2^nd note: Since tax planning requires a wide range of knowledge in tax, you would need to review material from multiple prior lectures in this course to complete this homework.

Question 1

Addison, a cash method taxpayer, just learned about the concept of cash method versus accrual method a few day ago. Addison immediately come up with a “brilliant idea” to help him pay as little tax as possible in 2020 by playing with the timing advantage of cash method. Since 2020 is an exceptional good year for Addison’s online business, he sees his income extremely high. Below are actions that Addison are planning on taking to reduce his 2020 taxable income:

1. Advising all clients to instead of paying him by cash, they should pay him by checks (assume no limitation on when the checks can be redeemed). In that way, Addison can have the flexibility to when to cash in those check and, thus, control when he will recognize his income in 2020. For example, if he receives $300k worth of checks in 2020, he can just cash out $10k and save the remaining $200k for next year. So, in 2020, Addison will only be tax on $50k instead of $100k.
2. Prepaying his warehouse rental expenses for the next 2 years (2021 and 2022). In that way, he can deduct all of those in 2020 and thus reducing his taxable income down significantly.
3. Selling a few business equipment from his online business for a dirt-cheap price to his second company (which he is also the primary owner). In that way, he can recognize a huge amount of loss from disposition of business assets and thus further reduce his taxable income.

What is your thought on each of the 3 strategies above? Will it work or not? Explain in detail.

Question 2:

Imagine today was 12/29/2019 and Amelia, a cash method taxpayer, come to you with a few questions regarding her tax planning for the 2020. Below are a few things that Amelia was considering and would like to consult with you:

1. Amelia was considering getting married in 2020 to her boyfriend, who is currently unemployed and now living in his mom’s basement training 24/7 to become a professional Mario Kart player. However, she afraid that after getting married, her tax would be doubled because now she also has to pay her husband’s tax. She is quite confused about this part and want to check how much would her tax go up if she gets married this year.
2. Amelia received a $5000 worth of Apple stock in 09/01/2019 from her father as a birthday gift. She was considering selling all of those sometime in September 2020 because Apple normally hold an annual event at that time and stocks tend to go up around that period. However, Amelia worry that if she sells stocks at that time, she will have to pay a much higher tax. Amelia was considering selling those stocks tomorrow (12/30/2019) because her income this year is still pretty low ($30k). Amelia would have the same job for 2020 so her expected income again would be $30k.

What are your thoughts and advice for Amelia? Provide detailed explanation for each concerns.

Answer rating: 100% (QA)

Addisons first strategy advising clients to pay by check instead of cash will not work because he wi... View the full answer