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Accounting 305 Exam 1

ACCOUNTING 305 

EXAM 1

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

1. Compare and contrast the income tax, the gift tax and the estate tax.

Income

Gift

Estate

Triggering event

Earning

Giving

Dying

Big Exemption

No

Yes

Yes

Aimed at recipient

Yes

No

No

Avoided by careful planning

No

Yes

Yes

Progressive

Yes

Not much

Not much

Frequency

Yearly

Transaction specific

Once

2. X applied for a credit card and received 50,000 frequent flyer miles.  When X gets 100,000 frequent flyer miles, he will get a free airplane ticket.  More miles will be earned by using his credit card, or by taking flights with one airline company.  Using the concepts of federal income tax, discuss possible tax treatments.

All inclusive income – they should be taxed.

Value may have assured as miles are amassed but until one gets to the level of the first free flight they are of no value on a cash basis.

Substance over form would say that miles are as good as currency as money, even if they allow the purchase of only one thing.

There is no specific legislation grace available for frequent flyer miles.

Taxing people before they use the miles seems to violate the realization concept. Most miles are never used for anything of value.

Airlines retain the right to charge the rules of redemption and therefore there is a claim of right issue.

Miles have been constructively received even if just credited to a taxpayer is ???

Biggest issue: where with all to pay

  1. Y, an accountant, owns shares in three companies, municipal bonds, a printer he uses to do tax returns for his clients and a valuable old-fashioned automobile.  He sells them all and joins a religious cult.  Discuss tax consequences.

Y needs to calculate proceeds – basis = realized gain or loss for all their assets because their sale is a taxable event. Sale of stock and bonds are capital assets and must be netted for application of the correct treatment. If the car was an investment (not used for personal purposes), it is a collectible and also capital, to be netted against stock and bond results. Losses or personal use items are not considered. The printer is a business asset and not capital, so its gain or loss is ordinary income.

                If Y donated the proceeds to the cult, Y may have a deduction.

  1. Z, age 70, is a retired accountant who has taken a position with a circus as a lion tamer.  In 2014, this circus spends most of the year touring cities in Asia.  He earns $100,000 from this activity and also receives $26,000 in social security benefits.  Discuss.

Z may be entitled to a foreign earned income exclusion, allowing him to exclude $97,600 of his income. Z has to qualify by being out of the USA for at least 330 out of 365 day consecutive day period. This will not cause Z’s marginal tax rate to go down however. If Z does not qualify, he can take the foreign income tax credit to deduct any taxes he paid to non-US governments. Z may not have to pay any taxes on his social security benefits if he does not have any other income, and the FEI exclusion is allowed to lower his AGI for these purposes. Would be helpful if Z was filing a MFJ return. However, Z has to pay taxes on 85% of $26,000 since the exclusion is added back to MAGI for these purposes.

  1. E works for a very expensive hotel.  Under his arrangement with his employer, E gets a salary plus anything the hotel sells for free.  The hotel proposes to end this arrangement, instead giving E his salary, generous life insurance coverage and absolutely free medical insurance.  Discuss tax elements of E’s decision.

Are E’s current fringe benefits taxable? Most of what hotels have is food and lodging. They seem to be mostly in kind, on premise. For the convenience of the hotel? Depends on what work E does and how important it is to keep him close by. Not everything would count. De minimus? Not in total. Working condition? Maybe. No additional cost? Some things, not others.

Alternative-medical insurance is tax free but life insurance is not above $50,000 face value. Must use tabled employer cost to report cost of providing coverage above $50,000 which presents a function of employee age.

  1. H rents commercial office space from J.  J has been experiencing financial difficulties and has not paid the rent to H for six months.  Last year, J made alterations to the office space (with H’s consent) to make the property more suitable to his needs.  J wants H to forgive the unpaid rent.  If J will not do this J offers to make more changes to the space that would make it more valuable for H instead of paying the back rent.  Discuss tax consequences. 

Last year’s alterations by J have no tax consequence for H since they were not done in lieu of rent payments. J can deduct their cost as business expenses.

Proposed alternatives would be in lieu of rent and would be income to H. May not be deductable by J unless they also facilitate J’s business.

Proposed forgiveness will be income to J if J is solvent, but is excludable if J is insolvent. No impact on H assuming H is a cash-basis taxpayer.

  1. There are many examples where the taxpayer’s purpose in spending money is very important to whether or not a deduction for that expenditure should be allowed.  How do we tell, for tax purposes, what people’s intentions might be?  Provide examples.

Business vs. personal can be indicated by the willingness to have expenses disproportionate to income over a prolonged period of time.

Business transactions usually conform to a market price. In other words, people tend to refuse to pay more than other people would pay, and to not pay more for something than the value that they can reasonably expect to receive in exchange.

If parties are related to each other we sometimes refuse to consider actual intentions and pretend that nothing happened. With relatives, intention is irrelevant.

  1. People spend large amounts of money making their homes comfortable and pretty.  Can any tax advantage be gained by doing this?

Sale of a personal residence at a gain can be excluded from taxable income up to a rather high level. Spending or the ??? that increases its market value will produce larger excludable gain when sold.

Vacation home spending produces larger rents which allow more expenditures on the vacation home to be deductable. But this might be compromised by excessive personal use that will reclassify expenses as non-deductable.

Spending on a home office might increase client traffic and work the same way as a vacation home. Qualification rules pertain to having a suitable occupation, and forsaking personal us of that space.

  1. P, age 70, and Q, age 20, are married.  On March 10, 2014, they purchase a joint annuity for $1,000,000 which obligates the insurance company to pay them $3,000 every month that either P or Q is alive.  P dies in late November 2017.  Q dies in late June 2089.  How much income should they report? 

YEAR

AMOUNT

2014

2000

2015

2,666.64

2017

2,666.64

2088

36,000.00

2089

18,000.00

                                2014:      1,000,000 = 2,777.77

                                                     360

3,000 – 2,777.77  = 222.22

                                222.22 x 9 = 2000

                                                2015:     222.22x 12 = 2,666.64

                                                2017:     same as 2015

                                                2088:     3,000 x 12 = 36,000 (exclusion is complete)

                                                2089:     3,000 x 6 = 18,000 (exclusion is complete, payments end midyear)

  1. R owns 1,000 shares of Google (originally bought for $80,000) and a $10,000 bond issued by the city of Cleveland purchased for $9,750 in 2013.  In 2014, she receives cash dividends from Google of $2,000 and $400 interest from Cleveland.  In 2015, she sells the bond for $9,000 after receiving $200 in interest.  Also in 2015, Google issues a 10% stock dividend at a time when Google was selling for $500 a share.  In 2016, Google issues a 2% stock dividend where shareholders could take cash of $5,000 instead.  R takes the stock.  Early in 2017, R sells half of her Google stock for $40,000. Fill in the following boxes:

YEAR

TAXABLE INCOME

INCOME TYPE

2014

2,000

Ordinary

2015

(975)

Capital

2016

5,000

Ordinary

2017

(2,500)

Capital

                                2017:     40,000 –  = (2,500)                                                                                

  1. M is a snake lover.  He goes into the wild, captures them and raises them.  He sells snakes to various buyers including Hollywood and religious groups.  In 2014, he had expenses of $50,000 (operating $30,000, property taxes $12,000, depreciation $8,000) and revenues of $40,000.  He also has a job driving a truck where he earned $70,000 in wages.  Provide the following information.  Assuming this is a hobby:

AGI

110,000

TAXABLE INCOME

72,200

DEDUCTABLE EXPENSES

37,800

                Assuming this is a business:

AGI

60,000

TAXABLE INCOME

60,000

                                HOBBY

                                                                70                                                                 +40                                                                 110

 40 -22

37.8 72.2

                                BUSINESS

70 +40 -50 60           AGI - 0 60           TI

  1.  T sells weapons to street gangs, an activity that is illegal in the USA.  In starting his business in January 2014, T incurred the following expenses:

Advertising                         $10,000

Purchasing inventory     $30,000

Bribing police not to arrest him                      $15,000

Training employees        $20,000

Travel to develop customers                           $17,000

Accounting fees                $ 7,000

How much can T deduct, if anything, in 2014?

