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business
principles of taxation

Questions and Answers of Principles Of Taxation

In 2021, 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 2021 state income tax on its December 31, 2021, balance sheet. Extronic made the following state income
Grimes Corporation began business in 2017 and incurred losses for its first two years. In 2019, it became profitable. The following table shows Grimes’s taxable income before consideration of its
LSG Company is a calendar year, cash basis taxpayer. On November 1, 2022, LSG paid $9,450 cash to the janitorial service firm that cleans LSG’s administrative offices and retail stores. How much of
On February 1, Mr. Barnes purchased a business from Mr. and Mrs. Sanchez for a lump-sum price of $750,000. The business included the following balance sheet assets:By buying the business, Mr. Barnes
Warren Company is a calendar year, cash basis firm. On December 6, 2022, Warren paid $7,200 cash to a landscape service business that maintains the lawns and gardens around Warren’s headquarters.
BZD, a calendar year corporation, made the following year-end accruals for 2022 financial statement purposes. In each case, determine how much of the accrued expense is deductible on BZD’s 2022
Parmco, a calendar year corporation, made the following accruals for 2022 financial statement purposes. In each case, determine how much of the accrued expense is deductible on Parmco’s 2022
Company N, an accrual basis taxpayer, owes $90,000 to Creditor K. At the end of 2021, Company N accrued $7,740 interest payable on this debt. It didn’t pay this liability until March 3, 2022. Both
Acme is an accrual basis corporation. Mrs. Torres, Acme’s chief financial officer, is a cash basis individual. In December 2021, Acme’s board of directors decided that Mrs. Torres should receive
MG is an accrual basis corporation. In 2021, it wrote off a $65,000 account receivable as uncollectible. In 2022, it received a $65,000 check from the creditor in full payment of this receivable.a.
The Tax Cuts and Jobs Act of 2017 changed the tax treatment of research and experimentation costs incurred after 2021. This change requires capitalization and amortization of costs that previously
Ms. Drake sold a business that she had operated as a sole proprietorship for 18 years. On the date of sale, the business balance sheet showed the following assets:The purchaser paid a lump-sum price
Mr. and Mrs. Fabrizio, a retired couple, decided to open a family restaurant. During March and April, they incurred the following expenses:Mr. and Mrs. Fabrizio served their first meal to a customer
At the beginning of its 2022 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;
Zeno, Inc. sold two capital assets in 2022. The first sale resulted in a $53,000 capital loss, and the second sale resulted in a $25,600 capital gain. Zeno was incorporated in 2018, and its tax
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 April 2022, Lenape Corporation completed security, fire, and heating system improvements to existing nonresidential real property with a total cost of $1,285,000. Assuming these improvements are
Mr. Kyle realized a loss on the sale of an asset to Mr. Payne, his best friend for 20 years. Does this sale represent an arm’s-length transaction? Are Mr. Kyle and Mr. Payne related parties for tax
Mr. Zan, a calendar year taxpayer, opened a new car wash. Prior to the car wash’s grand opening on October 8, Mr. Zan incurred various start-up expenditures (rent, utilities, employee salaries,
Loni Company paid $1,067,000 for tangible personalty in 2021 and elected to expense $1,050,000 of the cost (the limited dollar amount for 2021). Loni’s taxable income before a Section 179 deduction
In 2021, 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
In 2022, 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 March 2021, Jones Company purchased a Mercedes for use in its business at a cost of $73,000. Assuming no bonus depreciation or Section 179 deduction, calculate the allowable tax depreciation on
On May 12, 2021, Nelson, Inc. purchased eight 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
Evan, a single individual, operates a service business that earned $110,000 (after all applicable deductions) in 2022. The business has no tangible property and paid no W-2 wages.a. Compute Evan’s
Keiji Jones is the owner of a small retail business operated as a sole proprietorship. During 2021, his business recorded the following items of income and expense:a. Compute taxable income
Rhea Xu is a self-employed professional singer. She resides in a rented apartment and uses one room exclusively as a business office. This room includes 225 of the 1,500 square feet of living space
Refer to the facts in the preceding problem. Assume that in the year 2023, the Social Security base amount increases to $150,000. Compute BDF’s 2023 employer payroll tax with respect to Mr. Li
On March 1, 2022, Eve and Frank each contributed $30,000 cash to the newly formed EF Partnership in exchange for a 50 percent general interest. The partnership immediately borrowed $50,000 from an
Mr. Li is employed by BDF, Inc. Compute BDF’s 2022 employer payroll tax with respect to Mr. Li assuming thata. His annual compensation is $60,000.b. His annual compensation is $200,000.
