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NAME:__________________________ 1. S (a full-time student) receives a scholarship to attend college. S is a music major in college and has received a gymnastics scholarship of $10,000. S spends the scholarship money as follows: Dormitory fees Tuition Books Student fees Sorority dues Food Gymnastics club Car insurance Notebooks and supplies Concert tickets Costs to attend gymnastic meets $2,000 $2,000 $750 $250 $250 $2,250 $250 $750 $500 $500 $500 Determine whether any of the above listed expenses will qualify for exclusion from gross income under section 117. Explain your reasoning for each. 2. M and W are husband and wife. They are filing joint tax returns for both 2013 and 2014 and have zero dependents. Below are their income and deductions for each year. Determine their taxable incomes, if any, for each year. Item 2013 2014 Interest Income Business gross receipts Business cost of sales Other business expenses M's Salary (not from the business) Net Capital Gains/(losses) Interest Expense on Mortgage Property taxes Medical expenses (before any limitation) Casualty loss (personal, before any limits but after insurance reimbursement) 4,000 400,000 200,000 125,000 80,000 3,000 225,000 175,000 125,000 40,000 15,000 25,000 (3,000) 22,000 4,000 10,000 3,000 0 0 4,000 3. V is involved in a car accident during which V is injured. V can no longer perform at her job as a violinist. She sues the person who caused the wreck as well as the person's employer since the individual was working as a delivery person at the time of the accident. V collects a total damage award of $12,000,000 made up of $2,000,000 of damages to her body, $2,000,000 of damages to her mind, and $8,000,000 in punitive damages. Her initial petition to the court (due to a poor lawyer) was silent on the split of what she was suing for and simply asked for a total award of $25,000,000. You are V's tax preparer. Given these facts, determine how much you would exclude from V's gross income based upon: A. The most conservative interpretation of the amount excludible. Conservative meaning the most inclusion in gross income. B. The most aggressive interpretation of the amount excludible. Aggressive meaning the most exclusion from gross income. 4. Even though V's attorney in problem 3 did a poor job on the allocation, he was still awarded, under the contract he signed with V, 25% of her taxable settlement as his compensation. Discuss under what theories you might exclude this amount from V's gross income (if possible), and how much income must her attorney recognize. If you were the attorney, would you have constructed your agreement with V in this fashion? Explain how, if at all, your answer might change if V's lawsuit were for age discrimination. 5. Name the four criteria in order to exclude an award from your gross income under section 74. (4 points) A. B. C. D. 6. Corporation A likes to provide rewards to its long-time employees in recognition of their commitment to the company. Every 4 years on the employee's anniversary date of employment, Corporation A gives the employee a gift certificate equivalent to $350 which they can use at Corporation A's on-line store. Can Corporation A deduct the amount provided to the individuals? Can the employees exclude the amount from their income? Explain your answers. 7. T is thinking about starting or acquiring a new business. T is currently in the pie making business where his company bakes special order pies for parties and for grocery stores. The grocery store pies are mass produced as opposed to the special order pies. T thinks that his business expertise will lend itself to a catering business. He has spent considerable time looking into the business, to determine whether he should buy an existing business or start his own. He has incurred legal fees from lawyers, and accountant's fees for various advice with respect to the new venture. The legal and accounting fees to date have been $15,000. T decides to start his own business and begins to work on getting the business up and running. He incurs the following costs. He loans some of his own pie staff to the new business in order to get it going. Legal/accounting (same as above) Incorporation costs Loaning his pie staff time Purchasing of catering equipment Truck purchase $15,000 $4,000 $10,000 $50,000 $25,000 Determine what to do with each of the above costs. Support your conclusions as to whether you think that T can deduct the costs or must capitalize them. Determine the amount you think that T can deduct during 2014, and how much, if any, he must deduct in future years. Presume that all of the activities and costs were incurred during 2014. 8. W is in the business of manufacturing crates. He purchased and placed in service some more crate making equipment and is asking you, as his CPA, what is the best answer for tax purposes with respect to generating the lowest possible taxable income for 2010. W purchased $1,750,000 worth of equipment in the first month of the tax year. Using all potential depreciation related deductions, determine how much depreciation W can take for the year of the purchase. Presume that the crate making equipment falls in the 7 year life for MACRS. 