Chapter 8

Computational Exercise 19 (MACRS)

• Euclid places in service a 7-year class asset on May 9, 2023, for $80,000 (the only asset acquired during the year). Euclid does not elect immediate expensing under 179. She does not claim any available additional first-year depreciation. Calculate Euclid's cost recovery deduction for 2023 and 2024.

Computational Exercise 21 (MACRS)

• Lopez acquired and placed in service a building on June 1, 2018, for $1,000,000. Calculate Lopez's cost recovery deduction for 2023 if the building is:

1. Classified as residential rental real estate.
2. Classified as nonresidential real estate.

Computational Exercise 28 (depletion computation)

• Jebali Company reports gross income of $340,000 and other property-related expenses of $229,000 and uses a depletion rate of 14%. Calculate Jebali's depletion allowance for the current year.

Problem 37 (listed property deduction limitations, bonus depreciation, MACRS)

• Janice acquired and placed in service an apartment building on June 4, 2023, for $1,600,000. The value of the land is $300,000. Janice sold the apartment building on November 29, 2029.

1. Determine Janice's cost recovery deduction for 2023.
2. Determine Janice's cost recovery deduction for 2029.

Problem 38 (listed property deduction limitations, MACRS, section 179 expense election)

• Lori, who is single, purchased and placed in service 5-year class property for $200,000 and 7-year class property for $420,000 on May 20, 2023. Lori expects the taxable income derived from her business (before considering any amount expensed under 179) to be about $550,000. Lori has determined that she should elect immediate 179 expensing in the amount of $520,000, but she doesn't know which asset she should completely expense under 179. She does not claim any available additional first-year depreciation.

1. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 5-year class asset.
2. Determine Lori's total cost recovery deduction if the 179 expense is first taken with respect to the 7-year class asset.
3. What is your advice to Lori?
4. Assume that Lori is in the 24% marginal tax state and Federal income bracket and that she elects 179 for the 7-year class asset. Determine the present value of the tax savings from the cost recovery deductions for both assets. See Appendix E for present value factors, and assume a 6% discount rate.
5. Assume the same facts as in part (d), except that Lori decides not to use 179 on either asset. Determine the present value of the tax savings under this choice. In addition, determine which option Lori should choose.
6. Present your solution to parts (d) and (e) of the problem in a spreadsheet using appropriate Microsoft Excel formulas. E-mail your spreadsheet to your instructor with a two-paragraph summary of your findings.

Problem 50 (start-up costs, intangible assets)

• Oleander Corporation, a calendar year entity, begins business on March 1, 2023. The corporation incurs startup expenditures of $64,000. If Oleander elects 195 treatment, determine the total amount of startup expenditures that it may deduct for 2023.

Problem 52 (depletion expense)

• Wes acquired a mineral interest during the year for $10,000,000. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined and 45,000 tons were sold for $12,000,000. Other related expenses amounted to $5,000,000. Assuming that the mineral depletion rate is 22%, calculate Wes's lowest taxable income after any depletion deductions.

Chapter 9

Discussion Question 15 (accountable employee plans, nonaccountable employee plans)

• What tax return reporting procedures must be followed by an employee under the following circumstances?

1. Expenses and reimbursements are equal under an accountable plan.
2. Reimbursements at the appropriate Federal per diem rate exceed expenses, and an adequate accounting is made to the employer.
3. Expenses exceed reimbursements under a nonaccountable plan.

Computational Exercise 16 (deductible transportation expenses)

• Lara uses the standard mileage method for determining auto expenses. During 2023, she used her car as follows: 9,000 miles for business, 2,000 miles for personal use, 2,500 miles for a move to a new job, 1,000 miles for charitable purposes, and 500 miles for medical visits. Presuming that all the mileage expenses are allowable (i.e., not subject to percentage limitations), what is Lara's deduction for:

1. Business?
2. Charitable?
3. Medical?

Computational Exercise 19 (education expenses)

• Samantha was recently employed by an accounting firm. During the year, she spends $2,500 for a CPA exam review course and begins working on a law degree in night school. Her law school expenses were $4,200 for tuition and $450 for books (which are not a requirement for enrollment in the course). Assuming no reimbursement, how much of these expenses can Samantha deduct?

Computational Exercise 21 (other business expenses)

• In 2023, the CEO of Crimson, Inc., entertains seven clients at a skybox in Memorial Stadium for a single athletic event during the year. Substantive business discussions occurred at various times during the event. The box costs $2,000 per event and seats 10 people. (The cost of a regular seat at Memorial ranges from $55 to $100.) Refreshments served during the event cost $700. How much of these costs may Crimson deduct?