                LEGAL START UP

                                10                                 20                                 17                                 7                                              55-54 = 1 (BONUS) + 54 – 1 = 4,533                                                                             15

ACCOUNTING 305                                                                         NAME_______________________

EXAM 1                                                                                                 10 FEBRUARY 2011

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. How does the payment of another tax bear upon the determination of the federal income tax?

                Employment Taxes

                                1) Deductable by Employer as Bus. Exp

                                2) Adds to income tax payment if paid by self-employed person

                State & Local Taxes (Income/Property)

                                1) Deductable by Business Taxpayers

                                2) Itemized Deduction for Non-Business Taxpayers

                Foreign Taxes paid create a credit against US income tax

                Gift Taxes

                                1) No impact for receipient, except upon resale

                                2) No impact for payer

Estate Tax – No Impact

Excise Tax – If bus exp, deductable

  1. Why is the entity concept important to the federal income tax?

                Whose income is taxed

                Protect progressive rates

                Who gets deductions that reduce the base that is taxed?

When people own entities, where is income taxed and what happens when resources flow from one to the other?

                Family units combine individuals because of the lack of any reasonable way to separate the commingled funds of husband and wife, and to recognize the complete dependence of children on parents.

  1. Why do people think that the constructive receipt doctrine conflicts with the claim of right doctrine, and why are they wrong?

                Constructive Receipt – a person on the cash bases is taxed on any money that they had access to, whether they have actually

                Claim of Right – a person is not taxed on money that they do not have a right to keep even if they are in possession of it

                Conflict – tax consequences of both violate the strict interpretation of what “cash basis” means, but in opposite ways

                Resolution – both are needed to prevent bizarre results, allow people to act rationally and avoid many amended returns

  1. B wants to know why a past court case is relevant to the tax research process and how much weight it should be given. Help her.

                The law should be the same for taxpayers that do the same thing or have the same transactions. If we were to start fresh every time something happened, we would develop too many inconsistencies. Therefore, stare decisions are used to predict what the tax outcomes will be

                Weight = f(position of the court) where higher courts have greater precedential weight.

                When courts are at the same level, weight = f(geographical proximity), where closer precedents are deemed more powerful. However more important than anything, Weight = f(factual similarity), where similar cases have more weight than dissimilar ones.

                Citator provides a secondary source to evaluate how respected past court cases has been.

  1. D, E and F all receive $15,000 Social Security benefits from the federal government. D includes none of this in her tax return. E includes $12,750 in his return. F includes $6,000 in her return. Explain how this could be possible.

                D, E, F have different taxable incomes, not taxable incomes or marital statuses.

                How much gets taxed requires a comparison of some fraction of the benefits with the wealth position of the taxpayer.

                D must have MAJI so low that it does not even cover the base amount for his filing status, throwing a zero into the lesser of formula

                E must have MAJI so high that it exceeds 85% of his benefits even after the base amount is subtracted

                Because less than half of F’s benefits are taxed she must be sufficiently poor (in terms of MAJI) so that not much is

  1. In 2011, R borrows $500,000 from his mother, S. R agrees to repay the loan in 10 years and pay S 1% interest every year. R could have borrowed the same amount from PNC Bank, but would have had to pay 8% interest. Discuss.

                If in a business context, imputation is more likely.

                Tax avoidance motive may matter.

                Did R use the $500,000 to create a financial asset?

                Did the asset produce income?

                Imputation requires that S pay income taxes on 8% x 1,000,000 , even if S only receives 1% x 1,000,000 from R

                Amount is too large for partial imputation therefore answer does not depend upon how much money R makes with the $500,000.

                Imputed interest amount is (.08-.01) x 500,000. This is also considered a gift to R.

                Depending on what R does with the 500,000, R might get a deduction for the 8% interest.

  1. T, who works as an accountant in Cleveland, has been asked by her employer to accept a long term transfer to the firm’s office in Portugal. Discuss the income tax dimensions of T’s decision.

                T will be exposed to a double tax on income earned in Portugal. This would make it financially difficult for T to take the assignment. Unless some tax relief can be found.

-  will T qualify for foreign earned income exclusion?

1) Must be out of country 330/365 days

                                2) Limited to $91,500

                                3) Does not change marginal tax rates

                                4) Disqualifies T from using foreign tax credit

                Use of foreign tax credit

                                1) Available if exclusion is not possible

                                2) Will be more advantageous if Portugal charges higher taxes

                                3) Based on taxes paid rather than on earnings

  1. P and Q receive valuable property from their investment. P’s investment was a municipal bond. Q’s investment was corporate stock. P has to pay taxes. Q does not have to pay taxes. Discuss.

                P sold the municipal bond at a gain. Capital gain treatment.

                                Perhaps the municipal bond was issued by a non-qualified governmental unit

                                                (outside the USA)

Q received a stock dividend (without cash option) or sold the stock for no gain or at a loss (proceeds < Q’s adjusted basis).

                S corp cash dividends are not taxed.

  1. When taxpayers have both business and non-business motives for an expense, how is this treated?

                Prorate if possible, based on usage  or size if an asset is acquired

                If an activity, impose rules that prevent losses due to mixed motive potential. Examples:

  • - hobby
  • - vacation homes
  • - home office deduction
  1. Y recently purchased a personal residence. Can he deduct some portion of its cost and upkeep on his income taxes?

                Home office deduction

                                - used for business, exclusively

                                - must see clients or customers at this location

                                - disqualified if an office elsewhere is provided/available

                                - must have business revenues from this activity

                                - cannot create a loss

                                - excess expenses can be carried over to subsequent years

  1. G has the following transactions in 2011

                                                                                Proceeds                                                       Buy             Sell

Transaction Type     Asset Type     (market value) Adjusted Basis         Date                Date     

                                Sale                        Stock                     $10,000                 $8,000                            8/1/09         4/7/11

                                Sale                        Inventory              20,000   15,000         2/10/09   2/25/11   

                                Sale                        Bonds                     4,000                     17,000          1/6/10    1/8/11

                                Purchase             Painting                  7,000                     6,000                            2/1/11        ---

                                Sale                        Gold                        11,000   6,000                           8/15/11   12/1/11

                What will be the impact (if any) on G’s tax liability in 2011 and thereafter?

                                Long term

                                                LTCG 2,000

                                                                                                LTCL 11,000

                                                LTCL 13,000

                                Short term

                                                STCG 5,000 (gold)

Net of Long term and Short Term = 6,000 LTCL

       
       

                                                Deduction =        6,000       =   3,000

                                                                     lo       3,000

                                                                Carryover

                                                                               

                                                                                LTCL 3,000

                                Ord. Income = 5,000 (inventory)

  1. H, who has a salary of $100,000, also collects seashells in his spare time, occasionally selling them to schools and jewelers. In 2011, he incurs expenses of $35,000 (travel $25,000, interest $2,000, taxes $1,000, wages $7,000) in this activity. His sales of seashells total $30,000. Demonstrate the impact of these facts on his income tax return, specifying what expenses (if any) are being deducted.

