Principles Of Taxation For Business And Investment Planning 2018 21st Edition Sally Jones, Shelley C. Rhoades Catanach, Sandra R Callaghan - Solutions

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 use her marginal or her average tax rate?
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 this new source of federal revenue affect the revenues of state and local governments?
Country A levies an individual income tax with the following rate structure:Percentage Rate ___________________ Bracket10% ...............................Income from -0- to $20,00015 .................................Income from $20,001 to $75,00025 .................................Income from
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 year 5, Ms. OC wins a lottery, and her taxable income for this one year jumps to $670,000. a. How
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, so current year revenue was $1.25 million. Clement's city council recently voted to increase the
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 recent tax law changes, the couple's future tax rate will increase to 28 percent. If Mrs. E decides
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 tax rate for next year will decrease to 25 percent.a. Based on a static forecast, how much less
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 is considering raising the tax rate to 2 percent because it needs $400,000 additional revenue to
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 blind, and as a result, Mrs. K's income tax liability is less than Mr. L's income tax liability.
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 government enacted a 10-year moratorium on change: No existing tax law can be modified and no new tax law
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. This modification necessitated an additional tax form and three additional pages of instructions. For
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. What and when was Tax Freedom Day in 2016? b. How many additional days would Americans have to work
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 million. The jurisdiction needs to increase its tax revenues by approximately $5 million each year to
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 discovered this fact, it increased its selling price for the system by $25,000. Is this transaction
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 worthwhile and spent the money, but Firm Z rejected the expenditure. Can you provide a tax explanation
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 based on a provision that Congress added to the Code two years ago?
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 at which the after-tax cash flows from the two expenditures are equal assuming that:a. Expenditure
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 of $50,000. Years 1, 2, and 3: Incur fully deductible cash expenditures of $30,000. Year 3: Incur
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 paid at the end of 3 years and $5,000 paid at the end of 5 years. The discount rate is 8 percent.c.
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 in $3,500 cash received in year 3 and year 5.a. Use a 6 percent discount rate and determine whether
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 which the after-tax cash flows from the two transactions are equal assuming that: a. Transaction 1
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 local economy, the couple estimates that their business will generate an additional $100,000 taxable
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 $95,000. If the company takes an aggressive approach by assuming the most beneficial tax consequences, the
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 marginal tax rate on this income would be 25 percent. Later in the year, a different manager evaluated
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 tax costs by at least 5 percent. Identify the tax issue or issues suggested by the following
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 a nontaxable transaction to Mr. and Mrs. A. The CEO rejected the suggestion by saying, "Since DLT
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 loan, Ms. S offered the roommate a job with SMJ at a $35,000 annual salary. Identify the tax issue
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 Subsidiary S and a second transaction that shifts a $15,000 deduction to Subsidiary T. Based on these facts,
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 of $60,000. Leslie has requested payment of one-half of the fee now, with the remainder paid in one
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 Country X and $1.8 million in Country Y. Country X levies income tax at a rate of 20 percent on net
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 increase in value will be taxable at the preferential capital gains rate of 15 percent.a. Using a 4
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 may apply to any scenario; identify all that are relevant. a. Aloha Corporation is considering
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. During the last two months of the year, Dr. P instructs his patients to remit their payments for his
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, November, and December to their 19-year-old grandson as a gift. Identify the tax issue or issues
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 highest price at which the stock has traded in the past 22 months. A friend advises her to hold 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 four times in three years. Country C has both a 20 percent income tax and a stable democratic
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 advantage of several favorable tax preferences. Consequently, Ms. K's after-tax return from this business
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, but the tax savings from the strategy should be greater than this opportunity cost. The strategy
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 a sale are much more favorable than those of a lease. Ms. LG believes that if her position
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 consequences of each distinct phase. The firm could implement the first phase in November 2016 and the
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 sale by year-end so that the gain would be taxed at its current 25 percent rate. Corporation Q's rate
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 Supreme Court generally agrees to hear tax cases only when the case involves a significant principle of
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 office. Identify the tax issue or issues suggested by the following situations and state each issue in the form
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 unclear at this point whether any of the loss will be compensated by insurance. Identify the tax issue
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 report the full citation for your source, in the form of the following example: Rev. Proc. 98-1, 1998-1
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 period beginning June 1. On June 15, Malo sent an invoice for $5,500 to a customer for services rendered
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 this expenditure can LSG deduct in 2017 assuming that: a. The expenditure is a prepayment for six
