Mike is working his way through college and trying to make ends meet. Tara, a friend, is graduating soon and tells Mike about a really great job opportunity. She is the onsite manager for an apartment complex catering to students. The job entails working in the office for about 10 hours a week, collecting rent each month, and answering after-hours emergency calls. The owner of the apartment complex requires the manager to live onsite as a condition of employment. The pay is $10 per hour, plus a rent-free apartment (worth about $500 per month). Tara then tells him the best part: the rent-free apartment is tax-free as well. Knowing that you are a tax student, Mike asks you if the rent-free apartment is really tax free or if this is just another scam. Explain to Mike whether the compensation for the apartment is really a nontaxable fringe benefit.
> How is unrecaptured §1250 gain for individuals similar to depreciation recapture? How is it different?
> Are both corporations and individuals subject to depreciation recapture when they sell depreciable real property at a gain? Explain.
> What are the similarities and differences between the tax benefit rule and depreciation recapture?
> Why is depreciation recapture not required when assets are sold at a loss?
> Compare and contrast §1245 depreciation recapture and §1250 depreciation recapture.
> On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end
> Explain Congress’s rationale for depreciation recapture.
> Lincoln has used a piece of land in her business for the past five years. The land qualifies as §1231 property. It is unclear whether Lincoln will have to recognize a gain or loss when she eventually sells the asset. She asks her accountant how the gain
> Dakota Conrad owns a parcel of land he would like to sell. Describe the circumstances in which the sale of the land would generate §1231 gain or loss, ordinary gain or loss, or capital gain or loss. Also describe the circumstances where Dakota would not
> Discuss the reasons why individuals generally prefer capital gains over ordinary gains. Explain why corporate taxpayers might prefer capital gains over ordinary gains.
> Explain the difference between ordinary, capital, and §1231 assets.
> What does it mean to characterize a gain or loss? Why is characterizing a gain or loss important?
> When a taxpayer sells an asset, what is the difference between realized and recognized gain or loss on the sale?
> Hawkeye sold farming equipment for $55,000. It bought the equipment four years ago for $75,000, and it has since claimed a total of $42,000 in depreciation deductions against the asset. Explain how to calculate Hawkeye’s adjusted basis in the farming equ
> Montana Max sells a 2,500-acre ranch for $1,000,000 in cash, a note receivable of $1,000,000 and debt relief of $2,400,000. He also pays selling commissions of $60,000. In addition, Max agrees to build a new barn on the property (cost $250,000) and spend
> Potomac Corporation wants to sell a warehouse that it has used in its business for 10 years. Potomac is asking $450,000 for the property. The warehouse is subject to a mortgage of $125,000. If Potomac accepts Wyden Inc.’s offer to give Potomac $325,000 i
> Harmer Inc. is now a successful company. In the early days (before it became profitable), it issued incentive stock options (ISOs) to its employees. Now Harmer is trying to decide whether to issue nonqualified options (NQOs) or ISOs to its employees. Ini
> Compare and contrast different ways in which a taxpayer triggers a realization event by disposing of an asset.
> Circuit Corporation (CC) is a calendar-year, accrual-method taxpayer. CC manufactures and sells electronic circuitry. On November 15, year 0, CC enters into a contract with Equip Corp (EC) that provides CC with exclusive use of EC’s specialized manufactu
> Matt hired Apex Services to repair Matt’s business equipment. On November 1, of year 0, Matt paid $2,000 for the repairs that he expects to begin in early March of year 1. a. What amount of the cost of the repairs can Matt deduct in year 0 if he uses th
> Haven received 200 NQOs (each option gives him the right to purchase 20 shares of Barlow Corporation stock for $7 per share) at the time he started working for Barlow Corporation three years ago when its stock price was $7 per share. Now that Barlow’s sh
> Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $15 per share. Yost exercises al
> Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation (5/1/Y1) four years ago when MNL’s stock price was $8 per share. Now (8/15/Y5) that MNL’s sto
> Ramon has finally arrived. He has interviewed for the CEO position with MMM Corporation. They have presented him with two alternative compensation offers. Alternative 1 is for a straight salary of $2,500,000. Option 2 is for a salary of $1,000,000 and pe
> Marcus is the CEO of publicly traded ABC Corporation and earns a salary of $1,500,000. Assume ABC has a 35 percent marginal tax rate. a. What is ABC’s after-tax cost of paying Marcus’s salary? b. Now assume that Marcus, in addition to the $1.5 million s
> Jorgensen High Tech Inc. is a calendar-year, accrual-method taxpayer. At the end of year 1, Jorgensen accrued and deducted the following bonuses for certain employees for financial accounting purposes. • $40,000 for Ken. • $30,000 for Jayne. • $20,000 fo
> North Inc. is a calendar-year C corporation, accrual-basis taxpayer. At the end of the year 1, North accrued and deducted the following bonuses for certain employees for financial accounting purposes. • $7,500 for Lisa Tanaka, a 30 percent shareholder.
