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business
federal taxation

Questions and Answers of Federal Taxation

On April 1 of the current year, Henry borrows $12,000 from the bank for a year. Because the note is discounted for the interest charge and Henry receives proceeds of $10,200, he is required to repay
Crown Corporation is an accrual method taxpayer owned 55% by Brett and 45% by Susie. Brett and Susie are good friends and have been business associates for several years. BJ Partnership is a cash
Several years ago, Magdelena purchased a new residence for $300,000. Currently, the outstanding mortgage on the residence is $260,000. The current fair market value of the home is $330,000. Magdelena
During the current year, Tina purchases a beachfront condominium for $600,000, paying $150,000 down and taking out a $450,000 mortgage, secured by the property. At the time of the purchase, the
During the current year, Travis takes out a $40,000 loan, using stock he owns as collateral. He uses $10,000 to purchase a car, which he uses 100% for personal use. He uses the remaining funds to
On January 1 of the current year, Scott borrows $80,000, pledging the assets of his business as collateral. He immediately deposits the money in an interest-bearing checking account. Scott already
On May 1 of the current year, Tara sells a building to Janet for $500,000. Tara’s basis in the building is $300,000. The county in which the building is located has a real property tax year that
Dawn, a single, cash-method taxpayer, paid the following taxes in the current year: Dawn’s employer withheld $5,400 for federal income taxes, $2,000 for state income taxes, and $3,800 for FICA from
Assume the same facts as Problem I:7-40, but change the amount of Joyce’s mortgage interest to $3,000.Data from problem I:7-40Joyce is a single, cash-method taxpayer. On April 11, 2016, Joyce paid
Joyce is a single, cash-method taxpayer. On April 11, 2016, Joyce paid $120 in state income taxes with her 2015 state income tax return. During 2016, Joyce had $1,600 in state income taxes withheld.
In 2017, Charla, a single taxpayer with no dependents, was severely hurt in a farm accident. Charla is 38 years old. The accident left Charla’s legs 85% paralyzed. After incurring $14,000 of
Chad is divorced and has custody of Brett, his 14-year-old son. Chad’s ex-wife has custody of their daughter, Sara. During the year, Chad incurs $3,000 for orthodontic work for Sara to correct a
Dan lives in Duncan, a small town in Arizona. Because of a rare blood disease, Dan is required to take special medical treatments once a month. The closest place these treatments are available to Dan
Assume the same facts as in Problem I:7-35. In addition, assume that in 2018, Angela receives an additional $7,000 in a settlement of a lawsuit arising because of the snow-skiing accident. $4,000 of
During 2017, Angela sustains serious injuries from a snow-skiing accident. She incurs the following expenses:Item__________________________________________AmountDoctor
During the current year, Bob has AGI of $100,000. He also donated some stock to his church. He purchased the stock two years ago for $55,000. The FMV of the stock at the time of the contribution is
During the current year, George made contributions totaling $40,000 to an organization called the National Endowment for the Preservation of Liberty (NEPL). Later during the year, the NEPL started
This year, Chuck took out a loan to purchase some raw land for investment. He paid $40,000 for the land, and he expects that within 5 years the land will be worth at least $75,000. Chuck is married,
Wayne and Maria file a joint tax return on which they itemize their deductions and report AGI of $50,000. During the year they incurred $1,500 of medical expenses when Maria broke her leg.
Other than the 10% limitation placed on medical expenses, the 10% reduction for casualty losses on personal property, the 2% reduction applied to certain miscellaneous itemized deductions, and the
List some of the more common miscellaneous itemized deductions and identify any limitations that are imposed on the deductibility of these items.
How are charitable contribution deductions reported on the tax return for individuals? What reporting requirements must be met for the contribution of property?
If a taxpayer’s charitable contributions for any tax year exceed the deduction limitations, may the excess contributions be deducted in another year? If so, in which years may they be deducted?
For individuals, what is the overall deduction limitation on charitable contributions? What is the limitation for corporations?
May an individual who is married and files a joint return deduct any charitable contributions if the itemized deductions total $7,000 (of which $3,000 are qualified charitable contributions)?
How is the amount of a charitable contribution of capital gain property determined if it is donated to a private non-operating foundation? How does this determination differ if capital gain property
a. For purposes of the charitable contribution deduction, what is capital gain property? Ordinary income property?b. What is the significance of classifying property as either capital gain property
When is interest generally deductible for cash method taxpayers? Explain if the general rule applies to prepaid interest, interest paid with loan proceeds, discounted notes, and personal interest. If
Why is interest expense disallowed if it is incurred to purchase or hold tax-exempt obligations?
Explain what a qualified residence is for purposes of qualified residence interest.
