Required:

Using the space below each item, briefly identify the federal tax issue(s) and the related federal tax consequence(s) for each of the following independent factual situations. Assume cash-basis taxpayers in all situations. Assume you are the tax preparer for the taxpayers involved and they have asked you if the transactions have any ramifications for tax purposes. What would you tell them? What are the tax issues? What specific dollar impact will the transaction have on the computation of federal taxable income? What will be the character of the transaction (for example, ordinary income/deduction, capital gain/loss, 1231 gain/loss, 1245 gain, 1250 gain, etc.)? Will the transaction be taxable (deductible) for self-employment tax purposes? Are there other issues that the client should be made aware of? You are not required to prepare a letter to client or memo to file, rather just a reasonable response as reflected in the example provided. Upload your completed Word document (or PDF) by Sundaytday 12/12/21 using the link provided in the Connect assignment.

Example:

Modern Corporation (assume it is a C corporation formed and doing business in Minnesota, the type of corporation subject to the 21% federal income tax rate) sold a used pick-up truck to the company president (also the sole shareholder who is being paid a reasonable salary) for only $1,000 (a very good deal). The president planned to keep the truck at the familys lake cabin and use it mostly for hunting and fishing trips with his children. The fully-depreciated truck was originally purchased by the corporation for $30,000, and had an estimated value of $10,000 at the time it was sold to the company president. You are the tax preparer for both the corporation and the company president/sole shareholder. Are there any issues that should concern either the corporation or the president/shareholder?

The issue to be resolved is whether this bargain purchase is taxable to the president/sole shareholder. The corporation should probably be reporting a $10,000 (not $1,000) as ordinary income due to 1245 recapture on the sale (which would be taxed at 21%), and a $9,000 non-deductible dividend paid. Since the president/sole shareholder is already being paid a reasonable salary, he should be reporting $9,000 dividend income for the bargain element, which will be taxed at the lower preferential tax for qualified dividends.

1. Bill is a CPA practicing as a sole proprietorship and files Form 1040, Schedule C. He attended a 3-day conference in 2020 in Washington DC on the new tax law. His wife Carol and their two children joined him on the trip. They stayed two extra days for sightseeing in Washington DC. Costs included the conference registration $600, airfare $500 roundtrip per person, taxi $50 from airport to hotel for the group (no additional costs for extra passengers), taxi $70 from hotel to airport for the group (no additional costs for extra passengers), hotel $350 per night for the group (would have been only $275 had only one person been staying at the hotel), meals $100 per day per person (ignore any standard per diem rates that might apply for meals). They also went to a Washington Capitals hockey game at the end of the first day of the conference, at a cost of $800 total for the group. What deduction, if any, is Bill entitled to report on his Schedule C?