> Antonio received 40 ISOs at the time he started working for Zorro Corporation six years ago (each option gives him the right to purchase 20 shares of Zorro stock for $3 per share). Zorro’s share price was $3 per share at the time. Now that Zorro’s share
> Matt works for Fresh Corporation. Fresh offers a cafeteria plan that allows each employee to receive $15,000 worth of benefits each year. The menu of benefits is as follows: For each of the following independent circumstances, determine the amount of in
> Jarvie loves to bike. In fact, he has always turned down better paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year
> Jasmine works in Washington, D.C. She accepts a new position with her current firm in Los Angeles. Her employer provides the following moving benefits: • Temporary housing for one month……………………………… — $3,000 • Transportation for her household goods………………
> LaMont works for a company in downtown Chicago. The firm encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $260 per month. a. If LaMont receives one pass (worth $260) each mont
> Sharmilla works for Shasta Lumber, a local lumber supplier. The company annually provides each employee with a Shasta Lumber shirt so that employees look branded and advertise for the business while wearing the shirts. Are Shasta’s employees required to
> Gray’s employer is now offering group-term life insurance. The company will provide each employee with $100,000 of group-term life insurance. It costs Gray’s employer $300 to provide this amount of insurance to Gray each year. Assuming that Gray is 52 ye
> JDD Corporation provides the following benefits to its employee, Ahmed (age 47): • Salary………………………………………...$300,000 • Health insurance:……………………….…$10,000 • Dental insurance:……………………………$2,000 • Life insurance:………………………………..$3,000 • Dependent care:…………………
> Why do employers use stock options in addition to salary to compensate their employees? For employers, are stock options treated more favorably than salary for tax purposes? Explain.
> From an employee perspective, how are incentive stock options treated differently than nonqualified stock options for tax purposes? In general, for a given number of options, which type of stock option should employees prefer?
> Lea is a highly paid executive with MCC, Inc., a publicly traded corporation. What are the circumstances under which MCC will be able to deduct more than $1 million of compensation paid to Lea during the year?
> What are tax reasons why a corporation may choose to cap its executives’ salaries at $1 million?
> What are nontax reasons why a corporation may choose to cap its executives’ salaries at $1 million?
> Holding all else equal, does an employer with a higher marginal tax rate or lower marginal tax rate have a lower after-tax cost of paying a particular employee’s salary? Explain.
> Seiko’s current salary is $85,000, and she fancies European sports cars. She purchases a new auto each year. Seiko is currently a manager for an office equipment company. Her friend, knowing of her interest in sports cars, tells her about a manager posit
> Nicole and Braxton are each 50 percent shareholders of NB Corporation. Nicole is also an employee of the corporation. NB is a calendar-year taxpayer and uses the accrual method of accounting. The corporation pays its employees monthly on the first day of
> Describe the circumstances in which an employee may not value a nontaxable fringe benefit.
> Explain the policy reason for including the value of country club memberships provided to an executive as a taxable fringe benefit.
> Explain why Congress allows employees to receive certain fringe benefits tax-free but others are taxable?
> Describe a cafeteria plan and discuss why an employer would provide a cafeteria plan for its employees.
> Explain why an employee might accept a lower salary to receive a nontaxable fringe benefit. Why might an employee not accept a lower salary to receive a nontaxable fringe benefit?
> Assume that a friend has accepted a position working as an accountant for a large automaker. As a signing bonus, the employer provides the traditional cash incentive but also provides the employee with a vehicle not to exceed a retail price of $25,000. E
> Compare and contrast the employer’s tax consequences of providing taxable and nontaxable fringe benefits.