9. Using the same facts as problem 8 except that the equipment was purchased and placed in service in January 2009, determine the tax depreciation deductions available to W in 2009. 10. Using the same facts as problem 8, except that the equipment was purchased and placed in service in the last month of 2011, determine the tax depreciation available to W in 2011. 11. F has recently purchased a home that he intends to use as a vacation home and a rental property. He and his family use the home for 65 days during the first year of ownership. F uses a property management firm to rent the property for $50 per night for a total of 155 nights during the year. He incurs the following expenses on the property: Interest expense Property taxes Maintenance Property manager fees Cleaning fees Depreciation Advertising Insurance $3,000 $2,000 $500 $2,500 $2,500 $3,500 $500 $300 Determine the net income or loss that F has from the property. Support your answer with a conclusion on whether the property is a residence or a rental property. If a rental property, comment on the deductibility of the loss, if any. If there are any deductions that F can use as itemized deductions, determine which ones and their amounts. 12. Using the same facts from problem 11, determine how many, if any, more days F must rent the property in order for it to be a rental (presuming it was not a rental in problem 11) and then determine the net income or loss from the activity. (For purposes of this problem you can ignore any passive activity loss rules). If you conclude that there are not enough days, or other information to answer this question, change the facts of problem 11 such that the property does qualify as a rental and explain what you changed (in other words, rewrite problem 11 and then solve it based upon your new facts) 13. P and J are a married couple with the following items of income for 2014: P wages State tax refunds J unemployment Dividends Interest income J Social Security $45,000 $5,000 $2,750 $400 $350 $18,000 P is a flight attendant who occasionally takes advantage of the airline's \"friends and family\" benefits where P and J can fly for free on certain flights at certain times. The only restriction on the use of the flights by P and J is that the flight cannot be full, otherwise, they can fly anywhere in the world. P and J took flights costing $4,000 during the year when compared to regular passenger costs. A review of their 2013 tax return shows they deducted $1,200 of state income taxes on their federal return. P and J also have the following deductions: Interest on home mortgage $5,000 State income taxes $2,500 State sales taxes $1,000 Property taxes $1,500 Charitable contributions $300 Contributions to congressman $400 Airline uniform costs $300 Calculate P and J's 2014 Adjusted Gross Income (AGI) as well as their taxable income. Presume that their personal exemptions total $7,000 and they will file a married filing joint tax return. If you are excluding any of the above items from either income or deductions, provide an explanation as to why. Show your calculations 14. Adding to the facts in problem 13, J decided he had enough of watching television all day and decided to start his own business. J incurs the following costs to get up and running: Legal fees to secure his business name and website domain name $500 Purchase of computer equipment $4,000 Purchase of equipment to put stitching on hats and clothing $3,000 His business is reasonably successful during 2014 and he had sales of $12,000 and total cost of goods sold of $10,000. Presume that both the computer equipment and the stitching equipment are assigned the 5 year life category for MACRS. Separately calculate what you think is the best result for tax purposes of J's business in 2014. Once you have that complete, use your conclusions and the information in problem 13 to calculate the AGI and taxable income of P and J for 2014. Do they end up with a net operating loss which they can carryback to 2012 and 2013? 15. During the flood of 1997 in Sacramento, the first floor of B's house was completely covered with water. Because he had just purchased the home two months before the flood, he knew it was worth $250,000 because that is what he paid for it. He also lost his car in the flood which originally cost him $10,000 in 1988 and was worth $1,000 in 1997. Once the water receded, B obtained a contractor to begin fixing his new home. Unfortunately for B, he had decided against flood insurance during the purchase process of his new home, thus there was little likelihood of receiving any type of insurance reimbursement for the repairs. Since he was already in the process of repairs, B decided to have the contractor add a deck on the back of the house. B and the contractor agreed upon an aggregate price for the repairs and the deck of $40,000. B's car was a total loss and he was reimbursed by his car insurance company for $1,000. B's AGI for 1997 was $275,000 (he is a doctor with a successful private practice). If we assume the cost of the deck by itself is $10,000, does B get to take any type of loss on his return related to the flood damage? If so, how much is the loss and is it a deduction for AGI or from AGI? 16. Continuing problem 15, B decides to sue the county and federal government for not properly telling him that his house might be in a flood zone. He hires a lawyer on a contingent fee arrangement where the lawyer will obtain 33% of any settlement. In 2014, the governments finally settle the suit by B (and many others) and B receives a gross settlement (before attorney fees) of $41,000. How much will be included in B's adjusted gross income in 2014? Can B deduct any of the legal fees paid to the lawyer as either a deduction for AGI or from AGI - explain your answers. 