Jabari Johnson is considering acquiring an automobile at the beginning of 2015 that he will use 100% of the time as a taxi. The purchase price of the automobile is $35,000. Johnson has heard of cost recovery limits on automobiles and wants to know the maximum amount of the $35,000 he can deduct in the first year. Write a letter to Jabari in which you present your calculations. Also prepare a memo for the tax files, summarizing your analysis. Johnson’s address is 100 Morningside, Clinton, MS 39058.
> Lucy sells her partnership interest, a passive activity, with an adjusted basis of $305,000 for $330,000. In addition, she has current and suspended losses of $28,000 associated with the partnership and has no other passive activities. Calculate Lucy’s t
> In the current year, Ed invests $30,000 in an oil partnership. He has taxable income for the current year of $2,000 from the oil partnership and withdraws $10,000. What is Ed’s at-risk amount at the end of the year?
> Arianna’s personal residence has an adjusted basis of $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna’s gain basis? What is her loss basis?
> Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000. a. What is Lisa’s realized and recognized gain or loss? b. What is Alfred’s recognized gain or loss if he subsequently sells the pr
> Sebastian purchases two pieces of equipment for $100,000. Appraisals of the equipment indicate that the fair market value of the first piece of equipment is $72,000 and that of the second piece of equipment is $108,000. What is Sebastian’s basis in these
> A business building on which straight-line depreciation of $13,000 was taken is sold on the installment basis for $100,000 with $20,000 down and four yearly installments of $20,000 plus interest. The adjusted basis for the building is $35,000
> Rose dies with passive activity property having an adjusted basis of $65,000, suspended losses of $13,000, and a fair market value at the date of her death of $90,000. Of the $13,000 suspended loss existing at the time of Rose’s death, how much is deduct
> Noah, who has $62,000 of AGI before considering rental activities, has $70,000 of losses from a real estate rental activity in which he actively participates. He also actively participates in another real estate rental activity from which he h
> Rhonda has an adjusted basis and an at-risk amount of $7,500 in a passive activity at the beginning of the year. She also has a suspended passive loss of $1,500 carried over from the prior year. During the current year, she has a loss of $12,000 from the
> Determine the treatment of a loss on rental property under the following facts: Basis ……………………………………….$650,000 FMV before the loss……………………800,000 FMV after the loss……………………..200,000
> Mary’s diamond ring was stolen in 2014. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Mary filed an insurance claim for the stolen ring, but the claim was denied. Because the insurance claim was den
> On May 9, 2013, Calvin acquired 250 shares of stock in Aero Corporation, a new startup company, for $68,750. Calvin acquired the stock directly from Aero, and it is classified as § 1244 stock (at the time Calvin acquired his stock, the corporation had $9
> Your client is a new partnership, ARP Associates, which is an engineering consulting firm. Generally, ARP bills clients for services at the end of each month. Client billings are about $50,000 each month. On average, it takes 45 days to collect the recei
> Bob owns a collection agency. He purchases uncollected accounts receivable from other businesses at 60% of their face value and then attempts to collect these accounts. During the current year, Bob collected $60,000 on an account with a face value of $80
> In the current year, Abe gives an interest in a passive activity to his daughter, Andrea. The value of the interest at the date of the gift is $25,000, and its adjusted basis to Abe is $13,000. During the time that Abe owned the investment, losses of $3,
> Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities. I da has a marginal tax rate of 28%. She has $12,000 of losses from Activity A, $18,000 of losses from Activity B, and income of
> During the current year, Gene, a CPA, performs services as follows: 1,800 hours in his tax practice and 50 hours in an apartment leasing operation in which he has a 15% interest. Because of his oversight duties, Gene is considered to be an active partic
> Bonnie and Jake (ages 35 and 36, respectively) are married with no dependents and live in Montana (not a community property state). Because Jake has large medical expenses, they seek your advice about filing separately to save taxes. Their income and exp
> You have just met with Scott Myers (603 Pittsfield Drive, Champaign, IL 61821), a successful full-time real estate developer and investor. During your meeting, you discussed his tax situation because you are starting to prepare his current Federal income
> Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2014, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Year
> Jonathan, a physician, earns $200,000 from his practice. He also receives $18,000 in dividends and interest from various portfolio investments. During the year, he pays $45,000 to acquire a 20% interest in a partnership that produces a $300,000 loss. Com
> Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income
> A number of years ago, Lee acquired a 20% interest in the BlueSky Partner- ship for $60,000. The partnership was profitable through 2014, and Lee’s amount at risk in the partnership interest was $120,000 at the beginning of 2015. BlueSky incurred a loss
> Dr. Randolph, a cash basis taxpayer, knows that he will be in a lower marginal tax bracket next year. To take advantage of the expected decrease in his tax rate, Dr. Randolph instructs his office manager to delay filing the medical insurance claims for s
> The end of the year is approaching, and Maxine has begun to focus on ways of minimizing her income tax liability. Several years ago, she purchased an nvestment in Teal Limited Partnership, which is subject to the at-risk and the pas- sive activity loss r
> Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road Excursions in which she has an at-risk basis of $0, suspended losses under t
> Rene retired from public accounting after a long and successful career of 45 years. As part of her retirement package, she continues to share in the profits and losses of the firm, albeit at a lower rate than when she was working full- time. Because Rene
> John, an engineer, operates a separate business that he acquired eight years ago. If he participates 85 hours in the business and it incurs a loss of $34,000, under what circumstances can John claim an active loss?