> When an employer provides group-term life to an employee, what are the tax consequences to the employee? What are the tax consequences for the employer?
> Lars Osberg, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lars $8,500 to purchase if he pays for it himself (Lars’s AGI is too high to receive any tax deduction for the insurance as a me
> Explain the differences and similarities between a fringe benefit as a form of compensation and salary.
> What risks do employees making an §83(b) election on a restricted stock grant assume?
> Matt just started work with Boom Zoom, Inc., a manufacturer of credit card size devices for storing and playing back music. Due to the popularity of their devices, analysts expect Boom Zoom’s stock price to increase dramatically. In addition to his salar
> How is the tax treatment of restricted stock different from that of nonqualified options? How is it similar?
> In 2016, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her $90,000 annual salary with no qualified fringe benefits, requires her to pay $3,500 a year for parking, and pay her life i
> Sylvana is given a job offer with two alternative compensation packages to choose from. The first package offers her $250,000 annual salary with no qualified fringe benefits. The second package offers $235,000 annual salary plus health and life insurance
> Santini’s new contract for 2016 indicates the following compensation and benefits: Santini is 54 years old at the end of 2016. He is single and has no dependents. Assume that the employer matches $1 for $1 for the first $6,000 that the
> Fizbo Corporation is in the business of breeding and racing horses. Fizbo has taxable income of $5,000,000 other than from these transactions. It has nonrecaptured §1231 losses of $10,000 from 2012 and $13,000 from 2010. Consider the following transacti
> WAR (We Are Rich) has been in business since 1983. WAR is an accrual method sole proprietorship that deals in the manufacturing and wholesaling of various types of golf equipment. Hack & Hack CPAs have filed accurate tax returns for WARâ€&
> Vertovec Inc., a large local consulting firm in Utah, hired several new consultants from out of state last year to help service their expanding list of clients. To aide in relocating the consultants, Vertovec Inc. purchased the consultants’ homes in thei
> Bills Corporation runs a defense contracting business that requires security clearance. To prevent unauthorized access to its materials, Bills requires its security personnel to be on duty except for a 15-minute break every two hours. Since the nearest r
> Mark received 10 ISOs at the time he started working for Hendricks Corporation five years ago when Hendricks’s price was $5 per share (each option gives him the right to purchase 10 shares of Hendricks Corporation stock for $5 per share). Now that Hendri
> Suppose that David adopted the last-in first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below). In late December, David sold widget #2 and next year David expects to purchase three more widgets at the followi
> This year Amber opened a factory to process and package landscape mulch. At the end of the year, Amber’s accountant prepared the following schedule for allocating manufacturing costs to the mulch inventory, but her accountant is unsure
> Nicole’s business uses the accrual method of accounting and accounts for inventory with specific identification. In year 0, Nicole received a $4,500 payment with an order for inventory to be delivered to the client early next year. Nicole has the invento
> In October of year 0, Janine received a $6,000 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $240 per month. a. When must Janine recognize the income from the $6,000 advance p
> On April 1 of year 0 Stephanie received a $9,000 payment for full payment on a three-year service contract (under the contract Stephanie is obligated to provide advisory services for the next three years). a. What amount of income should Stephanie recog
> Ben teaches golf lessons at a country club under a business called Ben’s Pure Swings (BPS). He operates this business as a sole proprietorship on the accrual basis of accounting. Ben’s trusty accountant, Brian, has produced the following accounting infor
> Way Corporation disposed of the following tangible personal property assets in the current year. Assume that the delivery truck is not a luxury auto. Calculate Way Corporation’s 2016 depreciation expense (ignore §179 expense and bonus depreciation for th
> Parley needs a new truck to help him expand Parley’s Plumbing Palace. Business has been booming and Parley would like to accelerate his tax deductions as much as possible (ignore §179 expense and bonus depreciation for this problem). On April 1, Parley p
> Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses: $250 fee to register for the conference, $300 per night for three night’s lodging, $200 for
> Harris Corp. is a technology start-up and is in its second year of operations. The company didn’t purchase any assets this year but purchased the following assets in the prior year: Harris did not know depreciation was tax deductible un
> Convers Corporation (June 30 year-end) acquired the following assets during the current tax year (ignore §179 expense and bonus depreciation for this problem): What is the allowable MACRS depreciation on Convers’ property i
