Questions and Answers of Taxation

Ms. P is considering investing $20,000 in a new business. She projects that this investment should generate $3,000 income each year. In estimating her tax on this future income stream, should Ms. P
The U.S. Congress has occasionally considered enacting a federal tax on the sale of consumer goods and services. This national sales tax would be in addition to any state and local sales tax. Would
Country A levies an individual income tax with the following rate structure:Percentage Rate ___________________ Bracket10% ...............................Income from -0- to $20,00015
Refer to Country A's rate structure described in the preceding problem. Ms. SP's annual taxable income for years 1 through 5 is $150,000. Ms. OC's taxable income for years 1 through 4 is $20,000. In
The city of Clement levies a 5 percent tax on the base price of rooms provided by hotels and motels located within the city limits. This year, the aggregate room price subject to tax was $25 million,
Mr. E, a petroleum engineer, earns an $83,000 annual salary, while Mrs. E, a homemaker, has no earned income. Under current law, the couple pays 20 percent in state and federal income tax. Because of
Ms. BK is a self-employed architect who earns $300,000 annual taxable income. For the past several years, her tax rate on this income has been 35 percent. Because of recent tax law changes, Ms. BK's
County M imposes a 1 percent tax on the gross receipts earned by firms operating within its jurisdiction. For the past year, gross receipts subject to tax totaled $400 million. The county government
Mrs. K is completely blind, while Mr. L is paralyzed from the waist down. Both individuals have the same income. The Internal Revenue Code provides a preferential deduction for individuals who are
Four years ago, the citizens of Country C complained that the national tax system was too uncertain because the government changed the tax laws so frequently. In response to this criticism, the
Two years ago, the government of State P decided to improve the horizontal equity of its individual income tax by allowing families to deduct the cost of heating and air conditioning their homes.
Visit the website for the Tax Foundation (www.taxfoundation.org). Select the link "About Us" to read the organization's mission statement. Select the link "Tax Topics" to research the following: a.
Jurisdiction B's tax system consists of a 6.5 percent general sales tax on retail goods and selected services. Over the past decade, the average annual volume of sales subject to this tax was $500
Firm F is negotiating to purchase a multimillion-dollar computer system from the manufacturer. Under applicable state law, Firm F is exempt from sales tax on the purchase. Because the manufacturer
Firm A and Firm Z are in the same business. Both firms considered spending $10,000 for the same reason. The expenditure would be deductible for both firms. Firm A decided that the expenditure was
Which assumption about the tax consequences of a future transaction is more uncertain: an assumption based on a provision that has been in the Internal Revenue Code for 25 years or an assumption
Company J must choose between two alternate business expenditures. Expenditure 1 would require a $80,000 cash outlay, and Expenditure 2 requires a $60,000 cash outlay. Determine the marginal tax rate
Firm Y has the opportunity to invest in a new venture. The projected cash flows are as follows: Year 0: Initial cash investment in the project of $300,000. Years 1, 2, and 3: Generate cash revenues
Use the present value table in Appendix A and Appendix B to compute the NPV of each of the following cash outflows:a. $22,000 paid at the end of 4 years. The discount rate is 5 percent.b. $2,000
Consider the following opportunities: Opportunity 1 requires a $4,000 cash payment now (year 0) but will result in $14,000 cash received in year 5. Opportunity 2 requires no cash outlay and results
Company P must choose between two alternate transactions. The cash generated by Transaction 1 is taxable, and the cash generated by Transaction 2 is nontaxable. Determine the marginal tax rate at
Mr. and Mrs. J's taxable income from their business has been stable for the past 5 years, and their average federal income tax rate has ranged between 22 and 24 percent. Because of a boom in the
Company WB is evaluating a business opportunity with uncertain tax consequences. If the company takes a conservative approach by assuming the least beneficial tax consequences, the tax cost is
Earlier in the year, Mrs. G, a business manager for Company RW, evaluated a prospective opportunity that could generate $20,000 additional taxable income. Mrs. G determined that the company's
Firm UW is about to enter into a venture that will generate taxable income for the next 6 to 8 years. The director of tax has come up with an idea to restructure the venture in a way that will reduce
DLT's chief operating officer is negotiating the acquisition of a controlling interest in the stock of AA Inc. from Mr. and Mrs. A. The director of tax suggested that the acquisition be structured as
Ms. S is the sole shareholder and chief executive officer of SMJ Corporation. Ms. S's college roommate recently lost her job, is in financial difficulty, and has asked Ms. S for a loan. Instead of a
Is every business organization a taxable entity for federal income tax purposes? Explain briefly.