> In the current year, White, Inc., earns $400,000 from operations and receives $36,000 in dividends and interest from various portfolio investments. White also pays $150,000 to acquire a 20% interest in a passive activity that produces a $200,000 loss. a
> Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts: a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to t
> Sarah has investments in four passive activity partnerships purchased several years ago. Last year, the income and losses were as follows: Activity Income (Loss) A ……………………………………………………..$ 30,000 B …
> Jorge owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive gain to Jorge of $115,0
> A number of years ago, Kay acquired an interest in a partnership in which she is not a material participant. Kay’s basis in her partnership interest at the beginning of 2014 is $40,000. Kay’s share of the partnership loss is $35,000 in 2014, while her sh
> In the current year, Bill Parker (54 Oak Drive, St. Paul, MN 55164) is considering making an investment of $60,000 in Best Choice Partnership. The prospectus provided by Bill’s broker indicates that the partnership investment is not a passive activity an
> Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the company’s 2015 gross income assuming that the company uses any available options to defer
> In 2014, Fred invested $50,000 in a general partnership. Fred’s interest is not considered to be a passive activity. If his share of the partnership losses is $35,000 in 2014 and $25,000 in 2015, how much can he deduct in each year?
> Mary, a single taxpayer with two dependent children, has the following items of income and expense during 2015: Gross receipts from business………………………….$144,000 Business expenses………………………………………….180,000 Alimony received …………………………………………..22,000 Interest
> In 2012, John opened an investment account with Randy Hansen, who held himself out to the public as an investment adviser and securities broker. John contributed $200,000 to the account in 2012. John provided Randy with a power of attorney to use the $20
> Olaf lives in the state of Minnesota. A tornado hit the area and damaged his home and automobile. Applicable information is as follows: Because of the extensive damage caused by the tornado, the President designated the area a disaster area. Olaf and h
> Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary receives an offer to sell the stock for $12 per share. She has the option of either selling all of the st
> Jake and Mary Snow are residents of the state of New York. They are cash basis taxpayers and file a joint return for the calendar year. Jake is a licensed master plumber. Two years ago, Jake entered into a contract with New York City to perform plumbing
> Sam Jones owns a granite stone quarry. When he acquired the land, Sam allocated $800,000 of the purchase price to the quarry’s recoverable mineral reserves, which were estimated at 10 million tons of granite stone. Based on these estimates, the cost depl
> Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1,200,000 to $1,500,000
> Jamie purchased $100,000 of new office furniture for her business in June of the current year. Jamie understands that if she elects to use ADS to compute her regular income tax, there will be no difference between the cost recovery for computing the regu
> In 2015, Muhammad purchased a new computer for $16,000. The computer is used 100% for business. Muhammad did not make a § 179 election with respect to the computer. He does not claim any available additional first-year depreciation. If Muhammad uses the
> Accounting students understand that the accrual method of accounting is superior to the cash method for measuring the income and expenses from an ongoing business for financial reporting purposes. Thus, CPAs advise their clients to use the accrual method
> On May 28, 2015, Mary purchased and placed in service a new $20,000 car. The car was used 60% for business, 20% for production of income, and 20% for personal use in 2015. In 2016, the usage changed to 40% for business, 30% for production of income, and
> On June 5, 2014, Leo purchased and placed in service a new car that cost $20,000. The business-use percentage for the car is always 100%. Leo claims any available additional first-year depreciation. Compute Leo’s cost recovery deduction for 2014 and 2015
> On October 15, 2015, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business-use asset Jon acquired in 2015. He used the car 80% of the time for business and 20% for personal use. Jon used the MACRS stat
> Olga is the proprietor of a small business. In 2015, the business’s income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends $600,000 on new 7-year class assets and elects to take the § 179 deduction on them. She doe
> Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $400,000 on May 20, 2015. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000.
