Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold Company (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold Company also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?
a. Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.
b. Gold Company may deduct the monthly contingent fee as it is paid.
c. Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
d. Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
e. None of the above.

Instructions Note: This problem is for the 2020 tax year. Daniel B. Butler and his spouse Freida C. Butler file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan's Social Security number is 111-11-1112, and Freida's is 123-45-6780. Dan was born on January 15, 1969, and Freida was born on August 20, 1970. During 2020, Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home: a. Gina, their daughter, age 22, a full-time student, who married on December 21, has no income of her own and did not file a joint return with her husband, Casey, who earned $10,600 during 2020. Gina's Social Security number is 123-45-6788. b. Willie, their son, age 19, graduated high school in May 2020. He is taking a leap year and will not begin college until 2021. He had gross income of $6,300 in 2020. Willie's Social Security number is 123-45-6787. c. Ben, their oldest son, age 26, is a full-time graduate student with gross income of $5,200. Ben's Social Security number is 123-45-6786. Dan was employed as a manager by W], Inc. (employer identification number 11-1111111, 604 Franklin Street, Corbin, KY 40702), and Freida was employed as a salesperson for Corbin Realty, Inc. (employer identification number 98-7654321, 899 Central Street, Corbin, KY 40701). Selected information from the W-2 forms provided by the employers is presented below. Dan and Freida use the cash method. Line Description Dan Freida $74,000 $86,0 11,000 2,960 1 Wages, tips, other compensation 2 Federal income tax withheld 17 State income tax withheld 12,400 3,440 Freida sold a house on December 30, 2020, and will be paid a commission of $3,100 (not included in the $86,000 reported on the W-2) on the January 10, 2021, dosing date. Other income (as reported on 1099 Forms) for 2020 consisted of the following: Dividends on CSX stock (qualified) Interest on savings at Second Bank Interest on City of Corbin bonds Interest on First Bank CD $4,200 1,600 900 382 The $382 from First Barik was an original issue discount. Dan and Freida collected $16,000 on the First Bank CD that matured on September 30, 2020. The CD was purchased on October 1, 2018, for $14,995, and the yield to maturity was 3.3%. Dan participated on a game show and won a cash prize of $7,000. In addition to the above information, Dan and Freida's itemized deductions included the following: Paid on 2020 Kentucky income tax Personal property tax paid Real estate taxes paid Interest on home mortgage (Corbin S&L) $700 600 1,800 4,900 Sales tax from the sales tax table is $1,860. Dan and Freida made Federal estimated tax payments of $8,000. They have never owned or used any virtual currency, and they do not wish to contribute to the Presidential Election Campaign. For 2020, they received the correct amount of economic impact payments (2020 recovery credits). The Kentucky income tax rate is 4%. Required: Compute Dan and Freida's 2020 Federal income tax payable (or refund due). Use Form 1040 and Schedules 1, B and the Qualified Dividends and Capital Gain Tax Worksheet to complete this tax return. If there is a tax overpayment, the Butlers would like a refund. If additional tax is due, assume no underpayment penalty applies. It may be necessary to complete the tax schedules before completing Form 1040. Enter all amounts as positive numbers. If an amount box does not require an entry or the answer is zero, enter "0". When computing the tax liability, do not round your immediate calculations. If required, round your answers to the nearest dollar. Make realistic assumptions about any missing data. Use the Tax Rate Schedule provided. Do not use the Tax Tables. Form 1040 Complete the Butler's Form 1040. Department of the Treasury-Internal Revenue Service (99) 1040 U.S. Individual Income Tax Return Filing Status Married filing jointly Your first name and middle initial Daniel Butler If joint return, spouse's first name and middle initial Freida C Butler Home address (number and street). If you have a P.O. box, see instructions. 