Mike Webb, married to Nancy Webb, is employed by a large pharmaceutical company andÂ earns a salary. In addition, Mike is an entrepreneur and has two small businesses on the side, both of which operate as sole proprietorships. One is a profitable consulting business where Mike provides financial and retirement advice to pharmacists. The other involves the manufacture of Christmas novelties in China, selling the products in gift shops in the U.S. This business is struggling. However, Mike feels the Christmas novelty business has great potential. Mike reports the following for 2017:
For 2016, Mike and Nancyâs AGI was $175,000 and their actual federal income tax liability was $29,000. a. Compute the Webbs regular federal income tax liability for 2017, including self- employment taxes. b. Are the Webbs subject to AMT in 2017? c. Are the Webbs due a refund for 2017? d. Are the Webbs subject to any underpayment penalties for 2017?
$150,000 Salary Consulting practice: Revenues $65,000 12,000 $22,000 40,000 Ordinary expenses 53,000 Sole proprietorship: Revenues Ordinary Expenses Interest (none tax-exempt) Dividends, qualified LTCG STCL (18,000) 3,000 9,000 $24,000 (4,000) 20,000 Itemized deductions: State and local taxes Real estate taxes Mortgage interest on personal residence Charitable contributions $14,000 8,000 7,000 8,000 37,000 Child care expenses: The Webb's have two dependent children, ages 13 and 11, and pay child care expenses of $4,000 per year for each child. Nancy is not employed, but is a full-time student (all of 2017) at State University, majoring in Accounting. Federal income tax withheld from salary Estimated taxes paid for 2017 $21,000 14,000
> Which of the following categories of individuals or income are exempt from the federal income tax withholding requirements? a. Household employees b. Independent contractors c. Newspaper carriers over age 18 d. Bonuses e. Commissions f. Vacation pa
> List three requirements that apply to written advice under Treasury Department Circular 230.
> Laser Corporation, a U.S. corporation, has a foreign office that conducts business in France. Laser pays foreign taxes of $74,000 on foreign-source taxable income of $185,000. Its U.S.-source taxable income is $320,000, total U.S. taxable income (worldwi
> Daryl is an executive who has an annual salary of $120,000. He is considering early retirement so he can pursue a career as a management consultant. Daryl estimates that he could earn approximately $80,000 annually from his consulting business. What tax
> Dale Eisen is saving as much as possible to fund a down payment on his first home. He is young (25 years old) and healthy, and has declined health insurance coverage offered by his employer because he would have to pay one-third of the $300 monthly cost
> Jennifer recently received a check for $30,000 and securities with a fair market value of $200,000 from her former husband pursuant to a divorce. The $30,000 represents a limony and the securities were transferred pursuant to the property settlement. The
> An individual has increasing levels of income each year and is uncertain regarding the amount of his estimated taxable income for any given year. What tax planning strategy can be used to avoid the penalty for underpayment of estimated tax?
> Vincent anticipates that his actual tax liability for the tax year 2017 will be $12,000 and that federal income taxes withheld from his salary will be $9,000. Thus, when he files his 2017 income tax return, he will have a $3,000 balance due. In the previ
> What is backup withholding? What is its purpose?
> Mario is a college student who had no income tax liability in the prior year and expects to have no tax liability for the current year. a. What steps should Mario take to avoid having amounts withheld from his summer employment wages? b. What are the c
> Although Virginia is entitled to five personal and dependency exemptions on her income tax return, she claims only one withholding allowance on Form W-4. a. Is it permissible to claim fewer allowances than an individual is entitled to? b. Why would an i
> The credit for employer-provided child care has two major components, a credit for qualified child care expenses and a credit for qualified child care resources and referral expenditures. a. Discuss each of the two components. What type of expenses are
> List an advisor’s duties that are excluded under the AICPA’s Statements on Standards for Tax Services.
> Explain what is encompassed by the term tax law as used by tax advisors.
