Questions and Answers of Taxation

Sarah pays $800 per month for her five-year-old daughter to attend a private kindergarten from 8:30 A.M. until 2:30 P.M. and after-school care until 5:30 P.M. The price of the kindergarten without
Contrast ceiling and floor limitations for itemized deductions. Provide an example of each.
Which types of taxes qualify as itemized deductions?
Why is investment interest expense limited to net investment income?
Lynn paid $12,000 of investment interest expense in a year in which she has the following investment income: $3,000 taxable dividend income, $4,000 taxable interest income, $1,000 from a short-term
What are "points" paid on a home mortgage and when are they deductible?
What is the overall charitable contribution deduction limitation? How are charitable contributions in excess of the current year's limit treated?
Describe the types of expenses allowed as miscellaneous itemized deductions. What limitation is imposed on these expenses?
Explain how itemized deductions are phased out. Can a taxpayer lose the benefit of all of his or her itemized deductions?
Compare the requirements for claiming a dependency exemption for a qualifying child and a qualifying relative.
Explain how a taxpayer determines if he or she is required to file a tax return?
What is the kiddie tax and when does it apply?
Describe the two types of Medicare surtaxes and explain how they are computed.
Cecilia is married and files a joint return with her husband, Steve. They have modified adjusted gross income of $135,000. Cecilia paid $2,700 in student loan interest this year. How much of this
Rebecca and Gregory, a married couple filing a joint return, reported adjusted gross income of $70,000 and total allowable itemized deductions of $12,800, including$3,100 for state income taxes, in
Suzanne, who is a head of household, has the following deductions before considering any phaseouts: Interest on qualified acquisition debt........................$9,800 Real property
Mario and Kaitlin are married and file a joint tax return. They have adjusted gross income of $385,000 that includes $4,700 of investment income ($3,000 short-term capital gains and $1,700 of
Joseph provides $12,000 of support for his mother, Miriam, who lives with him. Miriam is single and a U.S. citizen. Her only income is Social Security of $5,000 and taxable pension income of $4,200.
What is the total deduction for personal and dependency exemptions for the following taxpayers in 2016 if their AGI is $350,500? a. Married filing jointly with three dependents b. Single with no
Jessica and Jason are married, file a joint return, and have 4 dependent children. Calculate their 2016 personal and dependency deductions for each of the following independent situations: a. Their
Scott is 15 years old and qualifies as a dependent on his parents' tax return. During 2016 he earns $2,500 from a part-time job and also receives $800 of dividend income on stock given to him by his
What are the passive activity loss rules and how do they affect the deductibility of losses from rental property?
In January, Marco incurs $2,800 in expenses traveling to San Diego to investigate the feasibility of acquiring a new business. He acquires the business and on March 1 forms a new corporation, Marco
John is a teacher at a local high school. During 2016, he travels three days per week to a school in the next county to work with gifted children in an after-school program that does not end until
Luis, a self-employed individual, flies from New York to Rome. He spends seven days in Rome on business and stays in Rome for an additional three days to vacation. Transportation costs incurred were
In the current year, Melbourne Corporation pays the $2,000 annual premium for a life insurance policy on its president, for which Melbourne Corporation is the beneficiary. Melbourne also pays $20,000
Maureen operates a cosmetic sales business from her home. She uses 400 of 1,600 square feet of the home as an office for the entire year. Her income before her home office deduction is $3,400 and
Martin Galloway, the sole proprietor of a consulting business, has gross receipts of $45,000 in 2016. His address is: 1223 Fairfield Street, Westfield, New Jersey and his SSN is 158-68-7799. Expenses
Gary Sanders owns his own real estate business. He has a reputation within the community for honesty and integrity and believes that this is one of the reasons his firm has been so successful. Gary
Ben is the chief executive officer of a restaurant chain based in Maine. Ben began the business 15 years ago and it has grown into a multimillion-dollar company, franchising restaurants all over the
Marino Corporation pays $6,500 to rent a 10-seat skybox for three football games to use for business entertainment at each game. The price for a regular nonluxury box seat at each game is $45. How
Suzanne owns a vacation home at the beach in which she lived for 30 days and rented out for 61 days during the current year. Her gross rental income is $2,600. Her total expenses for the vacation
Mark wants to purchase a new luxury sedan for $50,000 for use exclusively in his business. The car salesman told Mark that he could expense $25,000 of the cost immediately using Section 179 and
Six years ago, Sharon purchased her personal residence for $500,000. In the current year, she converts the property to rental use because she has been unable to sell it due to the depressed real
Gisela gave Ellen stock worth $50,000 this year. Gisela purchased the stock for $60,000 four years ago. Calculate Ellen's basis for the stock if she sells it a. for $65,000. b. for $45,000. c. for
Blanco Corporation (a calendar-year taxpayer) purchased $2,200,000 of used manufacturing equipment in July, $400,000 of computer equipment in August, and purchased an office building for $850,000 (of
In 2013, Chris purchased a machine (7-year property) that cost $20,000 for use in his sole proprietorship. He claimed only regular MACRS depreciation (no Section 179 expensing or bonus depreciation)
On April 1, Radcliff Corporation, a calendar year taxpayer, purchased land, a warehouse, and used equipment (7-year property) for a total price of $500,000. An appraiser determined that the land has
Azona Corporation (a calendar-year taxpayer) purchased only one business asset during the year, 7-year used property that cost $2,600,000. Compute Azona's depreciation for the current year assuming
Kensington Corporation, Inc. (an October 31 fiscal year-end corporation) plans to purchase $2,700,000 of used office fixtures (7-year property), its only personalty acquired during the year.