Corporation P owns a controlling stock interest in Subsidiary S and Subsidiary T. Corporation P's marginal tax rate is 25 percent. It engages in one transaction that shifts $10,000 income to
French Corporation wishes to hire Leslie as a consultant to design a comprehensive staff training program. The project is expected to take one year, and the parties have agreed to a tentative price
Lardo Inc. plans to build a new manufacturing plant in either Country X or Country Y. It projects gross revenue in either location of $4 million per year. Operating expenses would be $1.5 million in
Vern plans to invest $100,000 in a growth stock, in year 0. The stock is not expected to pay dividends. However, Vern predicts that it will be worth $135,000 when he sells it in year 3. The $35,000
For each of the following scenarios, indicate which of the four basic tax planning variables (entity, character, time period, jurisdiction) impacts after-tax value. Note that more than one variable
Dr. P is a physician with his own medical practice. For the past several years, his marginal income tax rate has been 39.6 percent. Dr. P's daughter, who is a college student, has no taxable income.
Mr. and Mrs. K own rental property that generates $4,000 monthly revenue. The couple is in the highest marginal tax bracket. For Christmas, Mr. and Mrs. K give the uncashed rent checks for October,
Mrs. Y owns 1,800 shares of Acme common stock, which she purchased for $10 per share in 2002. In October of this year, she decides to sell her Acme stock for the market price of $27 per share, the
Company QP must decide whether to build a new manufacturing plant in Country B or Country C. Country B has no income tax. However, its political regime is unstable and its currency has been devalued
Mr. and Mrs. TR own an investment yielding a 4.25 percent after-tax return. Their friend Ms. K is encouraging them to sell this investment and invest the proceeds in her business, which takes
Firm Z is considering implementing a long-term tax strategy to accelerate the deduction of certain business expenses. The strategy has an opportunity cost because it decreases before-tax cash flows,
Ms. LG plans to structure a transaction as a legal sale of property, even though the economic substance of the transaction is a lease of the property. In her current position, the tax consequences of
Firm HR is about to implement an aggressive long-term strategy consisting of three phases. It is crucial to the success of the strategy that the IRS accepts Firm HR's interpretation of the tax
In November of this year, Corporation Q negotiated to sell a tract of land to an unrelated buyer. The buyer refused to close the sale until the following February. Corporation Q wanted to close the
Which of the following statements regarding the U.S. Supreme Court is FALSE? a. The Supreme Court may agree to hear an appeal (grant certiorari) or refuse to hear it (deny certiorari). b. The
John is a dentist. His neighbor Wade is a carpenter. John has agreed to perform dental work for Wade and his wife in exchange for Wade's installing a new laminate floor in John's dental
Argonaut Corporation sustained considerable damage to one of its warehouses during a recent hurricane. It expects to pay $200,000 to replace the roof of the building and repair other damage. It is
Find the IRS Revenue Procedure that gives the standard deduction amounts for the 2016 tax year. Prepare a table reporting the standard deduction amounts and their associated filing statuses. Also
Malo Inc. uses a fiscal year ending June 30. On May 29, Malo received a check for $3,900 from a business that leases parking spaces in Malo's parking garage. This payment was for the three-month
LSG Company is a calendar year, cash basis taxpayer. On November 1, 2017, LSG paid $9,450 cash to the janitorial service firm that cleans LSG's administrative offices and retail stores. How much of
