Henrich is a single taxpayer. In 2016, his taxable income is $425,000. What is his tax liability (including the net investment income tax) in each of the following alternative scenarios? a. All of his income is salary from his employer. b. His $425,000 of taxable income includes $2,000 of long-term capital gain that is taxed at preferential rates. c. His $425,000 of taxable income includes $55,000 of long-term capital gain that is taxed at preferential rates. d. Henrich has $195,000 of taxable income, which includes $50,000 of long-term capital gain that is taxed at preferential rates. Assume his modified AGI is $210,000.
> What expenses are deductible when a taxpayer combines both business and personal activities on a trip? How do the rules for international travel differ from the rules for domestic travel?
> Jenny uses her car for both business and personal purposes. She purchased the auto this year and drove 11,000 miles on business trips and 9,000 miles for personal transportation. Describe how Jenny will determine the amount of deductible expenses associa
> Tim employs three sales representatives who often take clients to dinner and provide entertainment in order to increase sales. This year Tim reimbursed the representatives $2,500 for the cost of meals and $8,250 for the cost of entertaining clients. Desc
> Jimmy is a sole proprietor of a small dry-cleaning business. This month Jimmy paid for his groceries by writing checks from the checking account dedicated to the dry-cleaning business. Why do you suppose Jimmy is using his business checking account rathe
> Jerry is a self-employed rock star and this year he expended $1,000 on special “flashy” clothes and outfits. Jerry would like to deduct the cost of these clothes as work-related because the clothes are not acceptable to Jerry’s sense of fashion. Under wh
> Provide an example of an expense associated with the production of tax-exempt income, and explain what might happen if Congress repealed the prohibition against deducting expenses incurred to produce tax-exempt income.
> What kinds of deductions are prohibited as a matter of public policy? Why might Congress deem it important to disallow deductions for expenditures against public policy?
> Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag. This year, however, Jake purchased 500 ba
> Tom is an attorney who often represents individuals injured while working (worker liability claims). This year -Tom spent $50 on a book entitled Plumbing For Dummies and paid $500 to take a course on plumbing residences and rental housing. Can you imagin
> Lauren is 17 years old. She reports earned income of $3,000 and unearned income of $2,200. Is she likely subject to the kiddie tax? Explain.
> Is cost of goods sold deductible as a business expense for a business selling inventory? Explain.
> What is an “ordinary and necessary” business expenditure?
> What is a §481 adjustment and what is its purpose?
> What are the relative advantages of the cash and accrual methods of accounting?
> Describe the related-party limitation on accrued deductions. What tax savings strategy is this limitation designed to thwart?
> Compare and contrast how bad debt expense is determined for financial accounting purposes and how the deduction for bad debts is determined for accrual-method taxpayers. How do cash-method taxpayer’s determine their bad debt expense for accounts receivab
> On December 31 of the current year, a taxpayer prepays an advertising company to provide advertising services for the next 10 months. Using the 12-month rule and the economic performance rules, contrast when the taxpayer would be able to deduct the expen
> Describe when economic performance occurs for the following expenses: Worker’s compensation, Rebates and refunds Insurance, warranties, and service contracts provided to the business Taxes
> Compare and contrast when taxpayers are allowed to deduct amounts for warranties provided by others to the taxpayer and when taxpayers are allowed to deduct expenses associated with warranties they provide to others.
> Compare and contrast the tests for accruing income and those for accruing deductions for tax purposes.
> What is the kiddie tax and on whose tax return is the kiddie tax liability reported? Explain.
> Compare and contrast financial accounting rules with the tax rules under UNICAP (§263A). Explain whether the UNICAP rules tend to accelerate or defer income relative to the financial accounting rules.
> Jack operates a plumbing business as a sole proprietorship on the cash method. Besides providing plumbing services, Jack also sells plumbing supplies to homeowners and other plumbers. The sales of plumbing supplies constitute less than $20,000 per year,
> Compare and contrast the rules for determining the tax treatment of advance payments for services versus advance payments for goods.