Explain what acquisition indebtedness and home equity indebtedness are with respect to a qualified residence of a taxpayer. Identify any limitations on the deductibility of interest expense on this
a. What is the amount of the annual limitation placed on the deductibility of investment interest expense?b. Explain how net investment income is calculated.c. Is any disallowed interest expense for
Why does Sec. 267 impose a restriction on the deductibility of expenses accrued and payable by an accrual method taxpayer to a related cash method taxpayer?
a. Identify the different categories of interest expense an individual may incur. How is the classification of the interest determined?b. Are these different categories of interest deductible? If so,
When real estate is sold during a year, why is it necessary that the real estate taxes on the property be apportioned between the buyer and seller?
What is an ad valorem tax? If a tax that is levied on personal property is not an ad valorem tax, under what circumstances may it still be deductible?
If Susan overpays her state income tax because of excess with holdings, can she deduct the entire amount in the year withheld? When Susan receives a refund from the state how must she treat that
a. Which taxes are specifically deductible for federal income tax purposes under Sec. 164?b. If a tax is not specifically listed in Sec. 164, under what circumstances may it still be deductible?
What is the limit placed on medical expense deductions? When can a deduction be taken for medical care? What if the medical care is prepaid?
In what cases are medical insurance premiums paid by an individual not deductible as qualified medical expenses?
In which year or years are points (representing prepaid interest on a loan) deductible?
At times, the term points is used to refer to different types of charges. Define the term and describe when points are deductible.
Bill, a plant manager, is suffering from a serious ulcer. Bill’s doctor recommends that he spend three weeks fishing and hunting in the Colorado Rockies. Can Bill deduct the costs of the trip as a
a. Which types of capital expenditures incurred specifically for medical purposes are deductible?b. What limitations, if any, are imposed on the deductibility of these expenditures?
What are the rules dealing with the deductibility of the cost of meals and lodging incurred while away from home in order to receive medical treatment as an outpatient?
a. If a taxpayer must travel away from his or her home in order to obtain medical care, which en route costs, if any, are deductible as medical expenses?b. Are there any limits imposed on the
Which tax form is used by the following individuals?a. Anita is single, age 68, and has a salary of $22,000 and interest of $300.b. Betty owns an apartment complex that produced rental
Virginia is a cash-basis, calendar-year taxpayer. Her salary is $20,000, and she is single. She plans to purchase a residence in 2017. She anticipates her property taxes and interest will total
a. What is the definition of cosmetic surgery under the Internal Revenue Code?b. Is the cost of cosmetic surgery deductible as a medical expense? Explain.
What is the definition of medical care for purposes of the medical care deduction?
Assume all of the same facts as in Problem I:6-55, except that during the year Kim rents the condominium a total of 14 days. How does Kim report the income and deductions from the property?
a. For which persons may a taxpayer deduct medical expenses?b. In the case of children of divorced parents, must the parent who is entitled to the dependency exemption pay the medical expenses of the
Three years ago, Paul Wilde exercised all his stock options in the start up company he helped establish and walked away with over $100 million. Since that time, he has spent all his energy, time, and
Richard Penn lives in Harrisburg, Pennsylvania. Richard is the president of an architectural firm. Richard has become known throughout the community for excellent work and honesty in his business
John and Kathy Brown have just been audited and the IRS agent disallowed the business loss they claimed in 2015. The agent asserted that the activity was a hobby, not a business. John and Kathy live
Peter Baumann, your client, wants to sell a printing press to Chamberlain Corporation for $50,000. Pete has used the press in his business for two years and its adjusted basis is $90,000. The Coxmann
Danielle Anderson, your client and a cash method taxpayer, works full-time at a music store located in a mall. She assists the manager in buying decisions, serves customers on the sales floor, and
Using the following facts, answer the questions below concerning Jaron’s 2017 tax liability.1. Two years ago, in November 2015, when his wife died, Jaron left the CPA firm he was working for and
Bryce, a bank official, is married and files a joint return. During 2017 he engages in the following activities and transactions:a. Being an avid fisherman, Bryce develops an expertise in tying
During the current year, Kim incurs the following expenses with respect to her beachfront condominium in Hawaii:Item
Assume the same facts as in Problem I:6-53, except that the income from the sale of rabbits is $1,200.a. What is the total amount of deductions Chuck may take during the year with respect to the
Chuck, a dentist, raises prize rabbits for breeding and showing purposes. Assume that the activity is determined to be a hobby. During the year the activity generates the following items of income
Emily is an interior decorator who does consulting work for several furniture stores. Additionally, she has been designing and creating rubber stamps for the past several years. She sells the stamps
Rachel Schurtz is a high school English teacher. In her spare time, she likes to make her own body lotion, lip gloss, and bath and shower gel. She uses the bath products herself and gives them to her
During the current year, CVI Corporation sells a tract of land for $75,000. The sale is made to Sandi, CVI Corporation’s sole shareholder. CVI Corporation originally purchased the land five years
Sally is an attorney who computes her taxable income using the cash method of accounting. Sage Corporation, owned 40% by Sally’s brother, 40% by her cousin, and 20% by her grandmother, uses the
PIB Partnership is owned 20% by Sara, 40% by Steve, and 40% by Thann. Burnham, Inc. is owned 70% by PIB Partnership, 10% by Ralph, 10% by Thann, and 10% by Sara. Ralph and Thann are brothers. All
During the current year, Troy sells land to Berry Corporation for $165,000. Troy purchased the land for investment in 2002 for $170,000. Berry Corporation is owned as follows:Owner
Cougar Corporation owns 1,000 shares of Western Corporation common stock, which it purchased on March 8, 2011, for $12,000. On October 3, 2017, Cougar purchases an additional 300 shares for $3,000.