17. D has decided to start his own enterprise growing wheat grass. The particular strain of wheat grass he plans on growing is very susceptible to direct sunlight, so D buys a vacant home in Elk Grove. He proceeds to board up all the windows, except the ones in his bedroom, and installs sophisticated hydroponic and growing light systems. Because D had previous experience working in a plant nursery that recently closed down, he did not spend any money investigating this new venture. D brought in $25,000 selling his wheat grass at local craft shows on the weekends and to friends. He incurred the following expenditures during the year. Expenditure Amount Lighting system Hydroponic equipment Wheat grass seeds Gas to the craft shows D's time, based upon his prior job's wage rate of $12/hour Doritos and other snacks Window coverings Electricity Water bills Purchase of the house Property taxes Mortgage interest Containers $12,000 $10,000 $3,000 $4,000 $12,000 $1,000 $2,500 $8,000 $3,000 $175,000 $1,500 $6,000 $1,000 D lived in the house during the year to avoid having to move back in with his mother. Decide whether this venture is a business or a hobby and calculate D's gross income and tax deductions based upon your conclusion. Support your conclusion with a short narrative explaining why you came to your conclusion (answering, \"because it was the easiest to calculate\" will result in reduced points). 18. Based on problem 17, use the opposite conclusion from what you determined in problem 18 and provide the results of what D should include in gross income and his taxable deductions. For both problems 17 and 18, when you conclude the venture is a business, show how you might present D's net income (including any calculations of depreciation expense) and determine where on his return this information might show up. Other assumptions for 17 and 18: growing systems and lighting systems fall into a 7 year MACRS category (whether your research supports that or not, this is the assumption we are using), and D does not rent any part of the house. The year for purposes of these two problems is 2014. 19. Ted provided you the following information about his business income and outflows for the years 2012 through 2014. After a long discussion with Ted about his business, you also determined that in 2012, Ted entered into a long-term contract to provide services to a large client of his. The contract terms called for an advance payment in 2012 of $200,000 and the length of the contract was to be 20 months. Ted signed the contract on July 2, 2012 and started work for this client the next day. The client paid him upon signing of the contract and this amount is included in the cash receipts listed below for 2012. After 16 months, the client decided to terminate Ted's services and demanded the remainder of their money back. Ted returned the remainder of the money at the beginning of 2014, but instituted a lawsuit for breach of contract to get the money back. The cost to Ted is included in the cash payments shown below for year 3. Ted also pays his employees and himself a monthly salary payable on the last day of the month, with the exception of December when Ted tells the payroll accountant to move payday to the next day for that month only. Ted runs the business as a corporation. The employees monthly salaries are $10,000 and Ted's salary is $20,000 per month. These amounts are not included in the below balances of accounts payable. Below is relevant information on the cash ins and outs of Ted's business. You should assume that the monthly payroll is not included in the beginning (if any) and ending accounts payable, BUT it is included in the amounts of cash expenses. In other words, do NOT assume that you need to make adjustments to the amounts below for expenses shown. If you do, your calculations will be off and you will be unable to reconcile the cash and accrual methods completely. 2012 Beginning Accounts Receivable 200,000 2013 350,000 2014 175,000 Ending Accounts Receivable Cash Received Beginning Accounts Payable Ending Accounts Payable Cash Expenses 350,000 600,000 150,000 250,000 380,000 175,000 700,000 250,000 275,000 450,000 150,000 800,000 275,000 300,000 500,000 Required: Calculate Ted's business net taxable income based upon the accrual method. Then calculate Ted's business net taxable income on the cash method. Ignoring tax law that would have required Ted to make a choice in the first year of his business and based solely on the three years of information you have available, recommend the best method of accounting for Ted's business and explain your reasoning. 20. Name two things I can do to make this class better for the rest of the semester. Naming \"no or less homework\" will result in zero points for this