> Taxpayers are permitted to contribute money to qualified retirement plans and receive very favorable tax benefits. Congress has provided further incentives to contribute money to such plans by enacting the Qualified Retirement Savings Contributions Credi
> Alice is a single mother, 37 years old, and has two qualifying children, ages 3 and 6. In 2017, she receives $3,600 alimony and earns $18,000 in wages resulting in $21,600 of AGI. Is Alice eligible for the earned income credit?
> The adoption credit is intended to assist taxpayers with the financial burden of adopting children. a. Discuss how the credit is computed. b. Why did Congress impose a phase-out of the credit for taxpayers based on AGI?
> Vivian is a single taxpayer with two children who qualify for the child and dependent care credit. She incurred $7,000 of qualifying child care expenses during the current year. She also received $4,000 in reimbursements from her employer from a qualifie
> What is the maximum child and dependent care credit available to an employed individual who has $8,000 of qualifying child care expenses and two or more qualifying dependents?
> Discuss the major differences between the American Opportunity credit and the Lifetime Learning credit. Include in your discussion the type of taxpayers who would likely qualify for each of the credits.
> If an individual is not employed and has no earned income, is it possible to take a child and dependent care credit for otherwise qualifying child and dependent care expenses? Explain.
> Discuss the difference between a refundable tax credit and a nonrefundable tax credit. Give at least one example of each type of credit.
> Discuss the special tax rules that apply to the tax credit for rehabilitation expenditures including the following: a. Types of eligible expenditures b. Applicable tax credit rates c. Calculation of basis for expenditures d. Restrictions on depreciat
> Queen Corporation has been in business since 1989. During the preceding year, the company had 25 full-time employees and gross receipts of $8,000,000. During the current year, Queen spent $15,000 to install access ramps for disabled individuals. Is Queen
> According to the Statements on Standards for Tax Services, what belief should a CPA have before taking a pro-taxpayer position on a tax return?
> Describe the tax costs to a taxpayer who does not purchase health insurance coverage for 2017. Assume the taxpayer is single, 40 years old, has no dependents, has household income of $55,000, and does not meet any of the conditions to be exempt from the
> Sarah, a married taxpayer who files a joint return, is considering a foreign assignment for two years. In 2017, she will earn $120,000 in the foreign country. Sarah has no other income. She will be eligible for either the foreign tax credit or the foreig
> Discuss the limitations that have been imposed on the general business tax credit, including the following: a. Overall ceiling limitation based on the tax liability b. Priority of general business and personal credits c. Carryback and carryover of unu
> If Congress is considering a tax credit or deduction as an incentive to encourage certain activities, is a $40 tax credit more valuable than a $200 tax deduction for a taxpayer with a 15% marginal rate? A 25% marginal rate?
> Discuss the underlying rationale for the following tax credit items: a. Foreign tax credit b. Research credit c. Business energy credit d. Premium tax credit e. Dependent care credit f. Earned income credit g. American Opportunity credit h. Adopt
> Theresa is a college professor who wants to work for a consulting firm during the summer. She will be working on special projects relating to professional development programs. What advantages might accrue to the consulting firm if the engagement is set
> Tony, who is single and 58 years old, is considering early retirement from his salaried job. He currently has $90,000 salary and also earns $50,000 profit from a consulting business. What advice would you give Tony relative to the need to make Social Sec
> Which of the following itemized deductions are deductible when computing the alternative minimum tax for individuals? a. Charitable contributions b. Mortgage interest on a loan used to acquire a personal residence c. State and local income taxes d. In
> Which of the following are individual AMT adjustments? a. Itemized deductions that are allowed for regular tax purposes but not allowed in computing AMTI. b. Excess of MACRS depreciation over depreciation computed under the alternative depreciation sys
> Which of the following are tax preference items for purposes of computing the individual AMT? a. Net long-term capital gain b. Excess depreciation for real property placed in service before 1987 c. Straight-line depreciation on residential real estate
> Compare the features of the computerized tax services with those of Internet sites maintained by noncommercial institutions. What are the relative advantages and disadvantages of each? Could the latter sites serve as a substitute for a commercial tax ser
> From a cash-flow perspective, why is it generally preferable to have an underpayment of tax (assuming no underpayment penalty is imposed) rather than an overpayment of tax?