                                Salary                                    100,000

                                Hobby Reveue                  30,000

                                AGI                                                    130,000

                                Hobby Expenses

                                                Int.                         1,000

                                                Taxes                    2,000

                                                Other                    27,000

                                                                                30,000

                                                -2% AGI 2,600

                                                                                                - 27,400

                                                                Taxable Inc.        102,600

  1. W, age 70, purchases an annuity for $1,000,000 in December 2010. He also pays a $60 commission for this. Starting in March 2011, W will receive $10,000 every month for as long as either he or his wife (age 51) shall live. How much should be included in his 2011 taxable income, if anything?

                                1,000,000

                                +          60

                Cost       1,000,060

                10,000 x 10    –   1,000,060   x 10

                                                         310

                100,000    –    32,260   =   67,740

  1. 2011 was a rough year for M. In May, M got sick and ran up $50,000 in medical expenses. Luckily, there were paid for by his employer. In July, he got into a car accident that was the fault of the other driver. The received $20,000 to compensate him for his personal injuries. In October, because he could not pay his mortgage on his vacation home, the bank reduced the amount he owed $400,000 to $300,000. In December he made two gambling trips to Las Vegas, winning $10,000 on the first but losing $15,000 on the second. Luckily M still has many other assets and is not thinking about declaring bankruptcy. What should he include (if anything) in his AGI on his 2011 taxes?

                                Forgiveness        100,000

                                Gambling               10,000

                                AGI                        110,000

  1. V runs a chicken restaurant in Cleveland. In 2011, he is considering expanding to either San Diego or San Francisco, or both. He incurs $15,000 in expenses exploring the San Diego choice and $14,000 exploring the San Francisco one.
  2. A) How much can V deduct in 2011 if he chooses not to expand?
  3. B) How much can V deduct in 2011 if he chooses the San Francisco one only?
  4. C) How much can V deduct in 2011 if he rejects both these options but instead spends $52,000 investigating and creating a used clothing store in Cleveland that opened September 1, 2011?
  1. $29,000
  1. 15,000 + (5,000 + 9,000) = $20,600

                                                                            15

 
   
  1. 29,000 + 3,000 + 49,000 x 4

                                                                                180

                                                32,000 +1,089 = $33,089

ACCOUNTING 305                                                               NAME-----------------------

EXAM 1                                                                                 SEPTEMBER 24, 2009

ANSWER ALL QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. Why is Adjusted Gross Income important to the determination of tax liability?

The higher AGI is, the higher taxable income is likely to be, since the tax rates are progressive. This is the main effect.

A secondary effect is that many deductions from AGI are calculated based on AGI such that higher AGI makes it more difficult to claim deductions. AGI in other words acts as a floor, as in hobby expenses which are deductable to the extent they exceed 2% AGI. Other times, AGI acts as a cap for deductions or as a metric whereby qualification for deductions are measured.

  1. Discuss the recovery of capital construct.

Taxable income on a transaction is calculated as the extent to which the amount realized on the disposition exceeds the amount of capital invested by the taxpayer. In other words, invested capital is recovered on a tax free basis.

Capital is also considered “recovered” through deductions related to the property, such as depreciation or casualty.

  1. Explain the tax treatment of annuity payments made to a taxpayer.

Annuities are periodic payments received by a taxpayer in exchange for a lump sum invested with another party. Since each payment is composite of interest and the return of capital, analytic separation is necessary to isolate the taxable component. Show the formula.

Factors that are relevant:

      -type of annuity

      -amount invested

      -# of payments

      -life expectancy

 Calculate amount excluded. The balance is included

  -Consequence if failure to recover entire investment, or if payments continue after full recovery.

  1. Explain the tax consequences of transactions between ex-spouses.

The payer can either have a deduction or not, the receiver can have taxable income or not. This varies with the nature of the payment, as follows:

Type                            Payer                           Recipient                     Rationale

  1. Alimony                      deduction                    income                         like income
  2. Child support              no deduction               no income                    personal
  3. Property settlement     no deduction               no income                    return of capital

-efforts to disguise one as another will be unraveled

  1. X makes Y a loan, obligating Y to pay 2% interest. Discuss.

Is 2% a market rate of interest? If yes, x reports taxable income (unless x is a government unit.) Y may get a deduction for interest paid especially if this borrowing is business-related.

If  2%  is  not a market rate, this may call for the imputation of the interest up to the statutory rate.

                Relevant factors include:

            -tax avoidance motive

            -total loan amount (>$100,000?)

            -what y does with the money

            -income the loan principle makes (>$1,000?)

            -relationship between the parties

            -true intention

  1. Z sells illegal drugs for a livelihood. It is a full time activity. Explain Z’s tax situation.

The legal expenses of a business (even an illegal one) are deductible under the normal business expense deduction rules. However, a special rule applies to drug dealers limiting their deductions to cost of goods sold.

  1. Explain the contribution of judicial materials to tax research.

Judicial materials are court opinions resolving tax cases. These show the relevance of special facts to the outcome. Court cases also interpret the language of the code and the regulations.

Court cases are relevant because they are possible precedents to be followed in future cases.

Precedential weight can be mandatory (within circuit) or persuasive (outside circuit).

  1. During 2009, J sells five pieces of property. Explain possible tax consequences.

Sales produce gains or losses when sales proceeds are compared to adjusted basis. If capital assets, properties will be netted against each other. Net Gains are taxed at lower rates. Net losses are limited to $3,000 (individuals) or 0 (corporations). Non-deductible losses usually carry over. If properties are business ones, gain or loss is ordinary and therefore fully taxable or fully deductable.

  1. K is getting started in the horse business. In 2009, her expenses exceed her income from this activity. Luckily, she also has a job as an accountant. Discuss.

If this is a business (profit-motive) losses are fully deductable, assuming K is material participating. If this is a hobby, expenses are only deductable to the extent of income. Furthermore, hobby expenses are deductable from AGI and only to the extent that they exceed 2% of AGI. When there are excess hobby deductions, there is a priority list about which are deducted first.

  1. Q, age 65, receives money monthly from the federal government. Is it taxable?

If wages, taxable

If unemployment, taxable

If disability, taxable (most likely)

If social security, taxable consequence vary with the following factor

            -AGI

            -non-taxable income

            -filing status

            -base amounts

Here, taxpayer will never have to report more than 85% of benefits, and could treat it as entirely excludable.

ACCOUNTING 305                                                               NAME-----------------------

EXAM 1                                                                                 SEPTEMBER 24, 2009

ANSWER ALL QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. Why is Adjusted Gross Income important to the determination of tax liability?
  1. Discuss the recovery of capital construct.
  1. Explain the tax treatment of annuity payments made to a taxpayer.
  1. Explain the tax consequences of transactions between ex-spouses.
  1. X makes Y a loan, obligating Y to pay 2% interest. Discuss.
  1. Z sells illegal drugs for a livelihood. It is a full time activity. Explain Z’s tax situation.
  1. Explain the contribution of judicial materials to tax research.
  1. During 2009, J sells five pieces of property. Explain possible tax consequences.
  1. K is getting started in the horse business. In 2009, her expenses exceed her income from this activity. Luckily, she also has a job as an accountant. Discuss.
  1. Q, age 65, receives money monthly from the federal government. Is it taxable?

ACCOUNTING 305                                                             NAME_______________________

EXAM 1                                                                                 27 SEPTEMBER 2012

DO ANY TEN QUESTIONS. THEY ARE EQUALLY WEIGHTED.

  1. Although the US federal tax system is officially progressive, it has elements that are not progressive. Discuss.

Progressive

            Rates ↑ taxable income

            Many deductions are disallowed to high income taxpayers

            More generous exclusions are given to lower income taxpayers (SS)

Not progressive

            Capital gains tax rates

            Dividend tax rates

            Any deduction which is given equally to high income and low income taxpayers

  1. Tax practitioners pay large amounts of money to acquire tax services from organizations like CCH and RIA. Discuss the use and value of these sources.