> During March 2015, Sam constructed new agricultural fences on his farm. The cost of the fencing was $80,000. Sam does not elect immediate expensing under § 179 and he does not claim any available additional first-year depreciation. However, an election n
> Janice acquired an apartment building on June 4, 2015, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2021. a. Determine Janice’s cost recovery deduction for 2015. b. Determine Janice’s cost reco
> On May 5, 2015, Christy purchased and placed in service a hotel. The hotel cost $10.8 million. Calculate Christy’s cost recovery deductions for 2015 and for 2025.
> Debra acquired the following new assets during 2015. Determine Debra’s cost recovery deductions for the current year. Debra does not elect immediate expensing under § 179. She does not claim any available additional first-ye
> Each Saturday morning, Ted makes the rounds of the local yard sales. He has developed a keen eye for bargains, but he cannot use all of the items he thinks are “real bargains.” Ted has found a way to share the benefits of his talent with others. If Ted s
> Juan, a sole proprietor, acquires a new 5-year class asset on March 14, 2015, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. Juan does not claim any available additional first-year d
> On November 4, 2013, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2013 and 2014, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wro
> In 2015, Rose, Inc., has QPAI of $4 million and taxable income of $3 million. Rose pays independent contractors $500,000. Rose’s W–2 wages are $600,000, but only $400,000 of the wages are paid to employees engaged in qualified domestic production activit
> Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2015, the proprietorship has QPAI of $400,000. Sarah’s modified AGI was $350,000. The W–2 wages paid by the proprietorship to employees engaged
> Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2015. Blue had the following expenses in connection with the project. The new product will be introduced for sale beginning in July 2017. Deter
> Dan Simms is the president and sole shareholder of Simms Corporation, 1121 Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of Washington, a qualified public charity. He will have the co
> In 2015, Gray Corporation, a calendar year C corporation, holds a $75,000 charitable contribution carryover from a gift made in 2010. Gray is contemplating a gift of land to a qualified charity in either 2015 or 2016. Gray purchased the land as an invest
> For each of the following independent transactions, calculate the recognized gain or loss to the seller and the adjusted basis to the buyer. a. Bonnie sells Parchment, Inc. stock (adjusted basis $17,000) to Phillip, her brother, for its fair market val
> Brittany Callihan sold stock (basis of $184,000) to her son, Ridge, for $160,000, the fair market value. a. What are the tax consequences to Brittany? b. What are the tax consequences to Ridge if he later sells the stock for $190,000? For $152,000?
> Nancy, the owner of a very successful hotel chain in the Southeast, is exploring the possibility of expanding the chain into a city in the Northeast. She incurs $35,000 of expenses associated with this investigation. Based on the regulatory environment f
> Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2015, the company repaired Samuel Mosley’s car and charged him $1,000. Samuel did not think the problem had been fixed, s
> Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret’s interest payments on the
> Ella owns 60% of the stock of Peach, Inc. The stock has declined in value since she purchased it five years ago. She is going to sell 5% of the stock to a relative. Ella is also going to make a gift of 10% of the stock to another relative. Identify the r
> Melissa, the owner of a sole proprietorship, does not provide health insurance for her 20 employees. She plans to spend $1,500 lobbying in opposition to legislation that would require her to provide such insurance. Discuss the tax advantages and disadva
> Quail Corporation anticipates that being positively perceived by the individual who is elected mayor will be beneficial for business. Therefore, Quail contributes to the campaigns of both the Democratic and Republican candidates. The Republican candidate
> Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Calculate Jebali’s depletion allowance for the current year.