> Why do many taxpayers intentionally overpay their tax through withholdings to obtain a tax refund?
> A credit is allowed to encourage businesses to conduct research and experimentation. One feature of the research credit is that only incremental expenditures are eligible. Explain the concept that the credit is allowed for increasing research activities.
> If an employer fails to withhold federal income taxes and FICA taxes on wages or fails to make payment to the IRS, what adverse tax consequences may result? May corporate officers or other corporate officials be held responsible for the underpayment?
> Why are most elderly people unable to qualify for the tax credit for the elderly?
> What are the underlying reason for enactment of many of the personal tax credits?
> What types of business property qualify for the business energy credit?
> What are the more significant tax credit items included in the computation of the general business tax credit?
> Brian and Jennifer are a married couple who believe they may be subject to the AMT this year. Currently, they calculate their alternative minimum taxable income (AMTI) to be $160,000. a. What is their AMT exemption amount? b. They are considering an op
> Why are most individuals not subject to the selfemployment tax?
> Use any major tax service to answer the following questions: a. What are the principal primary sources? b. What are the principal secondary sources?
> Does the AMT apply if an individual’s tax liability as computed under the AMT rules is less than his or her regular tax amount?
> Why are most taxpayers not subject to the alternative minimum tax (AMT)?
> Chips-R-Us is a computer technology corporation that designs hardware and software for use in large businesses. The corporation regularly pays individuals to install programs and give advice to companies that buy their software. In the current year, Simo
> Barbara was divorced two years ago. However, the final property settlement and determination of alimony payments was not made until February 2017 because of extended litigation. Barbara received a $20,000 payment of back alimony in March 2017 and will re
> Russ has never recognized any Sec. 1231 gains or losses. In December 2017, Russ is considering the sale of two Sec. 1231 assets. The sale of one asset will result in a $20,000 Sec. 1231 gain while the sale of the other asset will result in a $20,000 Sec.
> Holly has recognized a $9,000 STCL. She has no other recognized capital gains and losses in 2017. She is considering the sale of a Sec. 1231 asset held for four years at a $5,000 gain in 2017. She had not recognized any Sec. 1231 losses during the previo
> Berkeley Corporation has a policy of furnishing new automobiles to the athletic department of the local university. The automobiles are used for short periods of time by the extremely popular head basketball coach. When the automobiles are returned to Be
> In 2011, Jack purchased undeveloped oil and gas property for $900,000 and paid $170,000 for intangible drilling and development costs. He elected to expense the intangible drilling and development costs. During the current year he sells the property for
> Bob owns farmland with a $600,000 basis, and he elects to expense $100,000 of expenditures incurred for soil and water conservation purposes. Bob sells the farmland after farming for seven years and four months. What is the amount of the recognized gain
> List three methods of searching the major tax service databases.