Warren Company is a calendar year, cash basis firm. On December 6, 2017, Warren paid $7,200 cash to a landscape service business that maintains the lawns and gardens around Warren's headquarters. How
Firm F, a calendar year taxpayer, owes a $200,000 long-term debt to an unrelated creditor. In December, it paid $14,160 to the creditor as interest for the 12-month period from the prior September 1
Wahoo Inc., a calendar year taxpayer, leases equipment to a customer for $4,500 monthly rent. On November 27, 2017, Wahoo received a $36,000 rent payment for the eight-month period beginning on
GreenUp, a calendar year, accrual basis taxpayer, provides landscaping installation and maintenance services to its customers. In August 2017, GreenUp contracted with a university to renovate its
KLP, a calendar year corporation, sponsored a contest for its customers with a grand prize of $100,000 cash. Contestants could enter the contest from June 1 through November 30. KLP selected the
HomeSafe, an accrual basis, calendar year corporation, sells and installs home alarm systems. The contract price of a system includes four free service calls. HomeSafe's cost of each call is $75. At
BZD, a calendar year corporation, made the following year-end accruals for 2017 financial statement purposes. In each case, determine how much of the accrued expense is deductible on BZD's 2017
Parmco, a calendar year corporation, made the following accruals for 2017 financial statement purposes. In each case, determine how much of the accrued expense is deductible on Parmco's 2017 federal
In 2016, AS, an accrual basis corporation, contracted with a nationally prominent artist to paint a mural in the lobby of the new corporate headquarters under construction. The artist's commission
Extronic, a calendar year, accrual basis corporation, reported a $41,900 liability for accrued 2016 state income tax on its December 31, 2016, balance sheet. Extronic made the following state income
Company N, an accrual basis taxpayer, owes $90,000 to Creditor K. At the end of 2017, Company N accrued $7,740 interest payable on this debt. It didn't pay this liability until March 3, 2018. Both
Acme is an accrual basis corporation. Mrs. T, Acme's chief financial officer, is a cash basis individual. In December 2017, Acme's board of directors decided that Mrs. T should receive a $20,000
ZEJ, a calendar year accrual basis taxpayer, made the following adjustments to its allowance for bad debts this year:a. Compute ZEJ's bad debt expense for financial statement purposes. b. Compute
MG is an accrual basis corporation. In 2017, it wrote off a $65,000 account receivable as uncollectible. In 2018, it received a $65,000 check from the creditor in full payment of this receivable. a.
TRW Inc. began business in 2009 and was profitable for its first three years. In 2012, it generated a $741,000 net operating loss. The following table shows TRW's taxable income before consideration
FruAgro Company grows a variety of fruits and nuts for sale to grocery wholesalers. FruAgro owns and operates orchards in California, Florida, Mexico, and Costa Rica. This year, sales of produce from
Firm F is a cash basis legal firm. In 2017, it performed services for a client, mailed the client a bill for $6,150, and recorded a $6,150 receivable. In 2018, Firm F discovered that the client was
Firm Q operates a cash basis consulting business. In October, Firm Q billed a client for $23,400 of consulting services. In November, the client settled the bill by paying $10,000 cash and
In October 2015, Firm G completed a consulting engagement and received a $200,000 cash payment for its services. In December, the client notified Firm G that it was unsatisfied with the work and
BL and TM are both calendar year corporations. On January 1, 2017, BL purchased TM's entire business (all TM's balance sheet assets), and TM's shareholders dissolved the corporation under state law.