Use & value

            “one stop shopping” for all materials that are otherwise all over the place

            Editorial guidance

            Checklists

            Materials weighed by value

            Some idea of enforcement patterns

            Topical indexes

            Kept up to date

            Citator

            Better computerized interface

Limits

            Not official – cannot be cited as authority

            Need to now key words or code sections to use effectively

  1. Abel lent money to Cain for ten years, charging a low rate of interest. Over the first three years, Cain made the required interest payment to Abel. In year four, Abel won the lottery and told Cain that Cain only had to pay 50% of the principal of the loan. Discuss tax consequences for Abel and Cain, if any.

Abel

            May have inputed interest to pay in years 1 – 3 if

                        Interest rate < statutory rate

                        Principle is large (>100,000)

                        Cain used money to purchase an income-generating asset

            Must pay higher on lottery winnings in year 4 – How much did Abel get?

Cain

            Might have taxable income if money from Abel created income

            Will have an interest deduc. If Abel has to report imputed interest

            Might have income from debt forgiveness

                        Unless insovlent

  1. Ester receives a $450 refund from the state of Ohio in 2012. Is this taxable?  Support your answer conceptually.

Yes, if Ester deducted state income taxes on 2011’s federal income tax return

  • Tax benefit rule

No, otherwise

  • Return of capital
  1. Herrod received $400,000 in the mail one day. Which tax concepts suggest that this is taxable? Which concepts suggest that it is not taxable income? Add more facts as needed.

Yes

  • Wherewithal to pay: Herrod has the $
  • All inclusive income: when in doubt, it is taxable

No

  • If this is a recovery of capital, Herrod will not have to pay on all or at least some of it
  • If claim of right doctrim It is holding it for somebody else
  1. Saul is an amateur inventor. In 2011, he spent two thousand hours and $10,000 trying to invent a new kitchen appliance. In 2012, a venture capitalist offered him $100,000 for this product. In 2013, he could have traded it for a horse worth $80,000. In 2014, he spends $20,000 to obtain a patent and starts manufacturing the product for sale. Assuming Saul’s time is worth $9 an hour, discuss tax consequences (focusing somewhat on what Saul could have done as well as what he did do).

2012 sale:

            $100,000 – 10,000 = 90,000

2013 trade:

            $80,000 – 10,000 = 70,000

2014 business

            $5,000 + (10 + 20 – 5)                                     15       

                        Or

            $5,000 + 20 – 15 = 6,000                                 15

                        +

                        $10,000                          useful life

No tax credit is given for time spent!

  1. Sampson receives $94,000 from an insurance company in settlement of a life insurance policy. Discuss possible tax treatments.

Death of a relative (friend) – personal $94,000 is excluded

Investment

            $94,000 – cost (investment) = included

Key person (partnership)

            $94,000 is excluded

  1. Peter, Paul and Mary all have physical injuries and cannot work. Peter had his leg broken in an accident at work. Paul had a heart attack at home. Mary was injured in a head-on automobile accident that was the fault of the other driver. They all have money coming in to them in 2012 from insurance companies resulting from these events. Discuss tax consequences assuming that none of their insurance money is reimbursement for medical expenses.

Peter: this is probably worker’s compensation, exclude

Paul: this is probable disability insurance

            If employer provided, exclude if it is not a wage substitute

            If Paul bought the policy, exclude

Mary: damages

            If compensatory, exclude

            If punitive, include

  1. Noah and his family love the water. They purchased a cottage on Macintosh Island so they can spend their summer vacations there, and not pay for hotels. Moses and his family never take vacations because Moses is so busy working. Moses is a fortune teller and has clients that come to the family’s home to purchase advice. Give Noah and Moses tax advice.

Noah: vacation home

            Extent of personal use? 14 day test

            Rental amount (# days) dictates whether it has to be reported

            Consequence of vacation home status

            Consequence of business status

Moses: home office deduction

            Exclusive use?

            Alternative office?

            Procations

            Loss prohibition rules

  1. Ruth, an entrepreneur, would like to deduct as much as she can for income tax purposes. She has heard that personal expenses cannot be deducted. Give her some ideas that would help her convert some personal expenses into business expenses that she can deduct.

Some possibilities

            1) home office deduction – must qualify regarding clients, exclusive use etc.

            2) “mixed” motive travel – business exploration must be real

            3) allow family members to be partial owners

            4) mixed use assets

            5) claim family members are employers

            6) include hobbies as part of the business model

  1. Sarah has an ownership interest in a business called Heavenly Haven. In 2012, the business transfers to her $6,000 worth of property. Is this taxable?

Yes –

            If business is a regular corporation, this is a dividend or a wage

- A dividend is taxed at lower rate for Sarah; no deduction for the corporation

No –

            If business is a partnership, S will have already paid taxes on this (if the $6,000 is income)

            If this is a stock dividend with no chance to receive cash

            If business is a sole proprietorship, transfer has no meaning

  1.  Judas received the following in 2012:

Amount or Fair Market Value

Cost (if any)

Details

$ 100,000

-

Salary, all earned in Mexico City *

$   10,000

120,000

Interest received **

$     7,000

-

Medical benefits ***

$     3,000

-

Parking benefits ***

$   13,000

8,000

Stock sale #

$   11,000

20,000

Painting sale #

Notes:

*            With the exception of one week Christmas and Easter vacations, Judas was in Mexico City the entirety of 2012. 

**        From the city of Cleveland at 8.33%

***      Fringe benefit paid by employer

#          Held long term as an investment

How much income should Judas report in 2012?

            100,000           Sal

            (3000)              Cap. Loss

            120                  Parking            3,000 – (12 x 240)

            - 95,100           FEI Exclusion

            2,020               AGI

  1.  The Lazarus Company had the following transaction in 2012:

Sale Proceeds

Cost

Type of Asset

$    10,000

   18,000

Stock *

$  103,000

 101,000

Bonds *

-

   54,000

Startup Expense

$      8,000

   16,000

Furniture **

$  400,000

 325,000

Inventory

-

 175,000

Machine ***

-

   30,000

Fines #

Notes:

*          Held as an investment by Lazarus

**        Recently purchased, distributed to employees as a fringe benefit

***      7 year useful life, straight line methods

#         Speeding tickets, health code violations         

How much can Lazarus deduct in 2012?

            0                      capital transactions, assuming this is a corp.

            325,000           inventory

            8,000               fringe benefits

            25,000             machine (depreciation)

            4,533               startup (5,000 – (54,000 – 50,000)) + 53,000 ÷ 15 –

            362,533

ACCOUNTING 305                                                       NAME______________________________

EXAM 1                                                                      26 SEPTEMBER  2013

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. A and B are discussing the federal income tax rates.  A says that a progressive rate structure has dysfunctional (bad) consequences.  B says that we do not really have a progressive rate structure.  Support both positions.

What’s bad about progressive rates:

  1. The same dollar of income is taxed at different rates (unfair).
  2. It creates great incentive to shift income from high marginal tax rates to low ones.
  3. High income taxpayers have less incentive to make more money (job creators!).
  4. Tax flight of high income taxpayers.

Not Progressive:

  1. Capital gains taxations rates
  2. Dividend rates
  3. Most people get the same deductions and exclusions
  1. Provide examples that contradict the wherewithal-to-pay concept of taxation.
  1. Imparted interest to lenders
  2. Forgiveness (discharge) of indebtedness
  3. Barter transactions
  4. Interest on original issue discount bonds
  5. Stock dividend (when cash was an option)
  6. Constructive receipt
  7. Accrual Method (in general)
  8. Bargain sale
  1. C, age 64, seeks your advice about whether she should elect to receive social security benefits upon reaching age 65 next year.  If she waits until she is 70, she will get larger benefits.  Part of her concern is whether these benefits will be taxed.  Discuss.

