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business
federal taxation
Questions and Answers of
Federal Taxation
Otter Corporation sends people to the state capital to lobby the legislature to build a proposed highway that is planned to run through the area where its business is located.a. If Otter Corp. incurs
Michelle pays a CPA $400 for the preparation of her federal income tax return. Michelle’s only sources of income are her salary from employment and interest and dividends from her investments.a. Is
Under what circumstances may a taxpayer deduct an illegal bribe or kickback?
Why are expenses related to tax-exempt income disallowed?
What are the criteria for distinguishing between a deductible expense and a capital expenditure?
In order for a business expense to be deductible it must be ordinary, necessary, and reasonable. Explain what these terms mean.
Because expenses incurred both in a business and for the production of investment income are deductible, why is it important to determine in which category a particular activity falls?
If an activity does not generate a profit in three out of five consecutive years, is it automatically deemed to be a hobby? Why or why not?
Deductible business or investment expenses must be related to a profit-motivated activity.a. What are the factors used in determining whether an activity is profit-motivated?b. Why are these factors
For 2017, Mario, a single individual with no dependents, receives income of $55,000 and incurs deductible expenses of $9,000.a. What is Mario’s taxable income assuming that the expenses are
Joe is a single, self-employed individual who owns his own business. During the current year, Joe reported $200,000 gross income and $60,000of business expenses. He also paid $30,000 in alimony to
During the year, Sara sold a capital asset at a loss of $2,000. She had held the asset as an investment. This is the only capital asset she sold during the year. Is her deduction for this capital
Sam owns a small house that he rents out to students attending the local university. Are the expenses associated with the rental unit deductions for or from AGI?
Why was pay-as-you-go withholding needed in 1943?
Why is the distinction between deductions for AGI and deductions from AGI important for individuals?
Web Baker was hired three years ago by the Berry Corporation to serve as CEO for the company. As part of his employment contract, the corporation had agreed to purchase his residence at FMV in the
Jack, a tenured university professor, has been a malcontent for many years at Rockport University. The university has recently offered to pay $200,000 to Jack if he will relinquish his tenure
Lynette, a famous basketball player, is considering the possibility of transferring the sole right to use her name to promote basketball shoes produced and sold by the NIK Corporation. NIK will pay
Tom Williams is an equal partner in a partnership with the Kansas Corporation. Williams, an inventor, produced a new process while working for the partnership, which has been patented by the
Your client, Apex Corporation, entered into an agreement with an executive to purchase his personal residence at its current FMV in the event that his employment is terminated by the company during a
As a political consultant for an aspiring politician, you have been hired to evaluate the following statements that pertain to capital gains and losses. Evaluate the statement and provide at least a
Dallas, whose tax rate is 35%, has recognized an STCL of $11,000 and an LTCG of $10,200 due to the sale of stock. In late December, he is considering the sale of an antique chair held for investment
On December 20 of the current year, Winneld has decided to sell all of the stock that she owns and reinvest the proceeds in state of Minnesota bonds. Without considering the sales, her taxable income
Calvin, whose tax rate is 35% is considering two alternative investments on January 1, 20Y1. He can purchase $100,000 of 10% bonds due in five years or purchase $100,000 of Hobbes, Inc. common stock.