Two years ago, a professional theater company paid $300 to an antique dealer for an old oil painting that the company used as a prop. This year, the company's prop manager was cleaning the painting
Company A, a calendar year taxpayer, has always used the cash method of accounting. It completed an engagement for a major client in November 2017 and submitted a bill for its $160,000 fee. Because
Mr. RJ owns a consulting firm that uses a calendar year and the cash method. In November, Mr. RJ billed a client $3,500 for services performed in September. After waiting several weeks, he called the
Every December, Maxo Inc., an accrual basis, calendar year corporation, purchases 3,500 calendars from a publisher and mails them to its customers as a holiday gift. This year, Maxo received a
ABC Partnership owns 100 percent of the stock of two corporations, HT (an advertising firm) and LT (a commercial real estate development firm). HT is in a 35 percent marginal tax bracket. LT has an
Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly and monthly magazines to retail bookstores and newsstands. The sales agreement provides that the
CheapTrade, an accrual basis, calendar year corporation, operates a discount securities brokerage business. CheapTrade accepts orders to buy or sell marketable securities for its customers and
Moleri, an accrual basis corporation with a fiscal taxable year ending on July 31, owns real estate on which it pays annual property tax to Madison County, Texas. The county assesses the tax for the
Jetex, an accrual basis, calendar year corporation, engages in the business of longdistance freight hauling. Every year, Jetex is required to purchase several hundred permits and licenses from state
Company Y began business in February 2017. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31,
Corporation VB's tax returns for 2014, 2015, and 2016 provide the following information:a. On the basis of the given data, did VB derive any tax benefit from its 2014 NOL? Explain your conclusions.b.
Why do the MACRS tables published by the IRS incorporate a depreciation convention for the first year during an asset's recovery period but not for the year of disposition?
Firm O purchased two items of business personalty this year. The first item cost $35,000 and has a five-year recovery period, and the second item cost $61,500 and has a seven-year recovery period.
Describe the difference in tax treatment between start-up costs of a new business and expansion costs of an existing business.
Under what circumstances is percentage depletion not a true cost recovery deduction?
Discuss the relationship between cost recovery deductions and cash flows.
To what extent do cost recovery deductions based on the capitalized cost of a tangible asset reflect a decline in the economic value of that asset?
In its first year of operations, Lima Company manufactured 1,000 widgets, incurring direct materials and labor costs of $227,000. For book purposes, Lima capitalized $260,000 of indirect
Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2017. The equipment was seven-year recovery property, and Herelt used the half-year
Assuming a 34 percent tax rate, compute the after-tax cost of the following business expenditures: a. $20,000 cost of equipment subject to Section 179 election. b. $17,500 business expansion
On May 12, 2016, Nelson Inc. purchased eight used passenger automobiles for its business. Nelson did not make a Section 179 election to expense any portion of the cost of the automobiles, which are
In March 2016, Jones Company purchased a Mercedes for use in its business at a cost of $73,000. Assuming no bonus depreciation or Section 179 deductions, calculate the allowable tax depreciation on
Margo, a calendar year taxpayer, paid $580,000 for new machinery (seven-year recovery property) placed in service on August 1, 2017.a. Assuming that the machinery was the only tangible property
In 2017, Firm L purchased machinery costing $21,300 and elected to expense the entire cost under Section 179. How much of the expense can Firm L deduct in each of the following cases? a. Its taxable
In 2016, Company W elected under Section 179 to expense $19,300 of the cost of qualifying, property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In
Loni Company paid $527,000 for tangible personalty in 2016 and elected to expense $500,000 of the cost (the limited dollar amount for 2016). Loni's taxable income before a Section 179 deduction was
At the beginning of its 2017 tax year, Hiram owned the following business assets:On July 8, Hiram sold its equipment. On August 18, it purchased and placed in service new tools costing $589,000;
In April 2017, Lenape Corporation acquired new business machinery with a total cost of $775,000. Assuming the machinery qualifies for both the Section 179 deduction and bonus depreciation, calculate
ABC Company purchased business property several years ago, paying $25,000 cash and borrowing $80,000 to fund the acquisition. ABC also incurred $2,000 of freight costs for shipping the property to
Hansen Company, a cash basis taxpayer, paid $50,000 for an asset in year 0. Assume it can deduct one-half of the cost in year 0 and the remainder in year 1. Assume a 35 percent tax rate and 8 percent
Firm D paid a $500,000 lump-sum price for a commercial office building. A local consulting company approached Firm D with a proposal. For a $15,000 fee, the company would analyze the components of
Mr. R lived in a two-bedroom, one-bath residence until August when he moved to a new home and converted his old residence into residential rent property. He had no trouble finding tenants who signed

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