C should take benefits now if:

  1. C is not working.
  2. C does not have other forms of taxable income.
  3. C is married, filing jointly.
  4. C does not have tax free municipal bond interest.
  5. Time value of money matters.

C should not take benefits now if:

  1. C is working.
  2. C has interest or dividends or other forms of taxable income.
  3. C has municipal bonds.
  4. C is single.
  5. C expects to live longer.
  1. D wants to provide for his three daughters, X, Y and Z. She wants to::
    1. Give X $150,000 in cash.
    2. Pay Y’s living expenses up to $20,000 every year.
    3. Make Z an interest free loan of $400,000 to be repaid in 5 years.

      Discuss tax consequences (if any) of these choices.

  1. D would be liable for a gift tax of 150,000-13,000=137,000 unless special estate tax elections are made. X will not have income on getting the $150,000 but will if she invests it in most income producing vehicles.
  2. No tax consequences for D or Y unless Y is so old that this would be considered a gift.
  3. Imputed interest to D if Z uses the $400,000 to purchase an income-producing asset.
  1. F receives a stock dividend, based on his ownership of Apple Inc.  Discuss tax consequences when (a) the plan is announced to pay  the dividend, and the stock price increases by 5%, (b) he gets the shares in the mail, and (c)  he sells half of all his shares.

a.. No tax consequences.

  1. F will pay taxes only if F had the option to get cash instead. Ordinary dividend * 15% for amount of cash possible to get
  2. F will pay taxes on proceeds-basis (cost). If F did not have the option to get cash, basis= ½ F’s total cost. If F did have the option to get cash, F’s basis= ½ F’s total cost + ½ the taxes paid in b above. 

This is a capital gain, to be including in the netting process.

  1. H owns retail property that she rents to her grandson, J.  H also lends $200,000 to J so that J can remodel the storefront.  J fixed the space so that it is now worth $150,000 more than before the renovations.  J suddenly leaves town and abandons the project.  H forgives the loan because she loves her grandson.  Discuss tax issues.

H has no income upon J’s departure.  H may have more taxable income in the future if H is able to rent the property for more money.  H will also have taxable income in the future if the property sells for more than it would without the improvements.

J will have $200,000 taxable income on the discharge of indebtedness as long as J was solvent when the loan was forgiven.

H may have imparted interest if the loan was below market rate.

H cannot take a loss on the loan because it is a related party transaction.

  1. K has a business selling tacos from a food truck.  He also makes money by taking illegal bets from customers.  In his efforts to make more money, he travels to another city with his girlfriend to investigate expanding his business.  He decides, mostly because the police in that city cannot be bribed, he will not expand.  Discuss tax issues.

Even though K’s business has illegal elements, K can deduct expenses related to expansions.  K’s travel expenses are deductible fully in the year expended.  K can also deduct operational costs of the taco truck and the illegal betting, but cannot deduct any expenses such as bribes that are illegal.  K cannot deduct the extra costs of bringing his girlfriend on this trip, unless she performed services related to the evaluation of the expansion opportunity.

  1. M incurs the following start-up costs related to his new venture selling ice cream to tourists:
    1. Travel to evaluate this opportunity………………………..…...$16,000
    2. Payments to consultants…………………………….…..……..$10,000
    3. Advertising promoting the new venture …………………..…..$25,000
    4. Wages to employees (first year of operation)….………………..$20,000

Assuming all expenses are incurred in February 2013, what is the most M (a calendar year taxpayer) can deduct in 2013?

Startup costs = 16 + 10 + 25 = 51

$4000 First year bonus (5000-(51000-50000))

$2872.22 Amortization (51000-4000) = (47000/180)*11

            Wages ($20,000) fully deductible

  1. In her spare time, N makes jewelry and sells it at local arts festivals.  In 2013, she experienced the following results:
    1. Sales……………………………………………...$7,000
    2. Materials expense………………….…………....$10,000
    3. Booth rental expense……………………………..$2,000

She estimates that her own time put into this hobby was worth $8,000.  If N’s salary (from other activities) is $63,000, calculate her taxable income.

                        63,000 SAL

                        + 7,000 Hobby Rev

                        70,000 AGI

7,000 Allowable Hobby Expenses

-1,400 (2% AGI)

                        5,600 Hobby Expenses Deductible

                        64,400 Taxable income

  1. P had the following sales transactions in 2013:

Asset Type

Sale Date

Purchase Date

Proceeds

Cost

Stock

10/13/13

5/7/04

$7,000

$3,000

Corporate Bonds

5/9/13

5/7/12

$8,000

$19,000

Painting

6/15/13

6/1/13

$11,000

$3,000

Baseball

9/23/13

4/19/99

$2,000

$6,500

Municipal Bonds

1/3/13

5/10/12

$101,000

$106,000

The painting was acquired at a yard sale and sold to a professional art dealer.  The baseball was sold to P’s brother.  What tax consequences result from these events?

Long                                        Short

                        Stock 4000                                          8000 Painting

                        Bonds (11000)                                     (5000) M. Bonds

                                    (7000)                                      3000

                                                [(4000)]

                                                [3000]     = 3000 Deduction

                                                                        1000 LTCL C/O to next year

P’s brother might benefit from the (4500) disallowed loss upon sales to a non-related party.

  1. R (born 6/15/44) has two annuity contracts from different companies.  The first was purchased on 9/1/84 for $120,000.  It pays N $500 every month.  The second was purchased on 7/1/11 for $100,000 and pays N $600 every month.  How much should R include in his 2013 federal income, if any?

Proceeds:

500 – 120,000 / 360 =  $166.67 *12 = 2000

600 – 100,000 / 210 = 123.81 * 12 = 1485.71

                                                           

                                                            _______

                                                            $3485.71

  1. T works as a consultant.  Lately, he has worked almost exclusively on a South African client, and therefore has not spent much time in the USA.  Specifically, he went to SA on 12/1/12 and returned permanently on 6/30/14.  He returned to the US for family reasons for the last 20 days of  May 2013 and August 2013 and the last 10 days of May 2014.  T was paid $10,000 a month during this period.  How much tax should he include in his income for 2012, 2013, and 2014?

Exclusion evaluation: 2012-2013 does not work for the exclusion because T was in the USA for 40 days.  Works on 2013-2014 because only in USA for 30 days.

2012 income = 1* 10,000

2013 income = 12* 10,000 = 120,000

FEIE = 97,600 * 7/12 = 56,933

            120,000– 56,933 = 63,067

2014: 6* 10,000 = 60,000

FEIE = 97,600 * 5/12 = 40,667

60,000 – 40,667 = 19,333.

                               
   

NO

 
     
 
 

12/2012

 
 

12/13

 
 
 
 
   

YES

 
     
 
   

6/1/13

 
     

6/1/14

 
 

ACCOUNTING 305                                                               NAME______KEY_____________

EXAM 1                                                                                 SEPTEMBER 23, 2015

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. X hates to pay taxes, but has given up hope of avoiding the income tax. Provide X with advice about how he can avoid or minimize the amounts paid for other taxes.