> Evergreen Corporation (calendar year end) acquired the following assets during the current year (ignore §179 expense and bonus depreciation for this problem): a. What is the allowable MACRS depreciation on Evergreen’s prope
> At the beginning of the year, Dee began a calendar-year business and placed in service the following assets during the year: Assuming Dee does not elect §179 expensing or bonus depreciation, answer the following questions: a. What is Dee&acir
> DLW Corporation acquired and placed in service the following assets during the year: Assuming DLW does not elect §179 expensing or bonus depreciation, answer the following questions: a. What is DLW’s year 1 cost recovery fo
> At the beginning of the year, Pop lock began a calendar-year dog boarding business called Griff’s Palace. Pop lock bought and placed in service the following assets during the year: Assuming Poplock does not elect §179 expen
> Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000. a. What is Bob’
> Brittany started a law practice as a sole proprietor. She owned a computer, printer, desk, and file cabinet she purchased during law school (several years ago) that she is planning to use in her business. What is the depreciable basis that Brittany shoul
> Dennis contributed business assets to a new business in exchange for stock in the company. The exchange did not qualify as a nontaxable exchange. The fair market value of these assets was $287,000 on the contribution date. Dennis’s original basis in the
> In January, Prahbu purchases a new machine for use in an existing production line of his manufacturing business for $90,000. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,500 to install the machine, and aft
> Ralph invited a potential client to dinner and the theatre. Ralph paid $250 for the dinner and $220 for the theatre tickets in advance. They first went to dinner and then they went to the theatre. a. What amount can Ralph deduct if, prior to the dinner,
> Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $2,000 to repair minor leaks in the roof, $5,000 to make the
> Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at
> Last Chance Mine (LC) purchased a coal deposit for $750,000. It estimated it would extract 12,000 tons of coal from the deposit. LC mined the coal and sold it, reporting gross receipts of $1 million, $3 million, and $2 million for years 1 through 3, resp
> Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July of year 1. Bethany went through a lot of trouble and spent $10,000 in legal fees to receive a patent for the product in August of year 3. Bethany
> Nicole organized a new corporation. The corporation began business on April 1 of year 1. She made the following expenditures associated with getting the corporation started: a. What is the total amount of the start-up costs and organizational expenditure
> Juliette formed a new business to sell sporting goods this year. The business opened its doors to customers on June 1. Determine the amount of start-up costs Juliette can immediately expense (not including the portion of the expenditures that are amortiz
> After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000. Ingrid allocated $50,000 of the purchase price to goodwill.
> Paul Vote purchased the following assets this year (ignore §179 expensing and bonus depreciation when answering the questions below): a. What is Paul’s allowable MACRS depreciation expense for the property? b. What is Paul&a
> Burbank Corporation (calendar-year end) acquired the following property this year: a. Assuming no bonus or §179 expense, what is Burbank’s maximum cost recovery for this year? b. Assuming Burbank would like to maximize its c
> Lina purchased a new car for use in her business during 2016. The auto was the only business asset she purchased during the year and her business was extremely profitable. Calculate her maximum depreciation deductions (including §179 expense unless state
> Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution. a. Josh borrowed $50,000 from the First State Bank using his business assets as collateral.
> Assume that Ernesto purchased a laptop computer on July 10 of year 1 for $3,000. In year 1, 80 percent of his computer usage was for his business and 20 percent was for computer gaming with his friends. This was the only asset he placed in service during
> Phil owns a ranch business and uses 4-wheelers to do much of his work. Occasionally, though, he and his boys will go for a ride together as a family activity. During year 1, Phil put 765 miles on the 4-Wheeler that he bought on January 15 for $6,500. Of
> Acorn Construction (calendar-year end C-corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has record income and would like to maximize their cost recovery, as
> Assume that Sivart Corporation has 2016 taxable income of $750,000 before the §179 expense and acquired the following assets during 2016: a. What is the maximum amount of §179 expense Sivart may deduct for 2016? b. What is the max
> Woo lard Inc. has taxable income in 2016 of $150,000 before any depreciation deductions (§179, bonus, or MACRS) and acquired the following assets during the year: a. If Woo lard elects $50,000 of §179, what is Woo lardâ€