> Compare and contrast the tax treatment for rental income received in advance and advance payments for services.
> Describe the all-events test for determining income and describe how to determine the date on which the all-events test has been met.
> Why is it not surprising that specific rules differ between tax accounting and financial accounting?
> Explain why Congress sometimes mandates that businesses use particular accounting methods while other times Congress is content to require businesses to use the same accounting methods for tax purposes that they use for financial accounting purposes.
> Describe the 12-month rule for determining whether and to what extent businesses should capitalize or immediately deduct prepaid expenses such as insurance or security contracts. Explain the apparent rationale for this rule.
> Explain when an expenditure should be “capitalized” rather than expensed based upon accounting principles. From time to time, it is suggested that all business expenditures should be expensed for tax purposes. Do you agree with this proposition, and if s
> How does an entity choose its tax year? Is it the same process no matter the type of tax year-end the taxpayer adopts?
> Does the kiddie tax apply to all children no matter their age? Explain.
> Why does the law generally require partnerships to adopt a tax year consistent with the year used by the partners?
> Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients and he believed that many of them would follow him if he were to leave his cu
> Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting but he doesn’t keep any significant inventories of the specialized assets that he sells. Joe reported the
> R.E.M., a calendar-year corporation and Athens, Georgia band, recently sold tickets ($20,000,000) for concerts scheduled in the United States for next year and the following year. For financial statement purposes, R.E.M. will recognize the income from th
> Hank started a new business in June of last year, Hank’s Donut World (HW for short). He has requested your advice on the following specific tax matters associated with HW’s first year of operations. Hank has estimated
> Bryan followed in his father’s footsteps and entered into the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue, he also cleans carpets and sells carpe
> Rex loves to work with his hands and is very good at making small figurines. Rex opened Bronze Age Miniatures (BAM) for business several years ago as a sole proprietorship. BAM produces miniature characters ranging from sci-fi characters (his favorite) t
> Steve’s tentative minimum tax (TMT) for 2016 is $15,000. What is his AMT if a. His regular tax is $10,000? b. His regular tax is $20,000?
> In 2016, Juanita is married and files a joint tax return with her husband. What is her tentative minimum tax in each of the following alternative circumstances? a. Her AMT base is $100,000, all ordinary income. b. Her AMT base is $250,000, all ordinary i
> Corbett’s AMTI is $130,000. What is his AMT exemption under the following alternative circumstances? a. He is married and files a joint return. b. He is married and files a separate return. c. His filing status is single. d. His filing status is head o
> Does the kiddie tax eliminate the tax benefits gained by a family when parents transfer income-producing assets to children? Explain.
> Olga is married and files a joint tax return with her husband. What amount of AMT exemption may she deduct under the following alternative circumstances? a. Her AMTI is $90,000. b. Her AMTI is $180,000. c. Her AMTI is $500,000.
> In 2016, Sven is single and has $120,000 of regular taxable income. He itemizes his deductions as follows: real property tax of $2,000, state income tax of $4,000, mortgage interest expense of $15,000 (not home-equity loan). He also paid $2,000 in tax pr
> In 2016, Nadia has $100,000 of regular taxable income. She itemizes her deductions as follows: real property taxes of $1,500, state income taxes of $2,000, and mortgage interest expense of $10,000 (not a home equity loan). In addition, she receives tax-e
> Sylvester files as a single taxpayer during 2016 and claims one personal exemption. He itemizes deductions for regular tax purposes. He paid charitable contributions of $7,000, real estate taxes of $1,000, state income taxes of $4,000 and interest on a h
> In 2016, Carson is claimed as a dependent on his parent’s tax return. His parents’ ordinary income marginal tax rate is 28%. Carson’s parents provided most of his support. What is Carson’s tax liability for the year in each of the following alternative c
> In 2016, Sheryl is claimed as a dependent on her parent’s tax return. Her parents’ ordinary income marginal tax rate is 35%. Sheryl did not provide more than half her own support. What is Sheryl’s tax liability for the year in each of the following alter
> Lacy is a single taxpayer. In 2016, her taxable income is $40,000. What is her tax liability in each of the following alternative situations? a. All of her income is salary from her employer. b. Her $40,000 of taxable income includes $1,000 of qualified
> In 2016, Jasmine and Thomas, a married couple, have taxable income of $150,000. If they were to file separate tax returns, Jasmine would have reported taxable income of $140,000 and Thomas would have reported taxable income of $10,000. What is the couple
> In 2016, Lisa and Fred, a married couple, have taxable income of $300,000. If they were to file separate tax returns, Lisa would have reported taxable income of $125,000 and Fred would have reported taxable income of $175,000. What is the couple’s marria
> Augustana received $10,000 of qualified dividends this year. Under what circumstances would all $10,000 be taxed at the same rate? Under what circumstances might the entire $10,000 of income not be taxed at the same rate?