Dale purchased Blue Corporation stock four years ago for $1,000 as an investment. He intended to hold the stock until funds were needed to help pay for his daughter’s college education. Today the
Betty incurs the following transactions during the current year. Without considering the transactions, her 2017 AGI is $40,000. Analyze the transactions and answer the following questions:On March
In 2012, the Ryan Corporation sold a capital asset and incurred a $40,000 LTCL that was carried forward to subsequent years. That sale was the only sale of a capital asset that Ryan made until 2017,
Without considering the following capital gains and losses, Charlene, who is single, has taxable income of $460,000 and a marginal tax rate of 39.6%. During the year, she sold stock held for nine
Martha has $40,000 AGI without considering the following information. During the year, she incurs an LTCL of $10,000 and has a gain of $14,000 due to the sale of a capital asset held for more than a
On January 1, 2016, Sean purchased an 8%, $100,000 corporate bond for $92,277. The bond was issued on January 1, 2016, and matures on January 1, 2021. Interest is paid semiannually, and the effective
Determine the taxable income for the Columbia Corporation for the following independent cases: Income from STCG (NSTCL) NLTCG (NLTCL) Operations Case A B $110,000 100,000 $30,000 $44,000 65,000
Dan owns 500 shares of Rocket Corporation common stock. The stock was acquired two years ago for $30 per share. On October 2, 2017, Dan writes five calls on the stock, which represent options to buy
On February 10, 2017, Gail purchases 20 calls on Red Corporation for $250 per call. Each call represents an option to buy 100 shares of Red stock at $42 per share any time before November 25, 2017.
During 2017, Gary receives a $50,000 salary and has no deductions for AGI. In 2016, Gary had a $5,000 STCL and no other capital losses or capital gains. Consider the following sales and determine
On January 1, 2015, Swen paid $184,000 for $200,000 of the 8%, 20-year bonds of Penn Corporation, issued on January 1, 2011, at par. The bonds are held as an investment. Determine the gain and the
On December 31, 2016, Phil purchased $20,000 of newly issued bonds of Texas Corporation for $16,568. The bonds are dated December 31, 2016. The bonds are 9%, 10-year bonds paying interest
The Michigan Corporation owns 20% of the Wolverine Corporation. The Wolverine stock was acquired eight years ago to ensure a steady supply of raw materials. Michigan also owns 30% of Spartan
To better understand the rules for offsetting capital losses and how to treat capital losses carried forward, analyze the following data for an unmarried individual for the period 2014 through 2017.
Consider the four independent situations below for an unmarried individual, and analyze the effects of the capital gains and losses on the individuals AGI. For each case, determine AGI
An investor in a 28% tax bracket owns land that is a capital asset with a $50,000 basis and a holding period of three years. The investor wishes to sell the asset at a price high enough so that he
Wayne is single and has no dependents. Without considering his $11,000 adjusted net capital gain (ANCG), his taxable income, which includes no investment income, in 2017 is as follows:a. What is
Donna files as a head of household in 2017 and has taxable income of $90,000, including the sale of a stock held as an investment for two years at a gain of $20,000. Only one asset was sold during
Trisha, whose tax rate is 35%, sells the following capital assetsin 2017 with gains and losses as shown:a. Determine Trishas increase in tax liability as a result of the three sales. All
Mr. and Mrs. Dunbar have taxable income of $260,000 without considering the following sales. Consider the following independent cases where capital gains are recognized and determine the marginal tax
Beth acquired only one tract of land seven years ago as an investment. In order to sell the land at a higher price, she decides to subdivide it into 20 lots. She pays for improvements such as
Martha Lou owns 100 shares of Blain Corporation common stock. She purchased the stock on July 25, 1986, for $4,000. On May 2 of the current year, she receives a nontaxable distribution of 100 stock
Kathleen owns 500 shares of Buda Corporation common stock which was purchased on March 20, 1999, for $48,000. On October 10 of the current year, she receives a distribution of 500 stock rights. Each
Tally owns a house that she has been living in for eight years. She purchased the house for $245,000 and the FMV today is $200,000. She is moving into her friend’s house and has decided to convert
Daniel receives 400 shares of A&M Corporation stock from his aunt on May 20, 2017, as a gift when the stock has a $60,000 FMV. His aunt purchased the stock in 2007 for $42,000. The taxable gift
Irene owns a truck costing $15,000 and used for personal activities. The truck has a $9,600 FMV when it is transferred to her business, which is operated as a sole proprietorship.a. What is the basis
Bud received 200 shares of Georgia Corporation stock from his uncle as a gift on July 20, 2016, when the stock had a $45,000 FMV. His uncle paid $30,000 for the stock on April 12, 2001. The taxable
During the current year, Stan sells a tract of land for $800,000. The property was received as a gift from Maxine on March 10, 1995, when the property had a $310,000 FMV. The taxable gift was
Doug receives a duplex as a gift from his uncle. The uncle’s basis for the duplex and land is $90,000. At the time of the gift, the land and building have FMVs of $40,000 and $80,000, respectively.