625 Oak Street City, town, or post office. If you have a foreign address, also complete spaces below. Corbin, KY 40701 Foreign country name Standard Deduction Age/Blindness Dependents If more than four dependents, see instructions and check here Attach Sch. Bit required. Standard Deduction for- Single or Married filing separately, $12,400 Married filing jointly or Qualifying widow(er), $24,800 Head of household, $18,650 If you checked any box under Standard Deduction, see instructions. Someone can claim: None You: None Spouse: None Last name At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Last name V (see instructions): (1) First name Last name Gina Butler Wille Butler 1 123-45-6788 State Foreign province/state/county Foreign postal code 123-45-6787 2020 Wages, salaries, tips, etc. Attach Form(s) W-2 (2) Social security (3) Relationship number to you 900 Apt. no. 4,200 Child ZIP code Child OMB No. 1545-0074 No 9 Add lines 1, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income 10 Adjustments to income:: a From Schedule 1, line 22 b Charitable contributions if you take the standard deduction. See instructions. 2a Tax-exempt interest... 2a 3a Qualified dividends... 3a 4a IRA distributions... 4a 5a Pensions and annuities 5a 6a Social security benefits 6a 7 Capital gain or (loss). Attach Schedule D if required. If not required, check here... 8 Other income from Schedule 1, line 9. 10a D b Taxable interest. (4)if qualifies for (see instructions): Child tax credit Credit for other dependents No Yes 0 b Ordinary dividends b Taxable amount. b Taxable amount. b Taxable amount. 10b Add lines 10a and 10b. These are your total adjustments to income 11 Subtract line 10c from line 9. This is your adjusted gross income. 12 Standard deduction or itemized deductions (from Schedule A). Your social security number 111-11-1112 Spouse's social security number 123-45-6780 Presidential Election Campaign Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking a box below will not change your tax or refund. None D Yes 1 2b 3b 4b 5b 6b 7 8 9 IRS Use Only 10c 11 12 No 0 160,000 1,982 4,200 7,000 173,182 173,182 24,800 SCHEDULE 1 (Form 1040) Department of the Treasury Internal Revenue Service Name(s) shown on Form 1040, 1040-SR, or 1040-NR Daniel and Freida C Butler Part I Additional Income 1 Taxable refunds, credits, or offsets of state and local income taxes 2a Alimony received. b 3 Date of original divorce or separation agreement (see instructions) Business income or (loss). Attach Schedule C... 4 Other gains or (losses). Attach Form 4797.. 5 6 7 8 Part II 10 12 13 14 15 16 Educator expenses. 11 Certain business expenses of reservists, performing artists, and fee-basis government officials. Attach Form 2106 17 Additional Income and Adjustments to Income Attach to Form 1040, 1040-SR, or 1040-NR. Go to www.irs.gov/Form1040 for instructions and the latest information. 20 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Farm income or (loss). Attach Schedule F. Unemployment compensation Other income. List type and amount 21 Combine lines 1 through 8. Enter here and on Form 1040, 1040-5R, or 1040-NR, line B Adjustments to Income Health savings account deduction. Attach Form 8889. Prize Moving expenses for members of the Armed Forces. Attach Form 3903 Deductible part of self-employment tax. Attach Schedule SE. Self-employed SEP, SIMPLE, and qualified plans.. Self-employed health insurance deduction. Penalty on early withdrawal of savings 18a Alimony paid.. b Recipient's SSN.. c Date of original divorce or separation agreement (see instructions) 19 IRA deduction.. Student loan interest deduction. Tuition and fees deduction. Attach Form 8917 Your social security number 111-11-1112 22 Add lines 10 through 21. These are your adjustments to income. Enter here and on Form 1040, 1040-SR, or 1040-NR, line 10a.... BAA For Paperwork Reduction Act Notice, see your tax return instructions. 