> Whitney received $75,000 of taxable income in 2016. All of the income was salary from her employer. What is her income tax liability in each of the following alternative situations? a. She files under the single filing status. b. She files a joint tax re
> Determine the amount of the late filing and late payment penalties that apply for the following taxpayers. a. Jolene filed her tax return by its original due date but did not pay the $2,000 in taxes she owed with the return until one and a half months la
> For the following taxpayers, determine the due date of their tax returns. a. Jerome, single taxpayer, is not requesting an extension this year. Assume the due date falls on a Tuesday. b. Lashaunda, a single taxpayer, requests an extension this year. Ass
> For the following taxpayers determine if they are required to file a tax return in 2016. a. Ricko, single taxpayer, with gross income of $12,000. b. Fantasia, head of household, with gross income of $17,500. Ken and Barbie, married taxpayers with no dep
> This year, Santhosh, a single taxpayer, estimates that his tax liability will be $100,000. Last year, his total tax liability was $15,000. He estimates that his tax withholding from his employer will be $35,000. Is Santhosh required to increase his withh
> This year, Paula and Simon (married filing jointly) estimate that their tax liability will be $200,000. Last year, their total tax liability was $170,000. They estimate that their tax withholding from their employers will be $175,000. Are Paula and Simon
> This year Lloyd, a single taxpayer, estimates that his tax liability will be $10,000. Last year, his total tax liability was $15,000. He estimates that his tax withholding from his employer will be $7,800. a. Is Lloyd required to increase his withholdin
> In 2016, Zach is single with no dependents. He is not claimed as a dependent on another’s return. All of his income is from salary and he does not have any for AGI deductions. What is his earned income credit in the following alternative scenarios? a. Za
> In 2016, Amanda and Jaxon Stuart have a daughter who is one year old. The Stuarts are full-time students and they are both 23 years old. Their only sources of income are gains from stock they held for three years before selling and wages from part-time j
> In 2016, Laureen is currently single. She paid $2,800 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,800 each for a total of $5,600). Sheri and Meri qualify as Laureen’s
> Are there circumstances in which preferentially taxed income (long-term capital gains and qualified dividends) is taxed at the same rate as ordinary income? Explain.
> In 2016, Elaine paid $2,800 of tuition and $600 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband. What is the maximum American opportunity credit Elaine can claim for th
> Julie paid a day care center to watch her two-year old son this year while she worked as a computer programmer for a local start-up company. What amount of child and dependent care credit can Julie claim in each of the following alternative scenarios? a.
> Trey claims a dependency exemption for both of his two daughters, ages 14 and 17, at year-end. Trey files a joint return with his wife. What amount of child credit will Trey be able to claim for his daughters in each of the following alternative situatio
> Terry Hutchison worked as a self-employed lawyer until two years ago when he retired. He used the cash method of accounting in his business for tax purposes. Five years ago, Terry represented his client ABC Corporation in an antitrust lawsuit against XYZ
> Eva received $60,000 in compensation payments from JAZZ Corp. during 2016. Eva incurred $5,000 in business expenses relating to her work for JAZZ, Corp. JAZZ did not reimburse Eva for any of these expenses. Eva is single and she deducts a standard deduct
> Kyle worked as a free-lance software engineer for the first three months of 2016. During that time, he earned $44,000 of self-employment income. On April 1, 2016 Kyle took a job as a full-time software engineer with one of his former clients Hoogle Inc.