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 much of this expenditure can Warren deduct in 2017 assuming that: a. The expenditure is a
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 through August 31 of the following year. Compute the deduction for this payment assuming that: a.
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 December 1. How much of the payment must Wahoo recognize as 2017 taxable income assuming that: a. Wahoo
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 lawns and gardens. GreenUp agreed to complete the entire renovation by May 31, 2019, and the university
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 winner and announced her name on December 20. However, it didn't present a $100,000 check to the winner
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 the end of 2017, HomeSafe accrued a $48,900 expense and a $48,900 liability for future service calls
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 federal tax return. a. $55,000 expense and $55,000 liability for unpaid December salaries. BZD paid the
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 tax return. a. $30,000 expense and $30,000 liability for Henry Parmenter's 2017 performance bonus.
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 was $180,000, payable on completion of the mural. The artist finished her work and received the
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 tax payments during 2017:On December 27, Extronic's tax department calculated that the corporation's
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 Company N and Creditor K are calendar year taxpayers. For each of the following cases, determine the
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 bonus as additional compensation. Acme paid the $20,000 bonus to Mrs. T on January 12, 2018. In which
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 ZEJ's tax deduction for bad debts.
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. What was the effect of the write-off on MG's 2017 financial statement income and taxable income? b.
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 of this NOL.Recompute TRW's taxable income for this eight-year period assuming that it didn't elect
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 the California and Florida orchards generated $23.4 million net income, while 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 under criminal indictment and had fled the country. After learning this news, it wrote off the
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 transferring marketable securities worth $13,400 to Firm Q. How much taxable income does Firm Q recognize on
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 demanded that Firm G refund $50,000 of the payment. Firm G refused and referred the matter to its
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. As of January 1, TM had a $190,000 NOL carryforward. BL's business for 2017 (which includes the
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 and discovered an older painting hidden beneath the top coat of pigment. To the company's delight,
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 Company A didn't receive payment before year-end, it recognized no income from the engagement on its
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 client to remind her of the bill. The embarrassed client promised to telephone Mr. RJ as soon as
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 $14,420 bill from the publisher, which represented a sizeable price increase from prior years. Maxo
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 NOL carryforward deduction and will pay no tax this year. HT recently developed a new advertising
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 retailers may return any unsold magazines during the onemonth period after purchase. Bontaine will refund
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 charges them a commission fee for effecting the transaction in a timely, low-cost manner. CheapTrade
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 upcoming calendar year on January 1, and the tax becomes a lien on the property as of the assessment
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 and local governments in order to legally operate its fleet of trucks. During 2017, the cost of
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, it had collected $2.9 million of its billings and had paid $670,000 of its expenses. It expects to
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. VB generated a $350,000 net operating loss for 2017. It projects that it will continue to operate
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. Firm O wants to make the Section 179 election for one of its new assets. Which asset should the firm
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 manufacturing costs. For tax purposes, it had to capitalize $315,000 of indirect costs under the UNICAP rules.
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 convention to compute MACRS depreciation. a. Compute Herelt's MACRS depreciation with respect to the
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 costs. c. $125,000 cost of land held for investment. d. $34,500 intangible drilling costs.
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 five-year recovery property subject to the half-year convention. Compute Nelson's depreciation
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 this asset for 2016, 2017, and 2018.
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 placed in service during the year, compute Margo's maximum cost recovery deduction.b. How would your
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 income before the deduction was $58,000. b. Its taxable income before the deduction was $19,200. c.
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 2017, Company W's taxable income before any Section 179 deduction was $812,000. Compute its 2017
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 $394,100. Loni paid $23,700 for tangible personalty in 2017 and elected to expense the entire cost.
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; these tools are three-year recovery property. These were Hiram's only capital transactions for the year.
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 Lenape's total cost recovery on the machinery for 2017.
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 its business location. Over time, ABC has incurred $12,000 of repair costs for the property and made
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 discount rate.a. Calculate the net present value of Hansen's after-tax cost of the asset.b. Now
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 the building (shelving, lighting fixtures, floor coverings, plumbing, etc.) to determine how much 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 a one-year lease and moved in on September 1. As of this date, the market value of the old residence

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Principles Of Taxation For Business And Investment Planning 2018 21st Edition Sally Jones, Shelley C. Rhoades Catanach, Sandra R Callaghan - Solutions

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