Questions and Answers of South-Western Federal Taxation 2022 Individual Income Taxes

In 2021, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of
The taxpayer’s ending inventory is valued as follows. Under the lower of cost or market method, what is the value of the taxpayer’s inventory?
For 2021, Essence Company, a calendar year taxpayer, will change from the cash method for tax purposes to the accrual method. At the end of 2020, Essence showed the following items. Accounts
On December 30, 2021, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses. The buyer paid $5,000 down with the balance
In 2021, Skylar sold an apartment building for $20,000 cash and a $300,000 note due in two years. Skylar’s cost of the property was $250,000, and he had deducted depreciation of $150,000, $60,000
Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a longterm contract. The gross contract price was
Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000. Costs of the contract for 2020, the first year,
Shondee Corporation uses the lower of cost or market and FIFO inventory methods. At the end of 2020, the FIFO cost of the ending inventory was $181,000, and the market value of the inventory was
The Cardinal Wholesale Company is an S corporation that began business on March 1, 2021. Robert, a calendar year taxpayer, owns 100% of the Cardinal stock. He has $400,000 taxable income from other
Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year (2021), the company hires you to convert the cash receipts and
In 2020, Juan entered into a contract to write a book. The publisher advanced Juan $50,000, which was to be recovered out of future royalties. If the book was not completed by the end of 2021,
Kay, who is not a real estate dealer, sold an apartment house to Polly during the current year (2021). The closing statement for the sale is as follows. During 2021, Kay collected $9,000 in
Gold, Inc., is an accrual basis taxpayer. In 2021, an employee accidentally spilled hazardous chemicals on leased property. The chemicals destroyed trees on neighboring property, resulting in $30,000
Compute Mary’s income or deductions for 2021 using (1) the cash basis and (2) the accrual basis for each of the following.a. In May 2021, Mary paid a license fee of $1,200 for the period June 1,
On March 31, 2019, Big Boats Company entered into a contract with Vacations Unlimited to produce a state-of-the-art cruise ship to be completed within three years. Big Boats estimated the total cost
On June 30, 2021, Kelly sold property for $240,000 cash and a $960,000 note due on September 30, 2022. The note pays 6% interest, which is higher than the Federal rate. Kelly’s cost of the property
On December 30, 2020, Maud sold land to her son, Charles, for $50,000 cash and a 7% installment note for $350,000, payable over 10 years. Maud’s cost of the land was $150,000. In October 2022,
In 2021, Gail changed from the lower of cost or market FIFO method to the LIFO inventory method. The ending inventory for 2020 was: Item C was damaged goods, and the replacement cost used was
The Wren Construction Company reports its income by the completed contract method. At the end of 2021, the company completed a contract to construct a building at a total cost of $800,000. The
Ven Company is a retailer. In 2021, its before-tax net income for financial reporting purposes was $600,000. This included a $150,000 gain from the sale of land held for several years as a possible
What is the basis of the received property in each of the following exchanges?a. Apartment building held for investment (adjusted basis of $145,000) for office building to be held for investment
Quentin’s roadside vegetable stand (adjusted basis of $275,000) is destroyed by a tractor-trailer accident. He receives insurance proceeds of $240,000. Quentin immediately uses the proceeds plus
Wesley, who is single, listed his personal residence with a real estate agent on March 3, 2021, at a price of $390,000. He rejected several offers in the $350,000 range during the summer. Finally, on
Mitchell, a calendar year taxpayer, is the sole proprietor of a fast-food restaurant. His adjusted basis for the building and the related land is $450,000. On March 12, 2021, state authorities notify
Emily’s warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2021. Emily, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2022. Calculate
