appreciated.

Acc242 Assignment 3 Tax Due on 16 June 2017 Holland University QUESTION 1 Your client, Phil McCavity, DDS, is a dentist who is a cash basis taxpayer. Phil is in the 40% tax bracket. He leases office space from the owner of a medical office building. In July 2017 he entered into a ten year lease with an option to extend his lease for another two years. The lease calls for rent of $24,000 per month in the first year and provides for annual rent adjustments based on the Consumer Price Index. It is December 2017 and your client has asked how much he will save in taxes for 2017 if he prepays the January 2018 rent before December 31, 2017. What is your answer? QUESTION 2 Assume the same facts as above, except that the lease calls for rent increases of $1,000 per month in each of the first five years and increases of $1,200 per month for the next five years. If he exercises the renewal option, the monthly lease payment increases by $1,500 every year. How much will your client save in 2017 taxes if he prepays the January 2018 rent before December 31, 2017? Problem 1/Class 2 Your client, Phil McCavity, DDS, is a dentist who is a cash basis taxpayer. Phil is in the 40% tax bracket. He leases office space from the owner of a medical office building. In July 2017 he entered into a ten year lease with an option to extend his lease for another two years. The lease calls for rent of $24,000 per month in the first year and provides for annual rent adjustments based on the Consumer Price Index. It is December 2017 and your client has asked how much he will save in taxes for 2017 if he prepays the January 2018 rent before December 31, 2017. What is your answer? Assume the same facts as above, except that the lease calls for rent increases of $1,000 per month in each of the first five years and increases of $1,200 per month for the next five years. If he exercises the renewal option, the monthly lease payment increases by $1,500 every year. How much will your client save in 2017 taxes if he prepays the January 2018 rent before December 31, 2017? The lease agreement presented above is subject to 467 because the total sum of the lease agreement exceeds $250,000 and also it involves stepped rental agreements. Although in 1st paragraph, certain increases are ignored such as increases tied to objective verifiable index (i.e., CPI), so the lease agreement is not considered as involving stepped rent, thus not subject to 467. Advance rentals are deductible up to one year to which they apply, to both cash basis and accrual basis taxpayers. Mr. MacCavity may deduct the January 2018 rent amount actually paid within 2017 tax year. The tax saving will be 24,000 x 40% = $9,600. In the second paragraph's case, the lease agreement's proportional rental accrual is required to be calculated under 467. If the proportional rental accrual is required to be calculated, the amount of fixed rent allocated to the rental period is the sum of the present values of the amounts payable under the terms of the Sec. 467 rental agreement as fixed rent and interest, divided by the sum of the present values of the fixed rent allocated to each rental period under the rental agreement. Because the rental agreement does not call for any fixed rent payments prior to the lease term, the present value is determined as of the first day of the first rental period in the lease term. The present value of the single amount payable by the lessee under the rental agreement is computed as follows: (using 110% AFR long-term, compound annually; 2.95%) (24,000 + 25,000 + 26,000 + 27,000) x 12 + (28,000 x 12) x 5 (1+ 0.0295) 10 = 2,171,366.35 The sum of the present values of the fixed rent allocated to each rental period (discounting the fixed rent allocated to a rental period from the last day of such rental period) is computed as follows: 24,000 x12 (1+ 0.0295) + 25,000 x 12 + 26,000 x 12 + 2 3 (1+ 0.0295) (1+ 0.0295) 28,000 x 12 + 28,000 x 12 28,000 x 12 = 2,760,206.61 (1+ 0.0295) 5 (1+ 0.0295) 10 (1+ 0.0295) 6 + 28,000 x 12 (1+ 0.0295) 7 27,000 x 12 (1+ 0.0295) 4 + 28,000 x 12 (1+ 0.0295) 8 Thus, the fraction for determining the proportional rental amount is; 2,171,366.35/ 2,760,206.61 = 0.78666804946 467 rent in year. 1 ; 24,000 x 0.78666804946 = $18,880/month Therefore, the tax saving will be 18,880 x 40% = $7,552. If the additional 2-year option is exercised; The fraction for determining the proportional rental amount will be; 2,560,886.99/3,279,751.32 = 0.78081742795 467 rent in year. 1 ; 24,000 x 0.78081742795= $18,739.62/month Therefore, the tax saving will be 18,739.62 x 40% = $7,495.85 + + 28,000 x12 (1+ 0.0295) 9