> Glen, whose tax rate is 33%, sells each of the following assets for $200,000. Each case is an independent case. Sec. 1231 Ordinary Gain (Loss) Income Тахed Тахed Тахed Тахed at 33% at 25% at 20% at 15% Building purchascd in 2001 for $220,000 with adj
> Raquel owns land used in her trade or business for more than one year. The basis is $10,000 and its FMV is $40,000. Her tax rate is 33% and her AGI is $250,000. She makes no other charitable contributions except for the ones considered below. a. If she
> Assume the same facts as in Problem I:13-56 except the taxpayer is a corporation instead of an individual. a. What is the recognized gain on the sale of the building and the character of the gain? b. What is the recognized gain on the sale of the land
> Molly, whose tax rate is 39.6%, sells an apartment complex for $4.5 million with 10% of the price allocated to land. The apartment complex was purchased in 1993. She has no other sales or exchanges during the year and no nonrecaptured net Sec. 1231 losse
> Assume the same facts as in Problem I:13-54 except the taxpayer is a corporate taxpayer with a 34% tax rate and answer the ten true-false questions. From problem 54: Consider three office buildings placed in service as shown below and answer the followin
> Consider three office buildings placed in service as shown below and answer the following true-false questions. Assume all assets are sold by a noncorporate taxpayer at a gain and there are no other sales or exchanges or nonrecaptured Sec. 1231 loss unle
> Rosemary owns an office building placed in service in 1980 that cost $625,000 and has an adjusted basis of $227,000. If the straight-line method of depreciation were used, the adjusted basis would be $300,000. a. What is the maximum selling price that s
> Jesse owns a duplex used as residential rental property. The duplex cost $100,000 in 1986, and 10% of the cost was allocated to the land. Total cost-recovery deductions allowed amount to $90,000. The statutory percentages were used to compute cost-recove
> Mr. Briggs purchased an apartment complex on January 10, 2015, for $2 million with 10% of the price allocated to land. He sells the complex on October 22, 2017, for $2.5 million. Assume that 10% of the $2.5 million selling price is allocated to land and
> Brigham is single and is in the 33% marginal income tax bracket. He has the sales or exchanges below. At the beginning of the year, he has nonrecaptured net Sec. 1231 losses of $10,000. Determine the increase or decrease in Brigham’s tax liability as a r
> Name three primary sources of authority that tax professionals should check against the citator before relying on those sources for important matters.
> Assume the same facts as in Problem I:13-47 except the taxpayer is a corporation and answer the same questions. From problem 37: Charles owns an office building and land that are used in his trade or business. The office building and land were acquired i
> General Corporation owns equipment which cost $70,000 and has a $44,000 adjusted basis. General exchanges the equipment for other equipment ($42,000 FMV) and marketable securities ($30,000 FMV). Determine the following: a. Realized gain b. Recognized g
> Arnie, a college student, purchased a truck in 2015 for $6,000. He used the truck 70% of the time as a distributor for the local newspaper and 30% of the time for personal use. The truck has a five-year recovery period, and he claimed depreciation deduct
> Elizabeth owns equipment that cost $500,000 and has an adjusted basis of $230,000. If the straight-line method of depreciation had been used, the adjusted basis would be $300,000. a. What is the maximum selling price that she could sell the equipment fo
> Consider the following summary of Sec. 1231 gains and losses recognized by Janet during the period 2012â€“2017. Janet had no nonrecaptured Sec. 1231 losses at the beginning of 2012. If Janet has no capital gains and losses during the six-
> During the current year, Sean’s office building is destroyed by fire. After collecting the insurance proceeds, Sean has a $50,000 recognized gain. The building was acquired in 1998, and the straight-line method of depreciation has been used. He does not
> Vicki has an AGI of $70,000 without considering the sale of a nondepreciable asset for $23,000. The asset was acquired six years ago and has an adjusted basis of $35,000. She has no other sales or exchanges. Determine her AGI for the following independen
> Edith, who has no other sales or exchanges and no nonrecaptured Sec. 1231 losses, sells three tracts of land that are used in her trade or business. Edith is single, and her regular income tax rate is 33%. Asset #1—$15,000 gain and holding period of 20 m
> All assets listed below have been held for more than one year. Which assets might be classified as Sec. 1231, Sec. 1245, or Sec. 1250 property? An asset may be classified as more than one type of property. a. Land on which a factory is located b. Equip
> Ed operates a storage business as a sole proprietorship and owns the following assets acquired in 1998: Warehouse…………………………………..$400,000 Minus: Accumulated depreciation…..(230,000) Adjusted basis………………………………$170,000 Land……………………………………………….65,000 The FM
> What two functions does a citator serve?
