During 2016, Becky loans her brother Ken $5,000, which he intends to use to establish a small business. Because Ken has no other assets and needs cash to establish the business, the agreement provides that Ken will repay the debt if (and when) sufficient funds are generated from the business. Becky and Ken do not establish an interest rate. The business is unsuccessful, and Ken is forced to file for bankruptcy in 2017. By the end of 2017, it is estimated that the creditors will receive only 20% of the amount owed. In 2018 the bankruptcy proceedings are closed, and the creditors receive 10% of the amount due on the debt. What is Becky’s bad debt deduction for 2017? For 2018?
> Discuss the limitations and restrictions that the Internal Revenue Code places on employer contributions to qualified pension and profit-sharing plans.
> Explain how distributions from a qualified pension plan, which are made in the form of annuity payments, are reported by an employee under the following circumstances: a. No employee contributions are made to the plan. b. The pension plan provides for
> Assume all the same facts as in Problem I:7-51 except that James’ salary income is $130,000 instead of $70,000 and that he does not make the election. Compute James’ taxable income for the year. Problem 7- 51: During 2017, James, a single, cash method t
> Babson Corporation is proposing the creation of a qualified profit-sharing plan for its employees. The proposed plan provides for vesting of employer contributions after 20 years because the company wants to discourage employee turnover and does not feel
> Austin Corporation is proposing the establishment of a pension plan that will cover only employees with salaries in excess of $150,000. No other employees are covered under comparable qualified plans. What problems (if any) do you envision regarding the
> What is the difference between a defined benefit pension plan and a defined contribution pension plan?
> Compare and contrast the tax advantages accruing to employers and employees from the establishment of a qualified pension or profit-sharing plan versus a nonqualified deferred compensation arrangement (e.g., a restricted property plan).
> Discuss whether any of the following individuals are entitled to an office-in-home deduction: a. Maggie is a self-employed management consultant who maintains an office in her home exclusively used for client meetings and other business-related activiti
> Martin is a tax accountant employed by a public accounting firm. He incurs the following expenses: CPA review course ………………………. $ 400 Law school tuition and books …………….. 4,000 Accounting continuing education course (travel, fees, and transportati
> a. Discuss the two requirements for an employee expense reimbursement plan to be treated as an accountable plan. b. How are expenses and reimbursements treated under an accountable plan? c. How are expenses and reimbursements treated under a nonaccount
> Dan, a full-time employee of Beta, Inc., also owns 10% of its outstanding stock. The other 90% is owned by his three brothers. During the year, the president of Beta came to Dan, expressing grave concern about whether the company had the financial resour
> Bass Corporation purchases 10 tickets to the Super Bowl in February 2017 for entertaining its customers. Due to unusually high demand, the tickets have to be purchased from scalpers for $15,000 (10 × $1,500). The face value of the tickets is only $2,000
> If an individual belongs to a country club and uses the facility primarily for business entertainment of customers, what portion of the club dues is deductible?
> Lynn is a salesperson who entertains clients at business luncheons. A business relationship exists for the entertainment, and there is a reasonable expectation of business benefit. However, no business discussions are generally conducted before, during,
> During 2017, James, a single, cash method taxpayer incurred the following expenditures: Qualified medical expenses………………………………………. $ 8,000 Investment interest expense………………………………………..16,000 Other investment activity expenses……………………………..15,000 Qualified
> Atlantic Corporation provides a cafeteria for its employees. The meal charges are set at a sufficiently high level that the employees are not taxed on the subsidized eating facilities. Are Atlantic’s cafeteria-related costs subject to the 50% disallowanc
> Liz is an employee who regularly entertains customers in connection with her job. In the current year, Liz incurs $6,000 in business meal expenses that are connected with entertainment. Liz’s expenses are not lavish or extravagant. She itemizes her deduc
> Latasha is a self-employed attorney who entertains clients and potential clients in her home. a. What requirements must be met to qualify the outlays as deductible entertainment expenses? b. What is the difference between “directly related” and “associ
> Louis incurs “directly related” entertainment expenses of $4,000, but he is reimbursed by his employer for only $3,000 after an adequate accounting is made. a. How are these amounts reported on Louis’s tax return? b. What are the tax consequences if Lo
> Why are strict recordkeeping requirements required for the deduction of entertainment expenses?
> Len incurs $5000 of deductible moving expenses in the current year and is fully reimbursed by his employer in the same year. a. How are the expense deduction and the reimbursement reported on Len’s tax return if he uses the standard deduction? b. What
> In a rage because of personal difficulties, Evan drove recklessly and crashed his automobile, doing $8,000 worth of damage. Fortunately, no one was injured. Since Evan received two speeding tickets during the past year, he is concerned about losing his i
> Does it matter whether a moving expense is incurred by an employee, a self-employed individual, or an unemployed person?