Gift tax strategies:

  • Don’t make any gifts
  • Make gifts less than $14,000 per year, per donee
  • Consent to joint gifts with spouse less than $28,000 per year, per done
  • Utilized uniform life time credit for larger gifts

Estate tax strategies:

  • Don’t die
  • Spend all your assets before you die
  • Give your entire estate to your spouse
  • Give your entire estate to charity
  • Run up large debts before you die
  • Die with an estate less than the unused unified credit

Property tax strategies:

  • Don’t own any real estate
  • Live in a low taxing jurisdiction

Sales + Excise tax:

  • Don’t buy stuff that is taxed

Employment Taxes:

  • Don’t have a job, or a well-paying job
  1. Measuring income can be difficult. How do the income tax concepts identified in your textbook either help or hinder this measurement?

Helps:

-Realization – ignores temporary price fluctuations -Wherewithal to pay – refers to a recent transaction -Legislative grace – fewer things count, less measurements -Assignment of Income – easier to trace to proper party -Administration Convenience – some things can be ignored -Pay-as-you-go – Automatically measured by employer

Hinders:

-Recovery of capital – an offset against proceeds is needed -Arm’s length – losses disallowed have to be traced to any other taxpayer’s return -Substance > Form – form is always easier to measure -Method of Accounting – different rule application -All-inclusive income – more measurements needed -Tax-Benefit – more than a single year has to be considered

  1. Z just sold a capital asset. Describe how this transaction might influence Z’s tax liability
  • Basic measurement: Proceeds – (Adjusted Basis) = Gain/Loss
  • Need to net against all other capital transactions
  1. Basic Calculation as above for each one
  2. Classify as long term or short term based on holding period (one year)
  3. Net by holding period
  4. Net across holding periods if one is a gain and one is a loss
  • Consequences
  1. Net LT gain – qualifies for lower tax rate
  2. Net ST gains – add to ordinary income tax at ordinary rates
  3. Net LT losses or net ST losses becomes effectively a deduction = lesser of actual loss or $3,000
  1. B and C are both retired artists unrelated to each other, They both receive about $15,000 in social security payments in 2015. C goes to her accountant and wants to know why she  is paying a lot more taxes on her social security payment than B does. Explain it to her.

B pays less because:

  • B is married filing jointly and C is single
  • B has lower modified adjusted gross income than C
  • C has more tax exempt income than B

Extra points for specific cut points, examples

  1. D owns stock in IBM Inc. He reads in the Wall Street Journal that the company is thinking about offering shareholders a choice to receive a cash dividend or more IBM stock. D wants to know what the tax consequences will be this year if the company gives them (or does not give them) this choice in 2015.   Next year (2016), she will have to sell half of her IBM holdings to pay for her daughter’s wedding.  D also wants to know the tax consequences of this. Discuss.

2015: D reports taxable income on the cash dividend that D could have received. Makes no difference which D actually chooses.

2016: D is taxed as follows:

Stock Sale Proceeds – ½ (D’s adjusted stock basis)

Where adjusted stock basis = 1) D’s cost of the stock if D took a cash dividend in 2015

                                    2) D’s cost of the stock plus taxes paid in 2015

  1. E is injured while working on a construction site. Luckily, E’s employer provides E with medical insurance, disability insurance and life insurance. E has all hospital and doctor bills paid and also collects from the disability policy. E also collects $100,000 in damages by settling a lawsuit against the person that injured him. Discuss tax consequences.

Medical insurance – excluded payment

Disability insurance payments – excluded as long as they are not for lost wages

Damages – excluded as long as they are not for property lost by E (economic) or punitive against the defendant

Premiums paid to insurance companies by the employer:

  • Medical coverage – excluded
  • Disability coverage – excluded
  • Life insurance – excluded up to $50,000 face value. Rest taxed using table that uses extra face value and employee age.
  1. F wants to open a fancy restaurant. As such, he will have to incur many one-time expenses to get the business going. Describe F’s tax situation, under the assumption that F wishes to minimize his current year tax liability. 

Regular business expenses can be deducted in the current year but if they are startup costs they have to be prorated over the first 180 months of restaurant operation.

Startup costs include:

  • Investigation
  • Early advertising
  • Organizational (legal, accounting, etc.)
  • Initial employee training

F might qualify for bonus deduction of startup costs (accelerating the deduction out of the required amortization) in the first year of $5,000 as long as

  • F has at least that much in startup costs
  • F’s total startup costs are <$50,000

If F’s total startup costs are >$50,000, F loses one dollar of bonus for every dollar above $50,000.

  1. Juliet, married to Romeo, purchased an annuity on her own life for $360,000 when she was 48 years old on March 1, 2015. This will pay her $2,500 a month, starting on April 1, 2015.  She dies on May 30, 2048.  Answer the following:

2015 taxable income

$13,500

2025 taxable income

$18,000

2048 taxable income

$12,500

Assume instead that this annuity would continue to pay if either Romeo or Juliet were alive.  Assume also that Romeo was the same age as Juliet, and they both commit suicide on April 14 2020.

2015 taxable income

$14,597.56

(2,500-360,000/410) x 9

2016 taxable income

$19,463.40

(2,500 – 360,000/410) x 12

2020 taxable income

($299,951.15)

[(2,500 – 360,000/410) x 4] + [(878.05 x 61)-360,000]

  1. In 2015, property flows from the person letting go of it (the payor) to the person receiving it (the payee). In the Payee column, mark tax consequences as Included (Inc) or Excluded (Exc).  In the Payor column, mark tax consequences as deductible (Ded) or not deductible (Nd) assuming payor is an entity that pays taxes. For both columns, indicate the correct dollar amounts.

ITEM

PAYOR TAX CONSEQUENCES

PAYEE TAX CONSEQUENCES

Following the death of an uncle, a rare painting worth $1 million is transferred to a nephew.

ND - Estates

EXC: Inheritance

Promising student is awarded a “full-ride” education at Ohio State as long as the student plays football.

ND – No cash outflow

EXC: Scholarship

The Chairman of the Republican National Party loses $100,000 at a casino owned by Donald Trump.  Trump says “forget about it!” and eliminated the debt.

ND – No expense

INC: Forgiveness of debt

Allstate Insurance pays an woman $610,000, of which $600,000 is the face value of her deceased father‘s life insurance policy and $10,000 is accrued interest.

DED – Bus expenses

INC 10,000 EXC 600,000

Life insurance

Tenant changes the property to suit his business needs, improving the value of the property by $17,000 in lieu of $15,000 rent.

DOD – Bus expense

INC 15,000

Rent substitute

  1. Maxwell Smart, an undercover spy, spends most of his time in Russia.  He leaves the US on May 1, 2015 and returns on April 15, 2016.  He is paid $20,000 per month by the CIA.  He does not pay any tax in Russia because they don’t know he is there.  However, he is mysteriously killed on September 23, 2016.  Answer the following, assuming Maxwell wants to pay as little tax as possible and is single:

2015 AGI

139,200

2016 AGI

79,200

2015 marginal tax rate

33%

2016 marginal tax rate

28%

Number of days that he could have come back to the U.S. in late 2015 without changing your answers above

20 Days

240,000                            180,000 -100,800                           -100,800 139,200                            79,200

  1. The Triumph Company, an accrual taxpayer, incurs the following expenses in 2015.  Compute the appropriate tax deduction:

Note

ITEM

2015 DEDUCTION

1

Rent paid to father for store: $20,000

11,000

2

Fines paid to local governments: $5,000

0

3

Gasoline: $15,000

13,500

4

Replacement windows for store: $7,000

7,000

5

Life insurance premiums paid on CEO’s life: $5,000

0

6

Wages paid to the CEO’s personal driver: $25,000

25,000

7

Prepayment of next year’s lawn care expenses: $8,000

8,000

8

Lobbying costs: $50,000

0

9

Investment advice: $25,000

10,000

10

Vacation pay to employees: $23,000

20,500

1: Comparable property in this area rents for $11,000 2: Violations of excessive noise laws 3: For cars that were used 90% for business 4: Of this, $6,000 was for ones that were broken by teenagers, $1,000 was to replace one that was ugly.