Marcia Alvarez, a single individual, has qualified trade or business income after all applicable deductions of $280,000. Her business paid $100,000 of W-2 wages this year and has $50,000 of tangible
On January 10, 2019, a fire destroyed a warehouse owned by NP Company. NP’s adjusted basis in the warehouse was $530,000. On March 12, 2019, NP received a $650,000 reimbursement from its insurance
On June 2, 2021, a tornado destroyed the building in which FF operated a fast-food franchise. FF’s adjusted basis in the building was $214,700. In each of the following cases, determine FF’s
On April 1, 2022, Bullen Company transferred machinery used in its business to Eaton, Inc. in exchange for Eaton common stock. Both Bullen and Eaton use the calendar year for tax purposes. Bullen’s
Bangura, Inc. has accumulated minimum tax credits of $1.3 million from tax years prior to 2018. The following are Bangura’s regular tax before credits for 2018 through 2021.a. Complete the
Refer to the facts in the preceding problem.a. Complete Schedule K, Form 1065, for the partnership.b. Complete Schedule K-1, Form 1065, for Jayanthi.Data from Application Problems 21:Jayanthi and
Mrs. Singer owns a profitable sole proprietorship. For each of the following cases, use Schedule SE, Form 1040, to compute her 2021 self-employment tax and her income tax deduction for such tax.a.
At the beginning of 2022, Ms. Pope purchased a 20 percent interest in PPY Partnership for $20,000. Ms. Pope’s Schedule K-1 reported that her share of PPY’s debt at year-end was $12,000, and her
Luong Corporation, a calendar year, accrual basis corporation, reported $1 million of net income after tax on its financial statements prepared in accordance with GAAP. The corporation’s books and
Rochelle is a limited partner in Megawatt Partnership. For 2022, her Schedule K-1 from the partnership reported the following share of partnership items:a. Calculate the net impact of the given items
Jayanthi and Krish each own a 50 percent general partner interest in the JK Partnership. The following information is available regarding the partnership’s 2021 activities:a. Calculate the
In 2021, NB, Inc.’s federal taxable income was $242,000. Compute the required installment payments of 2021 tax in each of the following cases:a. NB’s 2022 taxable income is $593,000.b. NB’s
Hallick, Inc. has a fiscal year ending June 30. Taxable income was $5,000,000 for its year ended June 30, 2018, and it projects similar taxable income for its 2022 fiscal year.a. Compute Hallick’s
Amit is a limited partner in Reynolds Partnership. This year, Amit’s Schedule K-1 from Reynolds reflected $50,000 of ordinary income, $1,000 of interest income, and a cash distribution of $35,000.
In 2021, Bartley Corporation’s federal income tax due was $147,000. Compute the required installment payments of 2022 tax in each of the following cases:a. Bartley’s 2022 taxable income is
Refer to the facts in the preceding problem. BLS generated $408,000 ordinary business income in 2022.a. How much of Leo’s share of this income is included in his 2022 taxable income?b. Compute
In its first year (2021), Camco, Inc. generated a $92,000 net operating loss, and it made a $5,000 cash donation to a local charity. In its second year (2022), Camco generated a $210,600 profit, and
In each of the following cases, compute the corporation’s regular tax:a. Silva Corporation has $160,000 taxable income for its tax year ended December 31, 2017.b. Goyal Corporation has $160,000
On January 1, 2021, Leo paid $15,000 for 5 percent of the stock in BLS, an S corporation. In November, he loaned $8,000 to BLS in return for a promissory note. BLS generated a $600,000
Refer to the facts in the preceding problem. In 2022, YZ generated $7,000 ordinary business income and $18,000 dividend and interest income. The partnership made no distributions. At the end of the
In its first year (2021), Barsky Corporation made charitable contributions totaling $70,000. The corporation’s taxable income before any charitable contribution deduction was $250,000. In its
Zelda owns a 60 percent general interest in YZ Partnership. At the beginning of 2021, the adjusted basis in her YZ interest was $95,000. For 2021, YZ generated a $210,000 business loss, earned
This year, individual X and individual Y formed XY Partnership. X contributed $50,000 cash, and Y contributed business assets with a $50,000 FMV. Y’s adjusted basis in these assets was only
AB Corporation and YZ Corporation formed a partnership to construct a shopping mall. AB contributed $500,000 cash, and YZ contributed land ($500,000 FMV and $430,000 basis) in exchange for a 50
Tanisha is a self-employed attorney. This year, her net profit exceeded $350,000, which put her in the 37 percent tax bracket. Early in the year, Tanisha hired Ben as a paralegal and paid him a