> What are the two basic requirements that must be met to permit a deduction for moving expenses?
> Discuss the reporting procedures that should be followed by an employee to report employment related expenses on his or her tax return under the following conditions: a. Expenses are less than reimbursements, and no accounting is made to the employer.
> If an employee or self-employed individual uses the actual method of deducting automobile expenses and claims depreciation for the first two years of business use, can the individual switch to the standard mileage rate method for the third year and beyon
> During 2017, Doug incurs the following deductible expenses: $2,300 in state income taxes, $3,000 in local property taxes, $800 in medical expenses, and $2,000 in charitable contributions. Doug is 33, single, has no dependents, and has $35,000 AGI for the
> If an employee (or self-employed individual) uses the standard mileage rate method for the year in which an automobile is acquired, may the actual expense method be used in a subsequent year? If so, what restrictions are imposed (if any) on depreciation
> If an employee receives a reimbursement of 40 cents a mile from her employer for employment related transportation expenses, is the employee permitted to deduct the difference between the standard mileage rate and the reimbursement rate as an unreimburse
> If an employee receives a specific monthly amount from his or her employer as a reimbursement for employment-related entertainment, travel, and transportation expenses, why is it necessary to allocate a portion of the total reimbursement to each expense
> Louie is a full-time employee for a large corporation and also an investor in the stock market in his spare time. In the current year, Louie incurs $2,500 of travel expenses and $1,000 in registration fees related to attending investment seminars. He ded
> Latoya, a college professor, takes a nine-month leave of absence from her employment at a college in Ohio and accepts a visiting professorship (temporary assignment) at a college in Texas. Latoya leaves her husband and children in Ohio and incurs the fol
> Five years ago, Cora incorporated Gold, Inc., by contributing $80,000 and receiving 100% of the Gold common stock. Gold, Inc. is engaged in a retail business. Cora is single. Gold experienced financial difficulties. On December 22 of the current year, Co
> Kelly is an employee who incurs $2,200 of business meal expenses in connection with business entertainment and travel, none of which are reimbursed by her employer. $500 of the business meal costs are considered to be lavish or extravagant. How much can
> In each of the following cases involving travel expenses, indicate how each item is reported on the taxpayer’s tax return. Include any limitations that might affect its deductibility. a. Marilyn lives in Houston and owns several rental properties in Den
> Which of the following deduction items are subject to the 2% nondeductible floor applicable to miscellaneous itemized deductions? a. Investment counseling fees b. Fees for tax return preparation c. Unreimbursed professional dues for an employee d. Ga
> Determine whether the following expenses are either deductible for AGI or from AGI or nondeductible on an employee’s return. Indicate whether the expenses are subject to the 2% nondeductible floor for miscellaneous itemized deductions. a. Automobile exp
> Why is it important to distinguish whether an individual is an employee or an independent contractor (self-employed)?
> On April 1 of the current year, Henry borrows $12,000 from the bank for a year. Because the note is discounted for the interest charge and Henry receives proceeds of $10,200, he is required to repay the face amount of the loan ($12,000) in four equal qua
> Jim had $100,000 in deposits in a savings account at a bank in Page, Arizona. The bank collapsed and Jim did not receive anything for his deposits. The bank was chartered by the state of Arizona and was not insured by federal law. Jim is not sure what hi
> On November 15, Alex and Deanna Kent come to you for tax advice. The Kents, a married couple that files a joint tax return, own a rental home in Southern California. From January to November 1 of the current year, they rented out the home for 210 days. S
> Jace Seaton is a single taxpayer living in Eugene, Oregon. From 2013 to 2016, he worked as the CEO of Wengren & Jeffers, a local architectural firm. In 2017, he left the firm to start his own company as well as spend more time golfing and travelling. On
> In 2014, Annie Cook and several family members formed Treehouse Rentals, Inc., in Denver, Colorado. Treehouse is a closely held C corporation engaged in the rental real estate business. Treehouse properly classifies its activities as passive. In 2014, 20
> On January 12 of the current year, Barney Corporation, a publicly held corporation, files for bankruptcy. During the bankruptcy proceedings it is determined that creditors will only receive 10% of what they are owed and that the shareholders will receive
> During 2017, Karen, a single taxpayer, reports the following income and expense items relating to her interior design business: Revenues………………………………….$52,000 Cost of goods sold……………………….41,000 Advertising………………………………….3,300 Office supplies……………………………...