Wanda, a calendar year taxpayer, owned a building (adjusted basis of $250,000) in which she operated a bakery that was destroyed by fire in December 2021. She receives insurance proceeds of $290,000
Karl purchased his residence on January 2, 2020, for $260,000, after having lived in it during 2019 as a tenant under a lease with an option to buy clause. On August 1, 2021, Karl sells the residence
Elliott has the following capital gain and loss transactions for 2021: After the capital gain and loss netting process, what is the amount and character of Elliott’s gain or loss? Short-term
Near the end of 2021, Byron realizes that he has a net short-term capital loss of $13,000 for the year. Byron has taxable income (not including the loss) of $123,000 and is single. He owns numerous
On May 9, 2021, Glenna purchases 500 shares of Ignaz Company stock for $7,500. On June 30, 2021, she writes a call option on the stock, giving the grantee the right to buy the stock for $9,000 during
Shen purchased corporate stock for $20,000 on April 10, 2019. On July 14, 2021, when the stock was worth $12,000, Shen died and his son, Mijo, inherited the stock. Mijo sold the stock for $14,200 on
George is the owner of numerous classic automobiles. His intention is to hold the automobiles until they increase in value and then sell them. He rents the automobiles for use in various events
Maria meets all of the requirements of § 1237 (subdivided realty). In 2021, she begins selling lots and sells four separate lots to four different purchasers. She also sells two contiguous lots to
Melaney has had a bad year with her investments. She lent a friend $8,000; the friend did not repay the loan when it was due and then declared bankruptcy. The loan is totally uncollectible. Melaney
Benny purchased $400,000 of Peach Corporation face value bonds for $320,000 on November 13, 2020. The bonds had been issued with $80,000 of original issue discount because Peach was in financial
Carla was the owner of vacant land that she was holding for investment. She paid $2,000,000 for the land in 2018. Raymond was an investor in vacant land. He thought Carla’s land might be the
Liana Amiri (single with no dependents) has the following transactions in 2021:What is Liana’s net capital gain or loss? Draft a letter to Liana describing how the net capital gain or loss will be
Hilde purchased all of the rights to a patent on a new garden tool developed by a friend of hers who was an amateur inventor. The inventor had obtained the patent rights, set up a manufacturing
Consuela was a tenant in a campus apartment. She is a student at State University. Her lease began on August 1, 2021, and was due to expire on July 31, 2022. However, her landlord sold the building,
Aliya held vacant land that qualified as an investment asset. She purchased the vacant land on April 10, 2017. She exchanged the vacant land for a rental house in a qualifying like-kind exchange on
Phil and Susan Hammond are married taxpayers filing a joint return. The couple have two dependent children. Susan has wages of $34,000 in 2020. Phil does not work due to a disability, but he is a
Roger inherited 100 shares of Periwinkle stock when his mother, Emily, died. Emily had acquired the stock for a total of $60,000 on November 15, 2017. She died on August 10, 2021, and the shares were
Dennis sells short 100 shares of ARC stock at $20 per share on January 15, 2021. He buys 200 shares of ARC stock on April 1, 2021, at $25 per share. On May 2, 2021, he closes the short sale by
Helena has the following long-term capital gains and losses for 2021: $65,000 28% gain, $53,000 28% loss, $28,000 25% gain, and $24,000 0%/15%/20% loss. She also has a $33,000 short-term loss and a
For 2021, Maddie has gross income of $38,350 and a $5,000 long-term capital loss. She claims the standard deduction. Maddie is 35 years old and unmarried with two dependent children. How much of
Jane and Blair are married taxpayers filing jointly and have 2021 taxable income of $107,000. The taxable income includes $5,000 of gain from a capital asset held five years, $2,100 of gain from a
For 2021, Wilma has properly determined taxable income of $36,000, including $3,000 of unrecaptured § 1250 gain and $8,200 of 0%/15%/20% gain. Wilma qualifies for head-of-household filing status.