Willis Corporation (a calendar-year corporation) purchased $550,000 of used machinery (7-year property) on August 1. No other property was acquired in 2016. a. What is Willis Corporation's
In July 2016, Lenux Corporation (a calendar-year taxpayer) purchased $2,110,000 of new office furniture. Lenux claimed the maximum allowable Section 179 expensing and regular MACRS depreciation (but
Kondar Corporation (a calendar-year taxpayer) spent $2,060,000 to purchase used machinery in February 2016. a. What is the maximum that Kondar can elect to expense under Section 179? b. What is the
Corando Corporation (a calendar-year taxpayer) purchased $840,000 of used factory equipment in April 2016. Determine the maximum depreciation deduction for the equipment for 2016 and 2017.
Nicko Corporation (a calendar-year corporation) purchased a new machine (7-year property) in July 2014 for $20,000. Nicko did not elect Section 179 for this asset but did claim 50 percent bonus
McDowell Corporation (a calendar-year corporation) purchased and placed in service in 2016 a $25,000new automobile on August 15, $300,000 of new furniture on September 1, and a $680,000 warehouse (of
Is a depreciation deduction allowed for realty (such as a warehouse used in a business) in the year the property is sold? If yes, explain how it is calculated.
Karen is an employee of KF Corporation (a calendar-year taxpayer). In February 2015, KF purchased a new $40,000 car for Karen's use. During 2015, 2016, and 2017, 60 percent of Karen's mileage on the
On June 26, 2014, Elaine purchased and placed into service a new computer system costing $8,000. The computer system was used 80 percent for business and 20 percent for personal use in both 2014 and
Robert Lento, the sole proprietor of a consulting business, has gross receipts of $600,000 in 2016. Expenses paid by his business are: Advertising ..................................................$
Arco Corporation acquired some heavy equipment mid-year (in addition to the $2,600,000 in equipment purchased in January of this year). The new equipment is 7-year class property, but Arco expects to
Herald Corporation, a calendar-year taxpayer, purchased and placed the following business assets in service during 2016:AssetDate Placed in ServiceInitial CostUsed computer
Bing Corporation can buy a new car for business use for $40,000 (including tax, license, and title fees) or it can lease an identical car for $450 per month, paying $2,100 up front for tax, license,
Monicon Corporation purchased a $24,000 computer in 2013 and elected to expense it under Section 179. In 2016, the IRS audited Monicon and determined that its taxable income was incorrectly
Robert owns some investment land that has a basis of $1,000 and a fair market value of $22,000. He expects that it will continue to appreciate in value. Robert's uncle, Mike has a terminal illness
Jessica, a professional violinist with the Lincoln Symphony Orchestra, purchased a 100-year-old antique violin at a cost of $180,000. She thinks that it is a good investment because she knows that it
Juan owns 40 percent and Mario owns 60 percent of Crispy Donuts, Inc. (CDI). Juan wants to buy out Mario's interest in CDI, so he arranges a stock sale agreement under which CDI will redeem
Wally sells the auto he used 80 percent for business and 20 percent for personal use annually for $6,000. He purchased the car four years ago for $20,000. If used 100 percent for business, he would
Charlie sold Whiteacre for $40,000 cash and the buyer assumed Charlie's $19,000 mortgage on the property. Charlie paid a realtor commission of $2,000 on the sale. What is his realized gain or loss if
Calahan Corporation regularly factors its receivables when they are short of cash. This spring they not only factored $325,000 of receivables at 80 percent of their value but sold two company
Juno Corporation had ordinary taxable income of $127,000 in the current year before consideration of any of the following property transactions. It sold two blocks of stock held for investment. One
Taylor bought 10,000 shares of qualifying Section 1202 stock from a start-up company A on May 1, 2012 for $1,000,000 and 5,000 shares of Section 1202 stock from start-up company B on June 1, 2013 for
Carlotta moved into a smaller home ten months ago, after her husband died. She sold the home that they had lived in together for fifteen years and elected Section 121 so she would not have to
Barbara sold three assets during 2016. How much and what kind of gain or loss does she recognize from each sale? What tax rate applies to the net gain if Barbara's ordinary income is taxed at 25
Clarice became very ill in February of 2016 and was unable to work the rest of the year. She had only $12,000 of income from her sole proprietorship for the time she worked and was forced to sell the
Al Shalou, a single individual, had only $14,000 of salary income in 2016, but he had a number of taxable gains and losses on his property transactions during the year with the following results:a.