> On April 5, 2015, Kinsey places in service a new automobile that cost $36,000. He does not elect § 179 expensing, and he elects not to take any available additional first-year depreciation. The car is used 70% for business and 30% for personal
> In 2015, McKenzie purchased qualifying equipment for his business that cost $212,000. The taxable income of the business for the year is $5,600 before consideration of any § 179 deduction. Calculate McKenzie’s § 179 expense deduction for 2015 and any car
> Lopez acquired a building on June 1, 2010, for $1 million. Calculate Lopez’s cost recovery deduction for 2015 if the building is: a. Classified as residential rental real estate. b. Classified as nonresidential real estate
> Hamlet acquires a 7-year class asset on November 23, 2015, for $100,000. Hamlet does not elect immediate expensing under § 179. He does not claim any available additional first-year depreciation. Calculate Hamlet’s cost recovery deductions f
> Sandstorm Corporation decides to develop a new line of paints. The project begins in 2015. Sandstorm incurs the following expenses in 2015 in connection with the project: Salaries ……………………………………. $85,000 Materials …………………………………… 30,000 Depreciation on e
> Selma operates a contractor’s supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax return. For 2015, Selma reported cash receipts of $1.4 million, wh
> Tabitha sells real estate on March 2 for $260,000. The buyer, Ramona, pays the real estate taxes of $5,200 for the calendar year, which is the real estate property tax year. Assume that this is not a leap year. a. Determine the real estate taxes apporti
> Stanford owns and operates two dry cleaning businesses. He travels to Boston to discuss acquiring a restaurant. Later in the month, he travels to New York to discuss acquiring a bakery. Stanford does not acquire the restaurant but does purchase the baker
> Vella owns and operates an illegal gambling establishment. In connection with this activity, he has the following expenses during the year: Rent ………………………………………… $ 24,000 Bribes ………………………………………… 40,000 Travel expenses ……………………………. 4,000 Utilities ………………
> Liz and Doug were divorced on July 1 of the current year after 10 years of marriage. Their current year’s income received before the divorce included: Doug’s salary…………………………………………………………………………$41,000 Liz’s salary………………………………………………………………………………55,000 R
> Andy reported the following gains and losses from the sale of capital assets. Loss on Pigeon Corporation stock (held 9 months) ……………………… ($14,000) Gain on painting (held for 2 years as an investment) ………………………… 5,000 Gain on unimproved land (held for
> During the year, Olivia recorded the following transactions involving capital assets. Gain on the sale of unimproved land (held as an investment for 4 years) ……………………. $ 4,000 Loss on the sale of a camper (purchased 2 years ago and used for family vaca
> Vic, who was experiencing financial difficulties, was able to adjust his debts as follows. Determine the Federal income tax consequences to Vic. a. Vic is an attorney. Vic owed his uncle $25,000. The uncle told Vic that if he serves as the executor of t
> Laura recently was diagnosed with cancer and has begun chemotherapy treatments. A cancer specialist has given Laura less than one year to live. She has incurred sizable medical bills and other general living expenses and is in need of cash. Ther
> Ray and Carin are partners in an accounting firm. The partners have entered into an arm’s length agreement requiring Ray to purchase Carin’s partnership interest from Carin’s estate if she dies before Ray. The price is set at 120% of the book value of Ca
> The Egret Company has a 40% combined Federal and state marginal tax rate. Egret’s board estimates that, if its current president should die, the company would incur $200,000 in costs to find a suitable replacement. In addition, profits on various project
> Many years ago, Jack purchased 400 shares of Canary stock. During the cur- rent year, the stock became worthless. It was determined that the company “went under” because several corporate officers embezzled a large amount of company funds. Identify the r
> Champ received a $10,000 distribution from NeatCo, a U.S. C corporation. NeatCo’s earnings and profits for the year totaled $6,000. How much dividend income does Champ recognize? What Federal income tax rate applies to the dividend if Champ’s ordinary in
> Leilei operates a sole proprietorship, using the accrual basis of tax accounting. Last year, she claimed a $10,000 bad debt deduction for a receivable from Jackie. But this year, Jackie sent her a check for $7,000, which Leilei accepted in full satisfact
> Lisbeth makes the following interest-free loans during the year. The relevant Federal interest rate is 5 percent, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last six months of the tax year. Identify th
> Al is a medical doctor who conducts his practice as a sole proprietor. During 2015, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2014. At the end of 2015, Al held accounts receivable of
> Determine the taxpayer’s gross income for tax purposes in each of the following situations. a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for corporate stock with a fair market value of $12,000 at the time of the
> Julie is considering three alternative investments of $10,000. Julie is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The al
> The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company actually is more concerne
> Determine Amos’s gross income in each of the following cases. a. In the current year, Amos purchased an automobile for $25,000. As part of the transaction, Amos received a $1,500 rebate from the manufacturer. b. Amos sold his business. In addition to t
> Tonya, a Virginia resident, inherited a $100,000 State of Virginia bond this year. Her marginal Federal income tax rate is 35%, and her marginal state tax rate is 5%. The Virginia bond pays 3.3% interest, which is not subject to Virginia income tax. Alte
> Dolly is a college student who works as a part-time server in a restaurant. Her usual tip is 20% of the price of the meal. A customer ordered a piece of pie and said that he would appreciate prompt service. Dolly fulfilled the customer’s request. The cus
> The roof of your corporation’s office building recently suffered some damage as the result of a storm. You, the president of the corporation, are negotiating with a carpenter who has quoted two prices for the repair work: $600 if you pay in cash (“foldin