Gray, Inc., a C corporation, has taxable income from operations of $1,452,000 for 2021. It also has a net long-term capital loss of $355,000 from the sale of a subsidiary’s stock. The year 2021 is
Your client, Alternate Fuel, Inc. (a regular corporation), owns three sandwich shops in the Philadelphia area. In 2018, the year Alternate Fuel incorporated, it acquired land on the outskirts of
Randall owns an office building (adjusted basis of $250,000) that he has been renting to a group of physicians. During negotiations over a new seven-year lease, the physicians offer to purchase the
Yanling owns a 150-unit motel that was constructed in the late 1960s. It is located on 10 acres on the main highway leading into the city. Yanling renovated the motel three years ago.Yanling’s
Locate the most recent data available from the IRS on Form 8824 filings (irs.gov/statistics). In a Microsoft Excel spreadsheet, use this information to provide a summary of these transactions through
Reba, a calendar year taxpayer, owns an office building that she uses in her business. The building is involuntarily converted on November 15, 2021. On January 5, 2022, Reba receives enough proceeds
Bob is notified by the city public housing authority on May 3, 2021, that his apartment building is going to be condemned as part of a commercial development project. On June 1, 2021, Stella offers
Vijay owns land (adjusted basis of $40,000) that he uses in his business. He exchanges the land and $20,000 in cash for a different parcel of land worth $50,000. May Vijay avoid like-kind exchange
In June 2021, Sue exchanges a sport-utility vehicle (adjusted basis of $16,000; fair market value of $19,500) for cash of $2,000 and a pickup truck (fair market value of $17,500). Both vehicles are
On August 31, 2020, Nolan and Lei, who file a joint return and live in Charleston, South Carolina, sell their personal residence, which they have owned and lived in for 10 years. The realized gain of
Omar, who is single, sold his principal residence on April 10, 2021, and excluded the realized gain under § 121 (exclusion on the sale of a principal residence). On April 12, 2021, he purchased
Gary, who is single, sells his principal residence (owned and occupied by him for seven years) in November 2021 for a realized gain of $148,000. He had purchased a more expensive new residence eight
On February 24, 2021, Allison’s building, with an adjusted basis of $1,300,000 (and used in her trade or business), is destroyed by fire. On March 31, 2021, she receives an insurance reimbursement
On June 5, 2021, Brown, Inc., a calendar year taxpayer, receives cash of $750,000 from the county upon condemnation of its warehouse building (adjusted basis of $500,000 and fair market value of
Mandy and Theo exchange real property in a like-kind exchange. Mandy receives real property with a fair market value of $78,000 and transfers real property worth $70,000 (adjusted basis of $28,000)
The IRS provides a web-based tool to help taxpayers determine whether they are eligible for the earned income tax credit. Locate the EITC Assistant at the IRS website. Then apply the facts related to
Describe the exposure (i.e., wage base and tax rate) of a self-employed individual to the self-employment tax for 2021.
During 2021, Lincoln Company hires seven individuals who are certified to be members of a qualifying targeted group. Each employee works in excess of 600 hours and is paid wages of $7,500 during the
Samuel and Annamaria are married, file a joint return, and have three qualifying children. In 2021, they earn wages of $34,000 and no other income. Determine the amount of their earned income credit
In 2021, Henri, a U.S. citizen and calendar year taxpayer, reports $30,000 of income from France, which imposes a 10% income tax, and $50,000 from Italy, which imposes a 40% tax. In addition, Henri
In 2021, Santiago and Amy are married and file a joint tax return. They have three dependent children, ages 12, 14, and 19. All parties are U.S. citizens. The couple’s AGI is $140,000. Determine
Paola and Isidora are married; file a joint tax return; report modified AGI of $148,000; and have one dependent child, Dante. The couple paid $12,000 of tuition and $10,000 for room and board for
In 2021, Ivanna, who has three children under age 13, worked full-time while her spouse, Sergio, was attending college for nine months during the year. Ivanna earned $47,000 and incurred $6,400 of
Ava and her husband, Leo, file a joint return and are in the 24% tax bracket in 2021. Ava’s employer offers a child and dependent care reimbursement plan that allows up to $5,000 of qualifying
Julie, a self-employed individual, is required to make estimated payments of her tax liability for the year. Her tax liability for 2020 was $25,000, and her AGI was less than $150,000. For 2021,
In 2021, Bianca earned a salary of $164,000 from her employer. Determine the amount of FICA taxes and Medicare taxes withheld from her salary.