> At the beginning of 2017, Silver Corporation has a $95,000 capital loss carryforward from 2016. During 2017, the corporation sells land, held for four years, and realizes an $80,000 gain. Silver has no unrecaptured net Sec. 1231 losses, and it made no ot
> Jeremy purchased undeveloped oil and gas property five years ago. He paid $300,000 for intangible drilling and development costs and elected to expense the $300,000. During the current year, Jeremy sells the property, which has an $800,000 adjusted basis
> Sylvester owns and operates an unincorporated pizza business that delivers pizza to customers. Three years ago, he acquired an automobile for $30,000 to provide delivery service. Recently, Sylvester hired an employee who prefers to use his personal autom
> Sarah, who has been in the business of erecting, maintaining, and renting outdoor advertising displays for 18 years, has an offer to purchase her business. Two basic types of advertising displays are used in her business: structure X and structure Y. Str
> Green Acres, Inc., owns 1,400 acres adjacent to land owned by the U.S. government. The government, wanting to sell timber from its land, had to assure prospective bidders of access to the timber. The government entered into an agreement with Green Acres
> Six years ago Joelle started raising chinchillas. She separates her chinchillas into two groups, a breeding group and a market group. During the year, she had the following sales of chinchillas from her market group: 400 to producers of fur products; 100
> Dale owns business equipment with a $100,000 FMV and an adjusted basis of $60,000. The property was originally acquired for $150,000. Which one of the following transactions would result in recognition of $40,000 ordinary income by Dale due to the deprec
> Why may a corporation recognize a greater amount of ordinary income due to the sale of Sec. 1250 property than a noncorporate taxpayer?
> John and Karen are unrelated individuals. John sold land that is Sec. 1231 property held for three years and recognized a $50,000 gain. Karen sold a building that is Sec. 1231 property held for three years and recognized a $50,000 gain. Straight-line dep
> Will an individual taxpayer ever have to recognize Sec. 1250 ordinary income on the sale of a building used for business and placed in service after 1986? Explain.
> Under what circumstances might a tax advisor find the provisions of a tax treaty useful?
> Jackie purchases equipment during the current year for $800,000 that has a seven-year MACRS recovery period. She expects to sell the property after three years. Jackie anticipates that her marginal tax rate in the year of sale will be significantly highe
> Why is it unlikely that gains due to the sale of equipment will be treated as Sec. 1231 gains?
> Carlie who is single has a Sec. 1231 gain of $10,000 and no Sec. 1231 losses during the current year. Explain why the gain might be taxed at (a) 15%, (b) 39.6%, (c) 25%, (d) 20%, or (e) zero.
> Explain how the gain from an involuntary conversion of business property held more than one year is taxed if the involuntary conversion is the result of a condemnation. Explain the tax treatment if the involuntary conversion is due to a casualty.
> Alice owns timber, purchased six years ago, with an adjusted basis of $50,000. The timber is cut for use in her furniture business on October 1, when the FMV of the timber is $200,000. The FMV of the timber on January 1 is $190,000. May Alice treat any o
> Explain how the gain on the sale or exchange of land could be classified as either ordinary income, a Sec. 1231 gain, or a LTCG, depending on the facts and circumstances.
> Ted owns a warehouse that cost $850,000 in 1984 and is subject to depreciation recapture under Sec. 1245. The warehouse, which has an adjusted basis of zero, is destroyed by a tornado and Ted receives $580,000 from the insurance company. Within nine mont
> William owns two appreciated assets, land and a building, which have been used in his trade or business since purchased in 1990. If he sells the two assets to his 100%-owned corporation, will William have to recognize any ordinary income? Explain.
> When a taxpayer disposes of oil, gas, or geothermal property, part or all of the gain may be recaptured as ordinary income. Explain how the recapture amount is determined for oil and gas and geothermal properties.
> Carlos owns equipment with an $800,000 acquisition cost, a $270,000 adjusted basis, and a $500,000 FMV. Carlos makes a gift of the equipment to a charitable organization. The equipment is used by the charity in its exempt function. What is the amount of