This year, FGH Partnership generated $600,000 ordinary business income. FGH has two equal partners: Triad LLC and Beta, an S corporation. Triad LLC has three members: Mr. Ty, who owns a 40 percent
JC recently graduated from veterinary school and opened their own professional practice. This year, their net profit was $32,000. Assume JC does not qualify for the QBI deduction. Compute JC’s
Kari is a limited partner in Lizard Partnership. This year, Kari’s share of partnership ordinary income is $20,000, and she received a cash distribution of $30,000. Kari’s tax basis in her
In 2022, Wilma Way’s sole proprietorship, WW Bookstore, generated $120,000 net profit. In addition, Wilma recognized a $17,000 Section 1231 gain on the sale of business furniture. The business
Both Mx. Aldo and Mr. Zed are sole proprietors. This year, each proprietorship generated $85,000 net cash flow from business operations. Mx. Aldo used the cash to expand their business, while Mr. Zed
Tom, Neha, and Mateo want to become co-owners of a business enterprise. Compare their personal liability for the debts incurred by the enterprise if they organize asa. A general partnership.b. A
For 2022, Ms. Deming earned wages totaling $225,000. Calculate any .9 percent additional Medicare tax owed, assuming thata. Ms. Deming is single.b. Ms. Deming files a joint return with her husband
Mr. and Mrs. Tinker own a sizable investment portfolio of stock in publicly held corporations. The couple has four children—ages 20, 22, 25, and 27—with whom they want to share their wealth.
The Chungs are married with one dependent child. They report the following information for 2022:Compute AGI, taxable income, and total tax liability (including self employment tax). Assume that
Ms. Singh, who is in the 37 percent tax bracket, owns a residential apartment building that generates $80,000 annual taxable income. She plans to create a family partnership by giving each of her two
Jose, who is in the 35 percent marginal tax bracket with a 15 percent tax rate on dividends, owns 100 percent of the stock of JJ, Inc. This year, JJ generates $500,000 taxable income and pays a
Margarita, whose marginal tax rate on ordinary income is 37 percent, owns 100 percent of the stock of Henley Corporation. This year, Henley generates $1 million of taxable income.a. If Henley wants
Porto Corporation received $50,000 of dividend income from Seville, Inc. Porto owns 5 percent of the outstanding stock of Seville. Porto’s marginal tax rate is 21 percent. Assume both companies are
For the following problems, assume the taxable year is 2022. Determine Lilly’s 2022 filing status in each of the following independent cases:a. Lilly and Paul have been living together since 2020.
Determine Juan’s 2022 filing status in each of the following independent cases:a. Juan and his spouse were divorced on November 18. Juan has not remarried and has no dependent children.b. Juan and
Marnie, a single taxpayer, projects $13,500 of expenses qualifying as itemized deductions in both 2022 and 2023. Assuming that the standard deduction is $12,950 in both years, compute the effect on
Mr. and Mrs. Nguyen file a joint income tax return. Determine if each of the following unmarried individuals is either a qualifying child or a qualifying relative:a. The Nguyens’ child, Jinn, age
Randall is a professor at a private university. The university waives the tuition for a faculty member’s child who meets the entrance requirements. Randall’s two children are enrolled in degree
Devonte has the full-time use of an automobile owned and maintained by his employer. This year, Devonte drove this company car 48,000 miles on business and 22,000 for personal reasons. Devonte is not
Lex is employed at VD’s corporate headquarters and often works late hours. The headquarters building is located in a high-crime urban area. As a result, corporate policy is that any employee
Six years ago, Deepti paid $20 per share for 1,000 shares of stock in her company. This stock is now worth $58 per share. Deepti wants to exercise a stock option to buy 1,000 more shares at a strike
Jordan recently moved from Boston to Pittsburgh to take a job with OP, Inc. As part of the relocation, Jordan sold a home in Boston, and OP paid the $14,500 realtor’s commission on the sale.
Watts McNeil, age 50, is a self-employed writer who published 11 novels in the past 20 years. Each year, Watts makes the maximum contribution to a SEP plan. This year, Watts borrowed $200,000 from
Ms. Barstow purchased a limited interest in Quinnel Partnership in 2022. Her share of the partnership’s 2022 business loss was $5,000. Unfortunately, Ms. Barstow couldn’t deduct this loss because
On January 12, 2020, Mr. and Mrs. Nixon moved out of their old residence (where they had lived for 22 years) and into a new residence purchased nine days earlier on January 3. They finally sold their

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