Problem 40 (deduction for qualified business income)

• Ashley (a single taxpayer) is the owner of ABC LLC. The LLC (which reports as a sole proprietorship) generates QBI of $900,000 and is not a "specified services" business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ashley's taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ashley's QBI deduction for 2023?

Problem 42 (deduction for qualified business income)

• Scott and Laura are married and will file a joint tax return. Scott has a sole proprietorship (not a "specified services" business) that generates qualified business income of $300,000. The proprietorship pays W-2 wages of $40,000 and holds property with an unadjusted basis of $10,000. Laura is employed by a local school district. Their taxable income before the QBI deduction is $424,200 (this is also their modified taxable income).

1. Determine Scott and Laura's QBI deduction, taxable income, and tax liability for 2023.
2. After providing you with the original information in the problem, Scott finds out that he will be receiving a $6,000 bonus in December 2023 (increasing their taxable income before the QBI deduction by this amount). Redetermine Scott and Laura's QBI deduction, taxable income, and tax liability for 2023.
3. What is the marginal tax rate on Scott's bonus?

Chapter 10

Discussion Question 13 (medical expense deductions)

• Mike purchased four $100 tickets to a fund-raising dinner and dance sponsored by the public library, a qualified charitable organization. In its advertising for the event, the library indicated that the cost of the tickets would be deductible for Federal income tax purposes. Comment on the library's assertion.

Computational Exercise 20 (charitable contributions)

• Donna donates stock in Chipper Corporation to the American Red Cross on September 10, 2023. She purchased the stock for $18,100 on December 28, 2022, and it had a fair market value of $27,000 when she made the donation.

1. What is Donna's charitable contribution deduction?
2. Assume instead that the stock had a fair market value of $15,000 (rather than $27,000) when it was donated to the American Red Cross. What is Donna's charitable contribution deduction?
3. What documentation should you request from Donna to confirm the amount of her charitable contribution deduction?

Problem 26 (medical expenses)

• During 2023, Susan incurred and paid the following expenses for Beth (her daughter), Ed (her father), and herself:

Details

A balance sheet reads as follows. Surgery for Beth: $4,500. Red River Academy charges for Beth. Tuition: $5,100. Room, board, and other expenses: $4,800. Psychiatric treatment: $5,100. Doctor bills for Ed: $2,200. Prescription drugs for Susan, Beth, and Ed: $780. Insulin for Ed: $540. Nonprescription drugs for Susan, Beth, and Ed: $570. Charges at Heartland Nursing Home for Ed. Medical care: $5,000. Lodging: $2,700. Meals: $2,650.

• Beth qualifies as Susan's dependent, and Ed also would qualify except that he receives $7,400 of taxable retirement benefits from his former employer. Beth's psychiatrist recommended Red River Academy because of its small classes and specialized psychiatric treatment program that is needed to treat Beth's illness. Ed, who is a paraplegic and diabetic, entered Heartland in October. Heartland offers the type of care that he requires.
• Upon the recommendation of a physician, Susan has an air filtration system installed in her personal residence. She suffers from severe allergies. In connection with this equipment, Susan incurs and pays the following amounts during the year:

Filtration system and cost of installation $6,500

Increase in utility bills due to the system 700

Cost of certified appraisal 360

• The system has an estimated useful life of 10 years. The appraisal was to determine the value of Susan's residence with and without the system. The appraisal states that the system increased the value of Susan's residence by $2,200. Ignoring the AGI floor, what is the total of Susan's expenses that qualifies for the medical expense deduction?

Problem 32 (charitable contributions, tax deductions)

• This year, Nadia donates $4,000 to Eastern University's athletic department. The payment guarantees that Nadia will have preferred seating at football games near the 50-yard line. Assume that Nadia subsequently buys four $100 game tickets. How much can she deduct as a charitable contribution to the university's athletic department?

Problem 38 (medical expenses, charitable contributions, tax deductions)

• Evan is single and has AGI of $277,300 in 2023. His potential itemized deductions before any limitations for the year total $52,300 and consist of the following:

Medical expenses (before the 7.5%-of-AGI limitation) $31,000

Interest on home mortgage 8,700

State income taxes 9,500

Real estate taxes 3,600

Charitable contributions 2,500

• After all necessary adjustments are made, what is the amount of itemized deductions Evan may claim?