Tim and Sarah Lawrence are married and file a joint return. Tim’s Social Security number is 123-45-6789, and Sarah’s Social Security number is 111-11-1111. They reside at 100 Olive Lane,
Which of the following individuals qualifies for the earned income credit for 2021?a. Thomas is single, is 21 years of age, and has no qualifying children. His income consists of $9,000 in
In 2021, Miranda records net earnings from self-employment of $158,500. She has no other income. Determine the amount of Miranda’s self-employment tax and her for AGI income tax deduction.
Green Corporation hires six individuals on January 4, 2021, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2021, and each individual
In 2021, Joshua and Ellen are married and file a joint return. Three individuals qualify as their dependents: their two children, ages 5 years and 6 months, and Ellen’s son from a previous
Jason, a single parent, lives in an apartment with his three minor children, whom he supports. Jason earned $27,400 during 2021 and uses the standard deduction. Calculate the amount, if any, of
Kim, a U.S. citizen and resident, owns and operates a novelty goods business. During 2021, Kim reports taxable income of $115,000: $50,000 from foreign sources and $65,000 from U.S. sources. In
Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are gainfully employed and during 2021 earn salaries as follows: $130,000 (Jim) and $5,200 (Mary Jean).
Jenna, a longtime client of yours, is employed as an architect and is the president of the local Rotary chapter. To keep up to date with developments in her profession, she attends continuing
In each of the following independent situations, determine the amount of FICA that should be withheld from the employee’s 2021 salary by the employer.a. Harry earns a $50,000 salary and files a
Ruth Ames died on January 10, 2021. In filing the estate tax return, her executor, Melvin Sims, elects the primary valuation date and amount (fair market value on the date of death). On March 12,
a. In 2021, Maria records self-employed earnings of $135,000. Using the format illustrated in the text, compute Maria’s self-employment tax liability and the allowable income tax deduction for the
Isabelle invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the bonds earn interest of $8,000 each year. After holding the land and bonds for five
Lee owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market value of $250,000. The property is subject to a mortgage of $400,000. Because Lee is in arrears
On July 16, 2021, Logan acquires land and a building for $500,000 to use in his sole proprietorship. Of the purchase price, $400,000 is allocated to the building, and $100,000 is allocated to the
Robin inherits 1,000 shares of Walmart stock from her Robin aunt Julieta in 2021. According to the information received from the executor of Julieta’s estate, Robin’s adjusted basis for the stock
Thelma inherited land from Sadie on June 7, 2021. The land appreciated in value by 100% during the six months Sadie owned it. The value has remained stable during the three months Thelma has owned
Comment on the following transactions.a. Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On July 28, 2021, he sells 100 shares for $3,000. On August 16, 2021, he purchases
Sally owns real property for which the annual property taxes are $9,000. She sells the property to Kate on March 9, 2021, for $550,000. Kate pays the real property taxes for the entire year on
On July 1, 2021, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 3%.a. How much interest income and/or interest
Kareem bought a rental house in March 2016 for $300,000, of which $50,000 is allocated to the land and $250,000 to the building. Early in 2018, he had a tennis court built in the backyard at a cost
Rod Clooney purchases Kayla Mitchell’s sole proprietorship for $990,000 Communications on August 15, 2021. The assets of the business are:a. Calculate Kayla’s realized and recognized gain.b.
Nissa owns a building (adjusted basis of $600,000 on January 1, 2021) that she rents to Len, who operates a restaurant in the building. The city closed the restaurant for three months during 2021
Liam owns a personal use boat that has a fair market value of $35,000 and an adjusted basis of $45,000. Liam’s AGI is $100,000. Calculate the realized and recognized gain or loss if:a. Liam sells
On September 18, 2021, Gerald received land and a building from Lei as a gift. No gift tax was paid on the transfer. Lei’s records show the following. a. Determine Gerald’s adjusted basis
Zoe purchases Tan, Inc. bonds for $108,000 on January 2, 2021. The face value of the bonds is $100,000; the maturity date is December 31, 2025; and the annual interest rate is 5%. Zoe will amortize
Brent Morgan is a real estate agent for Coastal Estates, a residential real estate development. Because of his outstanding sales performance, Brent is permitted to buy a lot for $300,000 that

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