> Assume the same facts as in Problem I:8-56, except that the interest on their personal residence is $12,100 and they also have a $4,500 deductible casualty loss on personal property (after limitations). a. What is Michelle and Mark’s taxable income or lo
> Assume the same facts as in Problem I:8-56, except in addition to the other itemized deductions Michelle and Mark suffer a $4,500 deductible personal casualty loss (after limitations). a. What is Michelle and Mark’s taxable income or loss for the year?
> Michelle and Mark are married and file a joint return. Michelle owns an unincorporated dental practice. Mark works part-time as a high school math teacher, and spends the remainder of his time caring for their daughter. During 2017, they report the follo
> Assume the same facts as in Problem I:8-54, except that Becky and Ken are not related and that under the terms of the loan Ken agrees to repay Becky the $5,000 plus interest (at a reasonable stated rate) over a five-year period. What is Becky’s bad debt
> Can a casualty loss on a personal-use asset create or increase an NOL? Explain.
> Much has been written about abusive practices concerning the valuation of noncash property donated to qualified charities. under sec. 170, both corporations and individuals may deduct the fMv of property contributed to charitable organizations. of course
> Is the $100 floor on personal-use casualty losses imposed on each individual loss item if more than one item of property is destroyed in a single casualty? Is the floor imposed before or after the casualty gains are netted against the casualty losses?
> For individuals, how are casualty losses on personaluse property reported on the tax return? How are casualty losses on business property reported?
> Under what circumstances a loss arising from a casualty or theft may be deducted in a year other than the year in which the loss occurs?
> Compare and contrast the computational rules for deducting casualty losses on personal-use property with casualty losses incurred on business or investment property.
> During the current year, Rulon’s toilet overflowed because of a mechanical problem. Rulon was outside playing croquet, and by the time he returned, the water had flooded the basement, causing damage to the carpet, walls, and ceiling. The cost of repairin
> Explain how a taxable gain on property can be realized because of a casualty event such as a fire or theft. How are these gains treated?
> What tests must be met to qualify a loss as deductible under the casualty loss provisions? Discuss the application of each of these tests.
> Are the losses suspended under the passive loss rules lost forever? Explain.
> a. What requirements must be met in order for a taxpayer to deduct up to $25,000 of passive losses from rental real estate activities against active and portfolio income? b. What requirements must be met in order for a real estate rental activity to be
> Explain the difference between materially participating and actively participating in an activity. When is the active participation test used?
> Elaine is a physician who uses the cash method of accounting for tax purposes. During the current year, Elaine bills Ralph $1,200 for office visits and outpatient surgery. Unfortunately, unknown to Elaine, Ralph moves away leaving no payment and no forwa
> A client comes to you with an idea to treat a loan that he made to one of his children two years ago as a bad debt. The loan is evidenced by a properly executed note with stated interest and payment dates. However, the client has not collected any loan p
> Which of the following activities are considered passive for the year? Explain. Consider each situation independently. a. Laura owns a rental unit that she rents out to students. The rental unit is Laura’s only business and she spends approximately 875
> a. If a taxpayer is involved in several different business operations during the year, how is the determination made as to how many activities these operations constitute for purposes of the passive activity loss rules? b. Can a business operation and a
> Why it is important to identify exactly what constitutes an activity for purposes of the passive activity rules?
> a. F or purposes of the passive loss rules, what is a closely held C corporation? b. In what way do the passive loss rules differ from the regular passive loss rules when applied to closely held C corporations?
> a. What is a passive activity? b. Who is subject to the passive loss limitation rules?
> Describe a situation where a loss on the sale of business or investment property is not currently deductible, and explain why.
> What tax treatment applies to gains and losses on Sec. 1244 stock?
> What requirements must be met for stock to be considered Sec. 1244 stock?
> What two general requirements must be met for a transaction to result in a capital loss?
> During 2017, Pam incurred the following casualty losses: All of the items were destroyed in the same casualty. Before considering the casualty items, Pam reports business income of $80,000, qualified residential interest of $6,000 property taxes on her p
> Under what circumstances will a loss that is realized on a worthless security not be treated as a capital loss?
> Charley Long is a truck driver, the 18-wheeler variety. He works for Fishy Co., a seafood company in Mobile, Alabama, and drives a company truck. Charley’s job entails leaving Mobile at 4:00 PM each day (five days per week) and delivering fresh fish to r
> Describe the usual tax consequences that apply to a worthless security.
> When property is disposed of, what factors influence the amount of the deductible loss?
> What is the closed transaction doctrine, and why does it exist for purposes of recognizing a loss realized on holding property?
> Several years ago, Magdelena purchased a new residence for $300,000. Currently, the outstanding mortgage on the residence is $260,000. The current fair market value of the home is $330,000. Magdelena wants to borrow a sizable sum of money to pay for the
> During the current year, Tina purchases a beachfront condominium for $600,000, paying $150,000 down and taking out a $450,000 mortgage, secured by the property. At the time of the purchase, the outstanding mortgage on her principal residence is $700,000.
