Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming he has a 30 percent marginal tax rate.
a. $500 fine for speeding while traveling to a client meeting.
b. $240 of interest on a short-term loan incurred in September and repaid in November. Half of the loan proceeds were used immediately to pay salaries and the other half was invested in municipal bonds until November.
c. $600 for office supplies in May of this year. He used half of the supplies this year and he will use the remaining half by February of next year.
d. $450 for several pair of work boots. Christopher expects to use the boots about 80 percent of the time in his business and the remainder of the time for hiking. Consider the boots to be a form of clothing.
> LNS corporation reports book income of $2,000,000. Included in the $2,000,000 is $15,000 of tax-exempt interest income. LNS reports $1,345,000 in ordinary and necessary business expenses. What is LNS Corporation’s taxable income for the year? &n
> Is a corporation’s choice of its tax year independent from its year-end for financial accounting purposes?
> Does a corporation pay the AMT in addition to or instead of the regular tax? Briefly explain.
> Compare and contrast the general rule for determining the amount of the charitable contribution if the corporation contributes capital gain property versus ordinary income property.
> Is a corporation allowed to carry a net operating loss forward if it has income in prior years that it could offset with a carryback? Explain.
> What role do a corporation’s audited financial statements play in determining its taxable income?
> In its first year of existence (year 1), Willow Corp. (a C corporation) reported a loss for tax purposes of $30,000. In year 2 it reports a $40,000 loss. For year 3, it reports taxable income from operations of $100,000 before any loss carryovers. Usin
> Alice, the sole shareholder of QLP, decided that she would purchase a building and then lease it to QLP. She leased the building to QLP for $1,850 per month. However, the IRS determined that the fair market value of the lease payment should only be $1,60
> What is the tax base for the Social Security and Medicare taxes for an employee or employer? What is the tax base for Social Security and Medicare taxes for a self-employed individual? Is the self-employment tax in addition to or in lieu of federal incom
> Visit your state’s official Web site and review the information there related to forming and operating business entities in your state. Write a short report explaining the steps for organizing a business in your state and summarizing any tax-related info
> List four basic tax planning strategies that corporations and shareholders can use to mitigate double taxation of a C corporation’s taxable income.
> Assume Congress increases the dividend tax rate to the ordinary tax rate while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income?
> Assume Congress increases individual tax rates on ordinary income while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income? How would this change affect overall tax rates for owners of flo
> What types of business entities does the U.S. tax system recognize?
> Can unincorporated legal entities ever be treated as corporations for tax purposes? Can corporations ever be treated as flow-through entities for tax purposes? Explain.
> Why is it a nontax advantage for corporations to be able to trade their stock on the stock market?
> Why are C corporations still popular despite the double tax on their income?
> Explain how legal entities differ in terms of the liability protection they afford their owners.
> What happens to a C corporation’s net operating loss carryover after 20 years?
> Which is the largest tax collected by the U.S. government? What types of taxpayers are subject to this tax?
> When a C corporation reports a loss for the year, can shareholders use the loss to offset their personal income? Why or why not?
> If a corporation borrows money from a shareholder and pays the shareholder interest at a greater than market rate, how will the interest in excess of the market rate be treated by the IRS?
> How many levels of taxation apply to corporate earnings paid out as nonqualified fringe benefits? Explain.
> How many levels of taxation apply to corporate earnings paid out as qualified fringe benefits? Explain.
> Describe the circumstances in which a taxpayer acquires a home and rents it out and is not allowed to deduct a portion of the interest expense on the loan the taxpayer used to acquire the home.
> Paris participates in her employer’s nonqualified deferred compensation plan. For 2016, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and her marginal income tax rate is 30 percent, how much
> Marissa participates in her employer’s nonqualified deferred compensation plan. For 2016, she is deferring 10 percent of her $320,000 annual salary. Assuming this is her only source of income and her marginal income tax rate is 30 percent, how mu
> What types of retirement plans are available to self-employed taxpayers?
> What are the primary tax differences between traditional IRAs and Roth IRAs?
> Are companies allowed to decide who can and who cannot participate in nonqualified deferred compensation plans? Briefly explain.
> Name three common types of income shifting.
> Can employers match employee contributions to Roth 401(k) plans? Explain.
> What are the differences between a traditional 401(k) and Roth 401(k) plan?
> What nontax factor(s) should an employee consider when deciding whether and to what extent to participate in an employer’s 401(k) plan?
> When may employees begin to receive defined contribution plan distributions without penalty?
> Describe how an employee’s benefit under a defined contribution plan is determined.
> Describe the maximum annual benefit that taxpayers may receive under defined benefit plans.
> What does it mean to vest in a defined benefit or defined contribution plan?
> Meg works for Freedom Airlines in the accounts payable department. Meg and all other employees receive free flight benefits (for the employee, family, and 10 free buddy passes for friends per year) as part of their employee benefits package. If Meg uses
> Brady graduated from SUNY New Paltz with his bachelor’s degree recently. He works for Makarov & Company CPAs. The firm pays his tuition ($10,000 per year) for him so that he can receive his Masters of Science in Taxation which will qualify hi
> Lynette is the CEO of publicly traded TTT Corporation and earns a salary of $200,000 in the current year. Assume TTT has a 35 percent marginal tax rate. What is TTT Corporation’s after-tax cost of paying Lynette’s salary excluding FICA taxe
> Laura Li, a U.S. resident, works for three months this summer in Hong Kong. What type of tax authority may be especially useful in determining the tax consequences of her foreign income?
> From an employer perspective, how are incentive stock options treated differently than nonqualified stock options for tax purposes? In general, for a given number of options, which type of stock option should employers prefer?