Tracy owns a nondepreciable capital asset held for investment. The asset was purchased for $250,000 six years earlier and is now subject to a $75,000 liability. During the current year, Tracy
Sylvia, a dentist with excellent skills as a carpenter, started the construction of a house that she planned to give to her son as a surprise when he returned from Afghanistan, where he is serving in
Mike, a real estate broker in California, recently inherited a farm from his deceased uncle and plans to sell the farm to the first available buyer. His uncle purchased the property 12 years ago for
Lisa and John are in the business of breeding beavers to produce fur for sale. They recently purchased a pair of breeding beavers for $30,000 from XUN, Inc., and agreed to pay interest at 10% each
Mr. and Mrs. Pickens purchased a used piano in Y1 for their young son who had started taking piano lessons. In Y8 while cleaning the piano, Mrs. Pickens discovered $4,800 of old currency. They
If Pam transfers an asset to Fred and the asset is subject to a liability that is assumed by Fred, how does Fred’s assumption of the liability affect the amount realized by Pam? How does Fred’s
An individual taxpayer has realized a $40,000 loss on the sale of an asset that had a holding period of eight months. Explain why the taxpayer may be indifferent as to whether the asset is a capital
How might the current treatment of capital losses discourage an individual investor from purchasing stock of a high-risk, start-up company?
Phil, a cash-basis taxpayer, sells the following marketable securities, which are capital assets during 2017. Determine whether the gains or losses are long-term or short-term. Also determine the net
What is the first day that an individual could sell a capital asset purchased on March 31, 2017 and have a holding period of more than one year?
How does a lessor treat payments received for canceling a lease?
When is the transferor of a franchise unable to treat the transfer as a sale or an exchange of a capital asset?
Judy just obtained a patent on a new product she has developed. Bell Corporation wishes to market the product and will pay 12% of all future sales of the product to Judy. How can she be sure that the
Today, Juanita purchases a 15-year, 7% bond of the Sunflower Corporation issued four years ago at par. She purchases the bond as an investment at a discount from the par value. If she sells the bonds
On January 1 of the current year, the Orange Corporation issues $500,000 of 11%, 20-year bonds for $480,000. Determine the amount of original issue discount, if any.
Nancy and the Minor Corporation own bonds of the East Corporation. Minor Corporation owns 80% of the stock of East Corporation. East Corporation has declared bankruptcy this year, and bondholders
The effective tax rate on gain of $1 million resulting from the sale of qualified small business stock obtained in 2005 in an initial public offering and held more than five years is 14%. Do you
Why did the Supreme Court rule in Arkansas Best that the stock of a corporation purchased by the taxpayer to protect the taxpayer’s business reputation was a capital asset?
Four years ago, Susan loaned $7,000 to her friend Joe. During the current year, the $7,000 loan is considered worthless. Explain how Susan should treat the worthless debt for tax purposes.
Amy has LTCGs that are taxed at different tax rates, 15%, 25% and 28%. She also has NSTCLs that amount to less than her NLTCG. The procedure for offsetting the NSTCL against the LTCGs is favorable to
In 2002, Florence purchased 30 acres of land. She has not used the land for business purposes or made any substantial improvements to the property. During the current year, she subdivides the land
When is the gain on the sale or exchange of securities by a dealer in securities classified as capital gain?
Why did the Supreme Court rule in the Corn Products case that a gain due to the sale of futures contracts is ordinary income instead of capital gain?