> During the current year, Travis takes out a $40,000 loan, using stock he owns as collateral. He uses $10,000 to purchase a car, which he uses 100% for personal use. He uses the remaining funds to purchase stocks and bonds. He pays $3,200 interest on the
> On January 1 of the current year, Scott borrows $80,000, pledging the assets of his business as collateral. He immediately deposits the money in an interest-bearing checking account. Scott already had $20,000 in this account. On April 1, Scott invests $7
> On May 1 of the current year, Tara sells a building to Janet for $500,000. Tara’s basis in the building is $300,000. The county in which the building is located has a real property tax year that ends on June 30. The taxes are payable by September 1 of th
> In the current year Ned completely destroys his personal automobile (purchased two years earlier for $28,000) in a traffic accident. Fortunately none of the occupants are injured. The FMV of the car before the accident is $18,000; after the accident it i
> If an NOL is carried back to a prior year, what adjustments must be made to the prior year’s taxable income? What are the possible results of the adjustments?
> Dawn, a single, cash-method taxpayer, paid the following taxes in the current year: Dawn’s employer withheld $5,400 for federal income taxes, $2,000 for state income taxes, and $3,800 for FICA from her paychecks. Dawn purchased a new car and paid $600 in
> Assume the same facts as Problem I: 7-40, but change the amount of Joyce’s mortgage interest to $3,000. a. What is her taxable income for 2017? b. What is her AGI for 2018? Problem 7-40: Joyce is a single, cash-method taxpayer. On April 11, 2016, Joyc
> Steve is part owner and manager of a small manufacturing company that makes keypads for alarm systems. The keypads are sold to several different alarm companies throughout the country. Steve must travel to several cities each year to meet with current c
> Joyce is a single, cash-method taxpayer. On April 11, 2016, Joyce paid $120 in state income taxes with her 2015 state income tax return. During 2016, Joyce had $1,600 in state income taxes withheld. On April 13, 2017, Joyce paid $200 with her 2016 state
> In 2017, Charla, a single taxpayer with no dependents, was severely hurt in a farm accident. Charla is 38 years old. The accident left Charla’s legs 85% paralyzed. After incurring $14,000 of medical expenses at the hospital, the doctor recommended that C
> Chad is divorced and has custody of Brett, his 14-year-old son. Chad’s ex-wife has custody of their daughter, Sara. During the year, Chad incurs $3,000 for orthodontic work for Sara to correct a severe overbite and $2,000 in unreimbursed medical expenses
> Dan lives in Duncan, a small town in Arizona. Because of a rare blood disease, Dan is required to take special medical treatments once a month. The closest place these treatments are available to Dan is in Phoenix, 200 miles away. The treatments are prov
> Assume the same facts as in Problem I: 7-35. In addition, assume that in 2018, Angela receives an additional $7,000 in a settlement of a lawsuit arising because of the snow-skiing accident. $4,000 of the settlement is to pay Angela’s medical bills, and $
> During 2017, Angela sustains serious injuries from a snowskiing accident. She incurs the following expenses: Item……………………………………………………Amount Doctor bills………………………………………………..$11,700 Hospital bills…………………………………………………9,400 Legal fees in suit against ski res
> During the current year, Bob has AGI of $100,000. He also donated some stock to his church. He purchased the stock two years ago for $55,000. The FMV of the stock at the time of the contribution is $60,000. Bob has $5,000 of unused excess contributions f
> Jerry sprayed all of the landscaping around his house with a pesticide in June 2017. Shortly thereafter, all of the trees and shrubs unaccountably died. The FMV and the adjusted basis of the plants were $15,000. Later that year, the pesticide manufacture
> During the current year, George made contributions totaling $40,000 to an organization called the National Endowment for the Preservation of Liberty (NEPL). Later during the year, the NEPL started giving money to a political candidate to help with his ca
> This year, Chuck took out a loan to purchase some raw land for investment. He paid $40,000 for the land, and he expects that within 5 years the land will be worth at least $75,000. Chuck is married, and his AGI for the year is $230,000. Chuck paid $4,300
> Wayne and Maria file a joint tax return on which they itemize their deductions and report AGI of $50,000. During the year they incurred $1,500 of medical expenses when Maria broke her leg. Furthermore, their dentist informed them that their daughter, Ali
> Ajax Corporation is a young high-growth company engaged in the manufacture and distribution of automotive parts. Its common stock has doubled in value since the company was listed on the NASDAQ exchange about two years ago. Ajax currently has a high debt