> Longhaul Trucking traded two small trucks (each had a 10,000-pound gross weight) for one large truck (18,000-pound gross weight). Do the trucks qualify as like-kind property to Longhaul? (Hint: because the trucks are tangible personal property they must
> Lassen Corporation sold a machine to a machine dealer for $25,000. Lassen bought the machine for $55,000 and has claimed $15,000 of depreciation expense on the machine. What gain or loss does Lassen realize on the transaction?
> Shasta Corporation sold a piece of land to Bill for $45,000. Shasta bought the land two years ago for $30,600. What gain or loss does Shasta realize on the transaction?
> Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1950 and built the cabin at a cost of $10,000 in 1965. His grandfather died in 1980 and when his grandmother recently pas
> Meg O’Brien received a gift of some small-scale jewelry manufacturing equipment that her father had used for personal purposes for many years. Her father originally purchased the equipment for $1,500. Because the equipment is out of production and no lon
> On November 1 of year 0, Jaxon borrowed $50,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $4,500 relating to the 12-month period from November of year 0 through October of year 1. a. How much interest,
> Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution. a. From time to time, Michael rents a dump truck for his business. While hauling gravel to
> Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this exp
> Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate? Why?
> Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose?
> Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.
> Explain why Congress enacted the UNICAP rules and describe the burdens these rules place on taxpayers.
> Fred is considering using the accrual method for his next business venture. Explain to Fred the conditions for recognizing income for tax purposes under the accrual method.
> Compare and contrast the different year ends available to sole proprietorships, flow-through entities, and C corporations.
> Describe the record-keeping requirements for business deductions expenses including mixed-motive expenditures.
> This year Luke has calculated his gross tax liability at $1,800. Luke is entitled to a $2,400 nonrefundable personal tax credit, a $1,500 business tax credit, and a $600 refundable personal tax credit. In addition, Luke has had $2,300 of income taxes wit
> Brooklyn files as a head of household for 2016 and claims a total of three exemptions (3 × 4,050 = $12,150). She claimed the standard deduction of $9,300 for regular tax purposes. Her regular taxable income was $80,000. What is Brooklyn’s A
> Describe the order in which different types of tax credits are applied to reduce a taxpayer’s tax liability.
> The amount of the child and dependent care credit is based on the amount of the taxpayer’s expenditures to provide care for one or more qualifying persons. Who is considered to be a qualifying person for this purpose?
> What are the two basic timing strategies? What is the intent of each?
> How are tax credits and tax deductions similar? How are they dissimilar?
> What is the difference between the tentative minimum tax (TMT) and the AMT?
> Do taxpayers always add back the standard deduction when computing alternative minimum taxable income? Explain.
> What is the difference between earned and unearned income?
> Christopher sold 100 shares of Cisco stock for $5,500 in the current year. He purchased the shares several years ago for $2,200. Assuming his marginal ordinary income tax rate is 28 percent, and he has no other capital gains or losses, how much tax will
> At the beginning of her current tax year, Angela purchased a zero-coupon corporate bond at original issue for $30,000 with a yield to maturity of 6 percent. Given that she will not actually receive any interest payments until the bond matures in 10 yea
> Seth invested $20,000 in Series EE savings bonds on April 1. By December 31, the published redemption value of the bonds had increased to $20,700. How much interest income will Seth report from the savings bonds in the current year absent any special ele
> What are the implications of treating losses as passive?
> When taxpayers borrow money to buy municipal bonds, are they allowed to deduct interest expense on the loan? Why or why not?
> What happens to capital losses that are not deductible in the current year?
> The U.S. Constitution is the highest tax authority but provides very little in the way of tax laws. What are the next highest tax authorities beneath the U.S. Constitution?
> Jessica’s friend Zachary once stated that he couldn’t understand why someone would take a tax course. Why is this a rather naïve view?
> Following are a number of cost terms introduced in the chapter: Required: Choose the term or terms above that most appropriately describe the cost identified in each of the following situations. A cost term can be used more than once. Variable cost
> What is the difference between net cash provided by operating activities and free cashflow?
> If the Accounts Receivable balance increases during a period, how will this increase be recognized using the indirect method of computing the net cash provided by operating activities?
> How do the direct and the indirect methods differ in their approach to computing the netcash provided by operating activities?
> Assume that a company repays a $300,000 loan from its bank and then later in the sameyear borrows $500,000. What amount(s) would appear on the statement of cash flows?
> Why aren’t transactions involving accounts payable considered to be financing activities?
> If an asset is sold at a gain, why is the gain deducted from net income when computing the net cash provided by operating activities under the indirect method?
> Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold. The medallions are identical except for the materials used in their manufacture. What costing system would you advise the company to use?
> Why is interest paid on amounts borrowed from banks and other lenders considered to bean operating activity while the amounts borrowed are financing activities?
> What are the three major sections on a statement of cash flows, and what are the general rules that determine the transactions that should be included in each section?
> What are cash equivalents, and why are they included with cash on a statement of cashflows?
> What is the purpose of a statement of cash flows?
> What is meant by an investment project’s internal rate of return? How is the internal rate of return computed?
> If a company has to pay interest of 14% on long-term debt, then its cost of capital is 14%.Do you agree? Explain.
> Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions.
> What is net present value? Can it ever be negative? Explain.
> Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?
> Why isn’t accounting net income used in the net present value and internal rate of return methods of making capital budgeting decisions?
> What is meant by the term equivalent units of production when the weighted-average method is used?
> What is meant by the term discounting?
> What is meant by the term time value of money?
> What is the difference between capital budgeting screening decisions and capital budgeting preference decisions?
> What guideline should be used in determining whether a joint product should be sold at the split-off point or processed further?
> Define the following terms: joint products, joint costs, and split-off point.
> How will relating product contribution margins to the amount of the constrained resourcethey consume help a company maximize its profits?