5: Face value is $1 million dollars, with Triumph named as beneficiary

6: The CEO is too busy thinking about company strategy to drive himself 7: This is a recurring and non-material item 8: The company was successful in modifying pollution regulations that saved the company $2 million 9: $10,000 related to equity instruments, the rest pertains to State of Ohio bonds

10: $13,000 was paid to employees in 2015; $7,500 will be paid in January 2016. The rest rolls over to 2017.

  1. S has AGI of $100,000 in 2015.  In his spare time, S designs webpages but most of his friends think it is just an excuse for buying every new piece of computer software and hardware he can.  In 2015, he spends $15,000 for his computer work, twice as much as he receives from his customers.  S has been doing this for ten years and he has never taken in more money than he has spent.  Answer the following for S:

Customer revenue included in AGI

7,500

Computer expense deduction

5,350

Taxable income, based on these facts only

102,150

Computer expense deduction if S’s AGI was zero

7,500

If the IRS conceded that S has a business, recalculate AGI

92,500

If the IRS concedes that S has a business, recalculate taxable income, using these facts only

92,500

100,000 +7,500 107,500 AGI

7,500 -2,150 5,350 107,500 -5,350 102,150

ACCOUNTING 305                                                               NAME_________KEY

EXAM 1                                                                                 OCTOBER 4, 2016

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. The federal income is just one of many taxes imposed on individuals and businesses in the U.S. Compare the federal income tax to some of the other taxes.

FIT

Real Estate Tax

Estate Tax

Gift Tax

Payroll tax

What does it tax?

Income

FMV-realty

FMV – all assets

FMV – gift property

Wages

How often paid?

Yearly

Usually twice a year.

Once – upon death

Every time a large gift is made

Every pay period

Exclusion

No

Automatic

No

Yes.

5.45 million currently

$14,000 per year per donee

No

Who gets it and for what purpose?

Federal government for general purposes

Local government

Usually for local things like schools

Federal government for general purposes

Federal government for general purposes

Federal government- Social security program

Progressive?

Yes

Yes – on FMV terms

Yes – on FMV

Yes – on size of gift

No – made worse with a ceiling

  1. Discuss the entity concept as it relates to income tax.

This pertains to who is the proper taxpayer as it relates to responsibility for income

Applied to individuals:

  • Allows married taxpayers to file one return, if they want
  • Allows children to be considered part of their parents return, if they want

Applied to businesses

  • Corporations with common ownership may file a consolidated return
  • Corporation with common ownership must share the lower tax brackets
  • Income earned by the corporation is attributable to the corporation which is a distinct entity
  • Income earned by a partnership is pushed down to the owners, suggesting that the partnership is not a self-contained entity
  1. A taxpayer does not feel like the IRS has determined his tax liability correctly. Discuss his options for a more satisfactory outcome.

These steps taken in this order:

  • Hearing before the IRS
  • Go to court – choice of three trial level locations: U.S. Tax Court, Federal Courts of Claims, U.S. District Court
  • Appeal the court verdict to the U.S. Court of Appeals
  • Appeal the decision of U.S. Court of Appeals to the U.S. Supreme Court
  1. A taxpayer, age 67, receives money every month from the U.S. government. Discuss its taxation.

If it’s wages, it is taxable

If it’s interest, it is taxable

If it’s social security tax consequences will be determined by the following factors:

  • AGI
  • Tax exempt income
  • Marital status
  • Total benefits x 50%

Social Security is never taxed at more than 85% of its benefits and often at 50% for lower income taxpayers

  1. One business uses the cash method of accounting. Another business uses the accrual method of accounting. They both use the same tax preparer and that person says the two businesses will have the same tax consequences. Could she be correct?

Yes, the tax law forces everyone into a hybrid method of accounting for many transactions. Some points of confluence:

  • Constructive receipt
  • Interest
  • Prepayments

No, some specific rules exist for the two methods of accounting:

  • Inventories – accrual, matching
  • Commitment to pay plus follow through on payment within 2 ½ months
  • The general timing difference between the methods
  1. X’s rich uncle loans X a large sum of money. Because things are not going well for X, the uncle is thinking about making the repayment easier for X. Discuss tax issues.

If U reduces the rate of interest to a below market position, U might trigger the imputed interest rules, creating taxable income for U on money never paid to U by X. Factors:

  • Size of loan
  • What X is doing with the money
  • How much income X makes with the money

If U forgives the loan or any part of it, X may have taxable income if X is solvent. Depending on their relationship, this might be a gift from U to X in which case, the gift tax for U might be at issue. Loan forgiveness must exceed 14,000 per year.

U could employ X and let X “work off” the loan. This would create taxable income to X and a possible business deduction for U.

  1. A taxpayer often works at home and therefore believes that some of his home expenses should be deducted. Is he right?

Yes:

  • If he is seeing his clients at his house
  • As long as he keeps part of his home used exclusively as an office
  • If his employer requires him to work from home.

No:

  • If he has another office that he could use
  • If he does not have sufficient net profits from his work to offset home office expenses

If Yes:

  • Must prorate shared house expenses to calculate the business component, usually based on the relative square footage of the spaces
  • Special phone line rule
  • Disallowed office expenses due to insufficient business can carryover
  1.  X has the following stock transactions in 2016:

CHARACTER

AMOUNT

LTCL

10,000

STCG

4,000

LTCG

6,000

STCL

7,000

STCL

11,000

STCG

12,000

LTCG

20,000

STCL

15,000

LTCL

9,000

STCG

2,000

LTCG

5,000

STCL

8,000

                Answer these questions: 

How much will X report on his 2016 tax return?                                  __________(3,000)________________

What is the nature of this income (loss)?                                               ___________STCL_________________

What amount will be available for consideration on his 2017, if any?  ________8,000________________

What is the nature of that amount available for 2017?                     ___________STCL__________________

What would your answer to the first two questions be if the number at the top of the column had been 12,000?   ______________(3,000)               STCL_______________________________________________

L                              S (10,000)                4,000 6,000                     (7,000) (11,000)                12,000 20,000                   (15,000) (9,000)                  2,000 5,000                     (8,000)

  1.  J age 67 owns New York City bonds and an annuity.  The bonds were purchased for $300,000 ten years ago and pay 6% interest. These were sold in 2017.  The annuity was purchased eight years ago for $300,000 and pays $1,500 monthly to J.  J also receives $9,000 social security and is married.  J wins $30,000 by gambling in 2017.Complete the following table.

