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 current employer. As part of a New Year’s resolution, Jack decided he would finally do it. In January, Jack put his business plan together and in February, opened his doors for business as a C corporation called Geo-Jack (GJ). Jack is the sole shareholder. Jack reported the following financial information for the year (assume GJ reports on a calendar year and uses the accrual method of accounting). a. In January GJ rented a small business office about 12 miles from Jack’s home. GJ paid $10,000 which represented a damage deposit of $4,000 and rent for two years ($3,000 annually). b. GJ earned and collected $290,000 performing geological-related services and selling its specialized digging tool [see part (i)]. c. GJ received $50 interest from municipal bonds and $2,100 interest from other investments. d. GJ purchased some new equipment in February for $42,500. It claimed depreciation on these assets during the year in the amount of $6,540. e. GJ paid $7,000 to buy luxury season tickets for Jack’s parents for State U. football games. f. GJ paid Jack’s father $10,000 for services that would have cost no more than $6,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients. g. In an attempt to get his name and new business recognized, GJ paid $7,000 for a one-page ad in the Geologic Survey. It also paid $15,000 in radio ads to be run through the end of December. h. GJ leased additional office space in a building downtown. GJ paid rent of $27,000 for the year. i. In August, GJ began manufacturing a special geological digging tool that it sells to wholesalers. GJ’s QPAI from the activity for the year is $100,000 [included in revenues reported in part (b)]. GJ paid $10,000 of wages to the employees working on the project during the year and its cost of goods sold on the sales is $15,000. (Assume that taxable income does not limit the amount of the DPAD and that no wages should be included in cost of goods sold.) Remember that cost of goods sold and wages reduce taxable income. j. In November, Jack’s office was broken into and equipment valued at $5,000 was stolen. The tax basis of the equipment was $5,500. Jack received $2,000 of insurance proceeds from the theft. k. GJ incurred a $4,000 fine from the state government for digging in an unauthorized digging zone. l. GJ contributed $3,000 to help lobbyists for their help in persuading the state government to authorize certain unauthorized digging zones. m. On July 1, GJ paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July 1of this year through December 31 of next year. n. GJ borrowed $20,000 to help with the company’s initial funding needs. GJ used $2,000 of funds to invest in municipal bonds. At the end of the year, GJ paid the $1,200 of interest expense that accrued on the loan during the year. o. Jack lives 12 miles from the office. He carefully tracked his mileage and drove his truck 6,280 miles between the office and his home. He also drove an additional 7,200 miles between the office and traveling to client sites. Jack did not use the truck for any other purposes. He did not keep track of the specific expenses associated with the truck. However, while traveling to a client site, Jack received a $150 speeding ticket. GJ reimbursed Jack for business mileage and for the speeding ticket. p. GJ purchased two season tickets (20 games) to attend State U. baseball games for a total of $1,100. Jack took existing and prospective clients to the games to maintain contact and find further work. This was very successful for Jack as GJ gained many new projects through substantial discussions with the clients following the games. q. GJ reimbursed employee-salespersons $3,500 for meals involving substantial business discussion. r. GJ had a client who needed Jack to perform work in Florida. Because Jack had never been to Florida before, he booked an extra day and night for sightseeing. Jack spent $400 for airfare and booked a hotel for 3 nights ($120/night). (Jack stayed two days for business purposes and one day for personal purposes.) He also rented a car for $45 per day. The client arranged for Jack’s meals while Jack was doing business. GJ reimbursed Jack for all expenses. Required: A. What is GJ’s net business income for tax purposes for the year? B. As a C corporation, does GJ have a required tax year? If so, what would it be? C. If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be? D. If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?
> Travis is a professional landscaper. He provides his clients with a one-year (12-month) warranty for retaining walls he installs. In June of year 1, Travis installed a wall for an important client, Sheila. In early November, Sheila informed Travis that t
> This year (year 0) Elizabeth agreed to a three-year service contract with an engineering consulting firm to improve efficiency in her factory. The contract requires Elizabeth to pay the consulting firm $1,500 for each instance that Elizabeth requests its
> Kimberly is a self-employed taxpayer. She recently spent $1,000 for airfare to travel to Italy. What amount of the airfare is deductible in each of the following alternative scenarios? a. Her trip was entirely for personal purposes. b. On the trip, she
> Rebecca is a calendar year taxpayer who operates a business. She made the following business-related expenditures in December of year 0. Indicate the amount of these payments that she may deduct in year 0 under both the cash method of accounting and the
> Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cas
> Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are due by the end of the month, and typically 70 percent o
> In July of this year Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting and Stephen has produced the following financial information for this year. Fill out a draft of the front page
> Explain why a taxpayer might choose one tax year end over another if given a choice.
> What is the difference between a full tax year and a short tax year? Describe circumstances in which a business may have a short tax year.
> How do casualty loss deductions differ when a business asset is completely destroyed as opposed to the destruction of a personal-use asset?
> Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and a loss deduction for a business asset that was stolen or completely destroyed in an accident.
> Describe the limits placed on the domestic production activities deduction and explain the apparent reason for each limitation.
> Describe the calculation of the domestic production activities deduction.
> Explain why the domestic production activities deduction is sometimes described as an “artificial” expense and the apparent rationale for this deduction. How might a business begin to determine the domestic portion of revenues and expenses for products t
> In very general terms, how is the alternative minimum tax system different from the regular income tax system? How is it similar?
> Clyde lives and operates a sole proprietorship in Dallas, Texas. This year Clyde found it necessary to travel to Fort Worth (about 25 miles away) for legitimate business reasons. Is Clyde’s trip likely to qualify as “away from home,” and why would this d
> 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?
> 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
> 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 o
> 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