> Alice is self-employed in 2016. Her net business profit on her Schedule C for the year is $140,000. What is her self-employment tax liability for 2016?
> Rasheed works for Company A, earning $350,000 in salary during 2016. Assuming he has no other sources of income, what amount of FICA tax will Rasheed pay for the year?
> Brooke works for Company A for all of 2016, earning a salary of $50,000. a. What is her FICA tax obligation for the year? b. Assume Brooke works for Company A for half of 2016, earning $50,000 in salary and she works for Company B for the second half o
> In 2016, Deon and NeNe are married filing jointly. They have three dependent children under 18 years of age. Deon and NeNe’s AGI is $811,300, their taxable income is $720,250, and they itemize their deductions as follows: real property taxes of $10,000,
> Once they’ve computed their taxable income, how do taxpayers determine their regular tax liability? What additional steps must taxpayers take to compute their tax liability when they have preferentially taxed income?
> In 2016, Janet and Ray are married filing jointly. They have five dependent children under 18 years of age. Janet and Ray’s taxable income is $140,000, and they itemize their deductions as follows: real property taxes of $5,000, state income taxes of $9,
> Compare and contrast an employee’s FICA tax payment responsibilities with those of a self-employed taxpayer.
> Bobbie works as an employee for Altron Corp. for the first half of the year and for Betel Inc. for rest of the year. She is relatively well paid. What FICA tax issues is she likely to encounter? What FICA tax issues do Altron Corp. and Betel Inc. need to
> Are an employee’s entire wages subject to the FICA tax? Explain.
> Lee is single and he runs his own business. He uses the cash method of accounting to determine his business income. Near the end of the year, Lee performed work that he needs to bill a client for. The value of his services is $5,000. Lee figures that if
> Is it possible for a taxpayer who pays AMT to have a marginal tax rate higher than the stated AMT rate? Explain.
> How do the AMT tax rates compare to the regular income tax rates?
> Describe what the AMT exemption is and who is and isn’t allowed to deduct the exemption. How is it similar to the standard deduction and how is it dissimilar?
> The starting point for computing alternative minimum taxable income is regular taxable income. What are some of the plus adjustments, plus or minus adjustments, and minus adjustments to regular taxable income to compute alternative minimum taxable income
> Brown Thumb Landscaping is a calendar-year, accrual-method taxpayer. In September, Brown Thumb negotiated a $14,000 contract for services it would provide to the city in November of the current year. The contract specifies that Brown Thumb will receive $
> Describe, in general terms, why Congress implemented the AMT.
> In January of year 0, Justin paid $4,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin de
> What is a tax bracket? What is the relationship between filing status and the width of the tax brackets in the tax rate schedule?
> Describe the consequences for failing to file a tax return and for paying tax owed late.
> What is the due date for individual tax returns? What extensions are available?
> What determines if a taxpayer is required to file a tax return? If a taxpayer is not required to file a tax return, does this mean that the taxpayer should not file a tax return?
> Describe how the underpayment penalty is calculated.
> What are the consequences of a taxpayer underpaying his or her tax liability throughout the year? Explain the safe harbor provisions that may apply in this situation.
> Describe the two methods that taxpayers use to prepay their taxes.
> When a U.S. taxpayer pays income taxes to a foreign government, what options does the taxpayer have when determining how to treat the expenditure on her U.S. individual income tax return?
> Is the foreign tax credit a personal credit or a business credit? Explain.
> How are business credits similar to personal credits? How are they dissimilar?
> Clem is married and is a skilled carpenter. Clem’s wife, Wanda, works part-time as a substitute grade school teacher. Determine the amount of Clem’s expenses that are deductible for AGI this year (if any) under the following independent circumstances:
> Under what circumstances can a college student qualify for the earned income credit?
> Why is the earned income credit referred to as a negative income tax?
