Q. 1

Brad Pitt, owner of a small car repair and engine service business, operates his business as a C corporation with a December 31 year-end. He has three employees, including himself. The following expenses, along with $565,000 of gross income, are reported in the corporations financial statements.

Employee 1 salary $ 28,000

Employee 2 salary 28,000

Brad Pitts salary 45,000

Building rent 24,000

New Machinery purchased for the year 100,000

Depreciation of machinery for the year 10,000

Insurance coverage for all assets in the business 5,000

Insurance coverage on Brad Pitts personal residence 3,000

Consulting Fees 5,000

Utilities 2,000

Taxes and Licenses 12,000

Fine paid to City 4,000

Advertising 3,000

Interest Expense 5,000

Charitable contributions 20,000

Political Contributions 27,000

Dues paid to Small Engine Repair Institute 1,000

Mileage on car for personal use 2,500

House Cleaning expenses on personal residence 1,000

Janitorial expense for business 5,000

Brad Pitt would like to know the amount of his deductible expenses for tax purposes.

Q. 2

At the beginning of 2017, Dr. John opened his medical practice as a personal service corporation. The entity uses a December 31 year-end and the accrual method of accounting. During the year, the corporation billed patients and insurance companies for $485,000 for medical services. At the end of the year, $60,000 of this amount had not been collected. The entity earned $1,500 interest on a money market account held in the local bank and another $1,500 interest on an investment in bonds.

Dr. Johns salary from his corporation is $12,000 per month. However, he did not cash his November and December payroll check until January 2018. To help provide funds to invest in the new business, Dr. Johns parents loaned him $150,000 and did not charge him any interest. He also owns stock that has increased in value from $7,000 at the beginning of the year to more than $30,000 at the end of the year.

Although Dr. John took several accounting classes in college, he would like your help in calculating the correct amounts of his own gross income and the gross income of the corporation.

Q. 3

Warren Buffett owns land that he received from his father 10 years ago as a gift. The land was purchased by his father in 1995 for $5,000 and was worth $10,000 at the time of the gift. The property is currently worth about $50,000. He is considering selling the land and purchasing a piece of property in the mountains.

Warren Buffett also owns 800 shares of AppleCo stock. He inherited the shares from his grandfather when he died in 1998. Warren Buffetts grandfather paid $10,000 for the shares and at the time of his death, the shares were worth $60,000. He is considering selling his shares.

Warren Buffett purchased a building in 2016 for $500,000. The building was destroyed by a fire on March 2017. Fortunately the building was partially insured. He received a reimbursement of $100,000.

Warren Buffett divorced his wife in 2017. In 2010, Warren Buffett and his wife purchased a home for $300,000. At the time of divorce, the home is worth $700,000. As part of the divorce, Warren Buffett receives the home. He wants to sell it for $700,000.

Warren Buffett has come to you for tax advice with respect to the land, shares, building and home. What is the recognized gain or loss for the land, shares and home if they are sold? What is recognized gain or loss for the building that was destroyed by the fire.