1 2a 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18a 19 20 21 OMB No. 1545-0074 22 2020 Attachment Sequence No. 01 7,000 7,000 0 Schedule 1 (Form 1040) 2020 SCHEDULE B (Form 1040) Department of the Treasury Internal Revenue Service (99) Name(s) shown on return Daniel and Freida C Butler Part I 1 List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see the instructions and list this interest first. Also, show that buyer's social security number and address FIRST BANK Interest (See instructions and the instructions for Forms 1040 and 1040-SR, line 2b.) Note: If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firm's name as the payer and enter the total interest shown on that form. Part II Ordinary Dividends (See instructions and the instructions for Form 1040 or 1040- SR, line 3b.) Note: If you received a Form 1099-DIV or substitute statement from a brokerage firm, list the firm's name as the payer and enter the ordinary dividends shown on that form. Part III Interest and Ordinary Dividends Go to www.irs.gov/ScheduleB for instructions and the latest information. Attach to Form 1040 or 1040-SR. Foreign Accounts and Trusts SECOND BANK 2 Add the amounts on line 1 3 Excludable interest on series EE and I U.S. savings bonds issued after 1989. Attach Form 8815. 4 Subtract line 3 from line 2. Enter the result here and on Form 1040 or 1040-SR, line 2b Note: If line 4 is over $1,500, you must complete Part III. 5 List name of payer i CSX 6 Add the amounts on line 5. Enter the total here and on Form 1040 or 1040-SR, line 3b Your social security number 111-11-1112 2 3 4 OMB No. 1545-0074 6 2020 Attachment Sequence No. 08 Amount 382 7a At any time during 2020, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions... 1,600 1,982 1,982 Amount 4,200 4,200 Note: If line 6 is over $1,500, you must complete Part III. You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferorto, a foreign Yes trust. No X Qualified Dividends and Capital Gain Tax Worksheet-Line 16 Before you begin: 1. Enter the amount from Form 1040 or 1040-SR, line 15. However, if you are filing Form 2555 or 2555-EZ (relating to foreign earned income), enter the amount from line 3 of the Foreign Earned Income Tax Worksheet (Taxable income) 2. Enter the amount from Form 1040, line 3a*. 3. Are you filing Schedule D?* Yes No 4. Add lines 2 and 3 Enter the smaller of line 15 or 16 of Schedule D. I either line 15 or line 16 is blank or a loss, enter -0- Enter the amount from Form 1040 or 1040-SR, line 7. See the earlier instructions for line 16 to see if you can use this worksheet to figure your tax. Before completing this worksheet, complete Form 1040 through line 15. If you do not have to file Schedule D and you received capital gain distributions, be sure you checked the box on Form 1040 or 1040-SR, line 7. 5. If filling Form 4952 (used to figure investment interest expense deduction), enter any amount from line 4g of that form. Otherwise, enter -O-. 6. Subtract line 5 from line 4. If zero or less, enter -0- 7. Subtract line 6 from line 1. If zero or less, enter -0- 8. Enter: $40,000 if single or married filing separately, $80,000 if married filling jointly or qualifying widow(er), $53,600 if head of household. 9. Enter the smaller of line 1 or line 8 10. Enter the smaller of line 7 or line 9. 11. Subtract line 10 from line 9. This amount is taxed at 0%. 12. Enter the smaller of line 1 or line 6. 13. Enter the amount from line 11.. 15. Enter: 14. Subtract line 13 from line 12. $441,450 if single, $248,300 if married filing separately, $496,600 if married filing jointly or qualifying widow(er), $469,050 if head of household. 