Broward Corp. owns 1,500 shares of Silver Fox Corporation common stock. Broward Corp. purchased the 1,500 shares on April 17, 2011, for $20,000. On December 8, 2016, Broward sells 750 shares for
During the current year, Richard and Alisha, a married couple who use the cash method of accounting, purchased a principal residence for $320,000. They paid $40,000 down and financed the remaining
Pamello, Inc., an engineering consulting firm, uses the cash method of accounting and is a calendar year taxpayer. Compute the amount of Pamello’s current year deductions for the following
Solutions Corporation, a computer vendor and consulting company, uses the accrual method of accounting. Its tax year is the calendar year. The following are three of the corporation’s transactions
Assume the same facts as in Problem I:6-40, except that Big Bang LLC incurs $41,000 in expenses, it does not already own the other entertainment galleries and it does not own anything similar.a. What
During January and February of the current year, Big Bang LLC incurs $3,000 in travel, feasibility studies, and legal expenses to investigate the feasibility of opening a new entertainment gallery in
Indicate whether Glenda can deduct the $5,000 payment in each of the following independent situations.a. Glenda is a supplier of medical supplies. In order to secure a large sales contract to the
Damian Corporation is engaged in the business of purchasing and importing carpets from Iran. Importing these carpets from Iran is illegal. Following is a list of income and expense items for the
Sam is a sole proprietor who owns, leases, and manages several apartment complexes and office buildings. During the current year, Sam incurs the following expenses. Which of these expenditures are
Eljay, LLP owns several apartment complexes and office buildings. The leasing and management of these buildings constitutes Eljay’s only business activity. During the current year Eljay incurred
Sam owns a small apartment building (this is the only rental building Sam owns). During the year Sam incurs the following expenditures:Item
During 2017, Kent, a 40-year-old single taxpayer, reports the following items of income and expense:Income:Salary
Roberta is an accountant employed by a local firm. During the year, Roberta incurs the following unreimbursed expenses:Item
Katie and Alan are avid boaters and water skiers. They also enjoy parasailing. This year, they started a new parasailing venture to give rides to patrons. Katie and Alan are both employed full-time
Kathleen pays $3,000 mortgage interest on the home that she and her husband live in. Kathleen and her husband live with Molly, Kathleen’s mother. The title to the home is in Kathleen’s name.
Gus, a football player who was renegotiating his contract with the Denver Broncos, paid his ex-girlfriend $50,000 to drop a sexual assault complaint against him and keep the matter confidential. The
David, a CPA for a large accounting firm, often works 10- to 12-hour days. As a requirement for his position, he must attend social events to recruit new clients. In addition to his job with the
Under Sec. 280A, how will a taxpayer report the income and expenses of a vacation home if it is rented out for only 12 days during the year?
Under Sec. 280A, how are expenses allocated to the rental use of a vacation home? In what order must the expenses be deducted against the gross income of the property?
Under Sec. 280A, what constitutes personal use of a vacation home by the taxpayer?
Assume that Jill is engaged in painting as a hobby. During the year, she earns $1,000 from sales of her paintings and incurs $1,300 expenses for supplies and lessons. Jill’s salary from her job is
If property is sold at a loss to a related taxpayer, under what circumstances can at least partial benefit be derived from the disallowed loss?
Under the related party rules of Sec. 267, why has Congress imposed the concept of constructive ownership?
Under Sec. 267, current deductions may not be taken for certain transactions between related parties.a. Who is considered a member of a taxpayer’s family under the related party transaction rules
The wash sale rules disallow a loss in the year of sale when substantially identical stock or securities are acquired by the taxpayer within a 61-day period. What types of stock or securities are
Why did Congress enact the wash sale provisions?
The timing of when the economic performance test is satisfied depends on the type of transaction and whether the transaction is recurring.a. When does economic performance occur for a taxpayer who
Under what circumstances would a taxpayer use both the cash method and the accrual method of accounting at the same time?
Under what circumstances can prepaid expenses be deducted in the year of payment by a taxpayer using the cash method of accounting?
What documentation is required in order for a travel or entertainment expense to be deductible?
During November and December of last year, Tommy’s, Inc., incurred the following expenses in investigating the feasibility of opening a new restaurant in town:Expenses to do a market

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