A single taxpayer has $15,000 of ordinary taxable income in 2016 (after his exemption and standard deduction but before consideration of the following recognized gains), a $9,000 long-term capital
Bill had the following gains and losses on asset sales: $500 gain on stock held 11 months; a $2,300 gain on land held two years; $1,900 loss on gold coins held two years; $1,200 gain on antique toys
Sam Johnson started a small machine shop, Machines, Inc., in his garage and incorporated it in March of 2013 as a calendar-year corporation. At that time, he began using his personal computer and
Natalie expects her ordinary income to exceed the 39.6 percent tax bracket this year. So far this year, she has a $5,000 short-term capital loss. As of June 1, she is holding 1,000 shares of Dritco
Joy purchased a home in Maine on December 15, 1998 for $250,000 and lived in it full-time until she purchased a second home in Florida on October 1, 2011 for $380,000. In 2011 and 2012 she continued
In 2016, Gregory, a single person, had $375,000 of ordinary taxable income. He sold Section 1202 stock at a taxable gain of $45,000, his art collection at a taxable gain of $102,000, and stock at a
Core Carpet Factory purchased a $40,000 binding machine (seven year property) six months ago that they expected to use for at least ten years. They began to use the machine immediately.
A number of specific transactions do not necessarily follow the general tax provisions applicable to property transactions. Following are a group of transactions that are subject to specific tax
A subsidiary of Corporation A, an electrical utility located in Springfield, and a subsidiary of Corporation B, a diversified manufacturer also located in Springfield, formed a joint venture under
Sheralyn was in the wholesale distribution business for pecans and peanuts grown in Georgia. She and her brother owned and operated several warehouses. Seven years ago, they purchased property for
Charlie exchanged land valued at $450,000 and a sports car valued at $50,000 for a 40 percent interest in a partnership that planned to build an apartment complex on the property. The land has a
On May 10 of the current year, Claire purchased 1,000 shares of ABCO stock for $10 per share because she believed the price had hit bottom. She did not know that her broker had sold 500 shares that
What is a corporate reorganization? Briefly define each of the types of corporate reorganizations.
Peter exchanges a building valued at $400,000 for land also valued at $400,000 in a qualifying like-kind exchange. The building has a basis of $230,000. What are Peter's realized gain or loss and the
Jewel's home was completely destroyed by fire in 2016. The building had an appraised value of $185,000 before the fire. Four years ago, Jewel paid $160,000 for the house and the land, with $25,000 of
Danny's living room furniture and his flat screen television were damaged in a fire in his home in January2016. In March2016, his golf cart was damaged in a flood. He was able to establish the
Cora was in Europe from Thanksgiving of 2015 until early January of 2016. When she returned to her home, she found it had been broken into and jewelry with a fair market value of $40,000 and a basis
Kelly was active in the market, buying and selling stocks for her own account. Below are a series of transactions Kelly initiated during the last quarter of 2016:The XYZ stock sold on 11/01 had been
Conroy Corporation agrees to sell some of its excess machinery for $190,000 consisting of a $70,000 down payment in year of sale and additional payments of $60,000 in each of the next two years, plus
Cornelia transfers property valued at $500 (basis = $350) to Wayside Corporation in exchange for 50 percent of its stock. Ferdinand transfers property valued at $450 (basis = $260) in exchange for 40
Columbo Corporation, a calendar-year corporation, began business in 2013. With the initial capital contributions from its sole shareholder, it purchased a building on March 12 for $250,000. It also
Barry is very dedicated to the arts and has made a career of purchasing copyrights to various art forms. Once purchased, he publicizes these works to capitalize on the copyrights and has been very
Cheryl owned six horses that she and her family used for riding and occasionally showing in hunter-jumper competitions. At the beginning of May, one of the horses showed signs of severe illness and
What limits are placed on the deductibility of casualty and theft losses of personal-use property in 2016?
Joe, June, and Jim-co-workers-decide that they want to start their own business. Joe has $200,000 to contribute, June has equipment valued at $100,000 (basis = $90,000) and Jim has real estate
Explain how a corporation's income is subject to double taxation.
What is the difference between accumulated and current earnings and profits?
Can a corporation have negative amounts in both its current and accumulated earnings and profits accounts? Explain
List five items that are added to a corporation's taxable income to determine earnings and profits. List five items that are deducted from a corporation's taxable income to determine earnings and
What is difference in the tax treatment for losses realized by a corporation in a partial liquidation and a complete liquidation?
What is the purpose of the personal holding company tax? What is the penalty rate that applies to a personal holding company? How does a personal holding company avoid this tax?
What is the purpose of the accumulated earnings tax? What is the penalty tax rate that applies to excess accumulated earnings? How does a company avoid this tax?
What are the two types of controlled groups?
What is the effect on total taxes if a corporation with $200,000 of taxable income pays a bonus of $50,000 to its single shareholder-owner who has $100,000 of other taxable income and is taxed at

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