16. Enter the smaller of line 1 or line 15. 17. Add lines 7 and 11 18. Subtract line 17 from line 16. If zero or less, enter -0- 19. Enter the smaller of line 14 or line 18. 20. Multiply line 19 by 15 % (0.15) 21. Add lines 11 and 19 2. 3. 4. 5. 4,200 4,200 1. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Keep for Your Records 21. 148,382 4,200 144,182 80,000 80,000 80,000 0 4,200 0 4,200 496,600 148,382 144,182 4,200 4,200 4,200 20. 630 20. Multiply line 19 by 15% (0.15) 21. Add lines 11 and 19 22. Subtract line 21 from line 12 23. Multiply line 22 by 20% (0.20) 24. Figure the tax on the amount on line 7. If the amount on line 7 is less than $100,000, use the Tax Table to figure the tax. If the amount on line 7 is $100,000 or more, use the Tax Computation Worksheet. 25. Add lines 20, 23, and 24. Feedback 26. Figure the tax on the amount on line 1. If the amount on line 1 is less than $100,000, use the Tax Table to figure the tax. If the amount on line 1 is $100,000 or more, use the Tax Computation Worksheet........... Check My Work 27. Tax on all taxable income. Enter the smaller of line 25 or 26. Also include this amount on the entry space on Form 1040 or 1040-SR, line 16. If you are filling Form 2555, don't enter this amount on the entry space on Form 1040 or 1040-SR, line 16. Instead, enter it on line 4 of the Foreign Earned Income Tax Worksheet... Single-Schedule X If taxable income is: Over- $0 9,875 40,125 85,525 163,300 207,350 518,400 27. *If you are filing Form 2555 or 2555-EZ, see the footnote in the Foreign Earned Income Tax Worksheet before completing this line. If taxable income is: Over- But not over- $0 19,750 80,250 171,050 326,600 414,700 622,050 $9,875 40,125 85,525 163,300 207,350 518,400 But not Over- 2020 Tax Rate Schedules Use the 2020 Tax Rate Schedules to compute the tax. (Note: Because the tax rate schedules are used instead of the tax tables, the amount of tax computed may vary slightly from the amount listed in the tables.) 2020 Tax Rate Schedules The tax is: $ 19,750 80,250 171,050 326,600 414,700 622,050 ...... 10% $987.50 +12% 4,617.50+ 22% 14,605.50 +24% 33,271.50+ 32% 47,367.50 + 35% 156,235.00 + 37% Married filing jointly or Qualifying widow(er)-Schedule Y-1 of the amount over- The tax is: ...... 10% $1,975.00+ 12% 9,235.00 +22% of the amount over- 29,211.00 24% 66,543.00 + 32% 94,735.00+ 35% 167,307.50+ 37% $0 9,875 40,125 85,525 163,300 207,350 518,400 21. $0 19,750 80,250 22. 171,050 326,600 414,700 622,050 $0 14,100 53,700 85,500 Head of household-Schedule Z If taxable income is: Over- 163,300 207,350 518,400 $0 9,875 40,125 85,525 163,300 207,350 311,025 4,200 But not over- 0 $ 14,100 53,700 85,500 163,300 207,350 518,400 But not over- $9,875 40,125 85,525 163,300 Married filing separately-Schedule Y-2 If taxable income is: Over- 207,350 311,025 20. 23. 24. 25. 26. The tax is: ...... 10% $ 1,410.00 + 12% 6,162.00+ 22% 13,158.00+ 24% 31,830.00+ 32% 45,926.00+ 35% 154,793.50 +37% The tax is: ...... 10% $ 987.50+ 12% 4,617.50+ 22% 14,605.50 +24% 630 33,271.50+ 32% 47,367.50 + 35% 83,653.75 + 37% 24,224 X of the amount Over- $0 14,100 53,700 85,500 163,300 207,350 518,400 of the amount over- $0 9,875 40,125 85,525 163,300 207,350 311,025 $0 19,750 80,250 171,050 326,600 414,700 622,050 $ 19,750 80,250 171,050 326,600 414,700 622,050 ...... 10% $ 1,975.00 +12% 9,235.00 + 22% 29,211.00 +24% 66,543.00 +32% 94,735.00 + 35% 167,307.50 + 37% Decrease in salary and other earned income Decrease in Social Security and Medicare tax Decrease in Kentucky income tax Decrease in Federal taxable income Decrease in Federal income tax Sincerely, $0 19,750 80,250 171,050 326,600 414,700 622,050 After-tax decrease in cash flow If you have any further questions, please call me. John Jones, CPA $0 9,875 40,125 85,525 Tax Planning Dan plans to reduce his work schedule and work only half-time for W333 in 2021. He has been writing songs for several years and wants to devote more time to developing a career as a songwriter. Because of the uncertainty in the music business, however, he would like you to make all computations assuming that he will have no income from songwriting in 2021. To make up for the loss of income, Freida plans to increase the amount of time she spends selling real estate. She estimates that she will be able to earn $90,000 in 2021. 