Andy owns an appliance store where he has merchandise such as refrigerators for sale. Roger, a bachelor, owns a refrigerator, which he uses in his apartment for personal use. For which individual is
A corporate taxpayer plans to build a $6 million office building during the next 18 months. How must the corporation treat the interest on debt paid or incurred during the production period?
Mario owns 2,000 shares of Nevada Corporation common stock at the beginning of the year. His basis for the stock is $38,880. During the year, Nevada declares and pays a stock dividend. After the
Martha owns 500 shares of Columbus Corporation common stock at the beginning of the year with a basis of $82,500. During the year, Columbus declares and pays a 10% nontaxable stock dividend. What is
Jim inherits stock (a capital asset) from his brother, who died in March of 2017, when the property had a $6.9 million FMV. This property is the only property included in his brother’s gross estate
On October 21 of the current year, David receives stock of Western Corporation as a gift from his grandfather, who acquired the stock on January 20, 1995. Under what conditions would David’s
Sergio owns 200 shares of Palm Corporation common stock, purchased during the prior year: 100 shares on July 5, for $9,000; and 100 shares on October 15, for $12,000. When Sergio sells 50 shares for
Vincent pays $20,000 for equipment to use in his trade or business. He pays sales tax of $800 as a result of the purchase. Must the $800 sales tax be capitalized as part of the purchase price?
In 2001, Ellen purchased a house for $60,000 to use as her personal residence. She paid $12,000 and borrowed $48,000 from the local savings and loan company. In 2005 she paid $10,000 to add a room to
What problem may exist in determining the amount realized for an investor who exchanges common stock of a publicly traded corporation for a used building? How is the problem likely to be resolved?
Bold Corporation paid $25 to each full-time employee at year-end in recognition of theholidays. Bold Corporation is interested in whether the amounts are taxable income to itsemployees, and whether
As a result of a fire damaging their residence, the Taylors must stay in a motel for three weeks while their home is being restored. They pay $2,000 for the room and $500 for meals. Their
Kim leased an office building to USA Corporation under a ten-year lease specifying that at the end of the lease USA had to return the building to its original condition if any modifications were
Ann is a graduate economics student at State University. State University awarded her a $1,000 scholarship. In addition, Ann works as a half time teaching assistant in the Economics Department at
Jay Corporation owns several automobile dealerships. This year, the corporation initiated a policy of giving the top salesperson at each dealership a free vacation trip to Florida. The president
Able Corporation is a closely held company engaged in the manufacture and retail sales of automotive parts. Able maintains a qualified pension plan for its employees but has not offered nontaxable
Maria was planning to paint the interior of her apartment over a three-day weekend. Her employer asked her to work all three days and will pay her $600 overtime. She called a professional painter who
Sally owns a small C corporation that has provided health insurance coverage for Sally and the company’s three other employees. The insurance coverage for Sally and the three employees is
Pat was divorced from her husband in 2012. During the current year she received alimony of $18,000 and child support of $4,000 for her 11-year-old son, who lives with her. Her former husband had
In October 2010, Jose acquired 100% of Acorn Corporation common stock by transferring property with an adjusted basis of $1,000,000 and fair market value of $4,000,000. Acorn is a qualified small
Jangyoun is a married taxpayer with a dependent 4-year-old daughter. His employer offers a cafeteria plan under which he can choose to receive cash or, alternatively, choose from certain fringe
Determine whether the following items represent taxable income.a. As the result of an age discrimination suit, Pat received a cash settlement of $40,000. One-half of the settlement represented wages
Old Corporation has suffered losses for several years, and its debts total $500,000; Old’s assets are valued at only $380,000. Old’s creditors agree to reduce Old’s debts by one-half in order
During bankruptcy, USA Corporation debt was reduced from $780,000 to $400,000. USA Corporation’s assets are valued at $500,000. USA’s NOL carryover was $400,000.a. Is USA Corporation required to
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