163,300 207,350 311,025 Assume that all other income and expense items will be approximately the same as they were in 2020 (including the prize winnings). Assume that Willie will be enrolled in college as a full-time student for the summer and fall semesters. No changes regarding Gina and Ben. The $3,100 commission received on January 10, 2021, is included in the $90,000 income to be eamed by Freida in 2021. The 22% 2020 marginal tax rate remains the same in 2021. Assume a payroll tax rate for FICA and Medicare of 7.65% and the Kentucky state income rate of 4%. Assume Interest income, dividend income, prize income and the standard deduction will be the same for 2021. Complete the following letter regarding whether the Butlers will have more or less disposable income (after Federal income tax) in 2021. October 29, 2020 Dan and Freida Butler 625 Oak Street Corbin, KY 40701 Dear Dan and Freida You asked me to estimate your after-tax income under the assumption that Dan will work only halftime next year. The 37,000 reduction in Dan's pay will be partially offset by a s 4,000 estimated increase in the amount Freida will earn. This net s 33,000 reduction in salary and wages will also result in a decrease in your Kentucky income tax, Social Security tax, and Medicare tax. The net reduction in your after-tax cash flow will be approximately $22,185 . The calculations are presented below: $ 9,875 40,125 85,525 163,300 207,350 311,025 SWFT, LLP 5191 Natorp Boulevard Mason, OH 45040 ...... (s Taxable Income ...... 10% 33,000 ) 31,680 $ 987.50 +12% 4,617.50+ 22% 14,605.50 +24% 33,271.50+ 32% 47,367.50 + 35% 83,653.75 + 37% 1,320 (s Cash Flow 33,000 ) 2,525 1,320 $0 9,875 40,125 85,525 163,300 207,350 311,025 6,970 22,185 Form 1040 (2020) . If you have a qualifying child, attach Sch. EIC. . If you have nontaxable combat pay, see instructions. BAA For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Refund 13 Qualified business income deduction. Attach Form 8995 or Form 8995-A Direct deposit? See instructions. 14 Add lines 12 and 13. 15 16 17 18 Add lines 16 and 17. 21 19 20 Amount from Schedule 3, line 7. Add lines 19 and 20 2 Daniel and Freida C Butler Tax (see instructions). Check if any from Form(s): 108814 20 4972 30 Amount from Schedule 2, line 3. 22 Subtract line 21 from line 18. If zero or less, enter -0- 23 Other taxes, including self-employment tax, from Schedule 2, line 10. 24 Add lines 22 and 23. This is your total tax Federal income tax withheld from: Form(s) W-2. 25 27 a 26 Taxable income. Subtract line 14 from line 11. If zero or less, enter -0- b Form(s) 1099. Other forms (see instructions). 31 28 29 d Add lines 25a through 25c. 30 Child tax credit or credit for other dependents. 32 Additional child tax credit. Attach Schedule BB12.. American opportunity credit from Form 8863, line 8.. 2020 estimated tax payments and amount applied from 2019 return Earned income credit (EIC). Recovery rebate credit. See instructions. Amount from Schedule 3, line 13. 25a 25b 36 Amount of line 34 you want applied to your 2021 estimated tax 25c PTICAL 27 28 29 30 31 Add lines 27 through 31. These are your total other payments and refundable credits 111-11-1112 33 Add lines 25d, 26, and 32. These are your total payments.. 34 If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid. 35a Amount of line 34 you want refunded to you. If Form 8888 is attached, check here b Routing number - c Type: Checking Savings d Account number 36 P 13 14 15 16 17 18 19 20 21 22 23 24 25d 26 32 33 34 35a 24,800 148,382 Form 1040 (2020) Page 2 22,185 X