TRANSACTION

2016 TAX CONSEQUENCES

Bond interest

0

Annuity payments

6387.09*

Social security payments

0**

TRANSACTION

2017 TAX CONSEQUENCES

Sale of bonds in 2017 for $296,500

(3,000)

Social security payments

4,500***

* (300,000/310) = 967.74 1500-967.74=532.26 532.26 x 12 = 6387.09

**[0.5(18,000 + 6387.09 + 4,500)]-32,000 < 0

*** 0.5(6387.09 + 4,500 – 3,000 + 30,000) – 32,000 = 5,887.09                                 [5887.09]                                 lo[4,500     ]  =  4,500

  1.  On June 1, 2015, P is sent on a long-term work assignment to several countries in 2015-2016.  He was back in the U.S. on three occasions (July 1-20, 2015, December 20-30, 2015 and May 10-28, 2016). P returned to the US to stay on July 20, 2016.  P earned $200,000 in both 2015 and 2016, 70% of which is earned outside the U.S.   During his trip, P married for the first time on January 10, 2016. Answer the following questions:

2015 gross income

39,200

2016 gross income

38,700

Qualification period, if any

July 21, 2015 – July 20, 2016

2015 tax rate

0.28

2016 tax rate

0.25

140,000                                 140,000 -100,800                               -101,300 39,200                                   38,700 x 0.28                                    x 0.25

  1.  M is employed as an accountant and makes a $80,000 salary.  In 2016, his parents died leaving him a cottage on Lake Michigan worth $200,000.  Since he is too busy to go there much, he rented it on the website Airbnb.com, receiving a total of $10,000 in rent for a total of 160 days.  M held some great parties at the cottage when he was able to be there, but this was only 18 days in 2016.  M had the following expenses related to the cottage in 2016:

Painting                               $5,000

                                Depreciation                      $4,000

                                Maintenance                     $6,000

                                                Total                   $15,000

                                Calculate M’s AGI for 2016                           _______$90,000_________________________

                                Calculate M’s AGI for 2016 if M had collected $14,000 in rent                              _______94,000__________________________

Calculate M’s AGI in 2016 if M had only personally been at the cottage for 12 days                                                          _______76,517*_________________________

Which expense, if any, will carry over to 2017?                                                     _______Depreciation____________________

*                                    80,000                                    +10,000 15,000 x 160/178 = -13,483                                        76,517

  1. K began a business offering luxury hotel accommodations to dogs and cats in 2016.  She incurred the following special expenses getting started:  Advertising                                         $30,000 Consultants                                        $15,000 Cat/Dog Food                                    $10,000 Travel                                                    $  6,000

            Total                                         $61,000

                Assuming the business began in January,                 how much can K deduct in 2016?                               _________17,133*______________________

                Assuming the business began in December,                 how much can K deduct in 2016:                                _________14,261.11**___________________

                How much of the above costs count as                 start-up costs?                                                                  _________51,000_______________________                 How much of these expenses will K be able to deduct,                 in total, for all years?                                                      _________61,000_______________________

                Do businesses want expenses to be                 classified as start-up costs?                                          _________No__________________________

 55-51 = 4,000 47/15 = 3,133 *10,000 + 4,000 + 3,133 = 17,133 **47/180 = 261.11 10,000 + 4,000 + 261.11 = 14,261.11

ACCOUNTING 305                                                             NAME___KEY________________

EXAM 1                                                                                 2 OCTOBER  2017

ANSWER ANY 10 QUESTIONS. ESSAYS ARE WORTH 10 POINTS, PROBLEMS ARE WORTH 12 POINTS

  1.  X, an immigrant to the USA, finds it unbelievable that the government taxes people when they share their property with their relatives and after they die.  Explain to X why it is this way and why the situation is not as bad as he thinks.

Why:

-Need to protect the progressive tax structure by preventing income shifting -Income redistribution is attempted -Death is a nice ending point for all transactions and is also something nobody would do to avoid taxes

Not as bad:

-Gift tax has $14000 per year per donee exemption that may be doubled if H/W agree -Estate tax does not start until total estate value exceeds $5.4 million

-If annual gifts exceed the annual exclusion you still can avoid the gift ax as long as you are willing to let your estate tax exemption be reduced

-Property passed to a spouse is excluded from the taxable estate

  1. If the US Supreme Court invalidates the constructive receipt concept and the arm’s length concept, what would happen?

Constructive receipt:

  • People could easily “turn their backs on” things that have happened
  • Much would become subjective rather than objective
  • There would be more emphasis on actual events rather than what could have happened
  • Income would be taxable at a later point than it is now

Arm’s length:

  • There would be more intra-family transactions
  • There would be more losses on property sales
  1. In order to support your client’s tax position, you find a court case.  How would you know how much support it provides?

What court made the opinion?

  • Supreme Court trumps all others
  • Appellate courts > trial courts
  • Courts in your circuit > courts in other circuits
  • Court you are in > court you are not in
  • Judiciary > administrative

How close are the facts of the precedent to the facts of your case?

  • Closer > not so close
  • Important facts > unimportant facts
  • Same industry > different industry

How old is the case?

  • Newer > older
  • Older cases that have been followed by newer cases have more authority than those that have been questioned or distinguished
  • Older cases involving technologies no longer used have less weight
  1. Compare and contrast the taxation of people who received social security payments and people who receive annuity payments.

SS

A

Likely to be taxed on full amount received?

Never

Only if you live longer than expected

How can you make it tax free

Be very poor

You cannot

Can this result in a tax loss?

No

Yes – if you die early

Does your marital status matter

Yes, to the rate of inclusion

Only if it is a joint annuity by increasing the # expected payments

Does your other income matter?

Yes, to the rate of inclusion

No

Does your life expectancy matter?

No. Death might redirect benefits to spouse and/or children

Yes. If you don’t get your number of expected payments, you have a capital loss. If you exceed them, you have pure gain.

  1. G has a generous employer.  H has a very un-generous employer.  G and H are about the same age and want about the same things in life.  Compare their tax situations.

Wages:

            G is in a worse tax situation because his higher wage will increase his tax bracket causing G to pay taxes at a higher rate. G will also have a higher AGI which will have the effect of reducing G’s ability to take an deduction from AGI that is dependent upon AGI position.

Tax Free Fringe Benefits (wanted by G and H):

            G is in a better tax position because G will not have to pay taxes to get things that G wants like life insurance, medical insurance. H will have to use after tax money to but these things. However, their tax returns are identical.

Taxable Fringe Benefits (not wanted by G and H):

            G is in a worse position if G has to pay taxes for them anyway. Sometimes tax consequences are based on availability not actual usage. List examples.

  1. Does the US tax law help or hinder people who want to start their own business?

Helps:

            -If already in the business, deduction is allowed for decisions not to expand

      -All expenses related to investigation resulting in a new business will be eventually           deducted

      -All expenses that are not startup expenses can be deducted immediately (subject to          normal limitations)

      -Small businesses (<$50,000 startup costs) can accelerate startup cost deductions up to     $5,000 in first year

Hinders:

-Startup costs need to be amortized over 180 months -Expenses that produce long term assets have to be capitalized -Does not give people deductions when they investigate bad ideas on their way to a good idea

  1. The following people all receive governmental money. Compute includable income, if any.

PERSON

2017 AMOUNT

DETAILS

AMOUNT TAXABLE,

IF ANY

A

$10,000

Unemployment benefits from the State of Ohio received over 10 weeks

10,000

B

$  8,000

Worker’s Compensation for lost wages from the State of Ohio

0

C

$  6,000

Interest income from the State of Utah bonds paid to a resident of Ohio

0

D

$15,000

Proceeds from the sale of City of Cleveland bond, originally purchased for $13,000

2,000

E

$  4,000

Death benefit paid by the US military for combat loss of son

4,000

F

$  5,000

Social Security benefits.  F has AGI = $70,000 because F continues to be employed full-time

4,250

G

$  5,000

Social Security benefits.  G has AGI = 0, but municipal bond interest of $14,000

0

  1. 5000 x 0.85 = 4,250
  1. The following insurance-type transactions occurred.  Compute includable income, if any.

PERSON

STORY

2017 INCLUSION

A

A enjoys group term life insurance as a fringe benefit.  If A dies, his family gets $250,000.  A is only 30 years old; he doubts he will die.

192.00

B

In 1997, B took X’s life insurance policy in exchange for the $40,000 X owed to B.  B paid $1,000 in premiums every year thereafter.  X died late in 2017 and the insurance company paid B $90,000.

30,000

C

C dies on March 30, 2022 at the age of 92.  She never figured that she would live so long.  She had collected $1,000 a month since April 1975 from an insurance company based on the $300,000 she paid to them in January 1975.

12,000

D

D was a self-employed accountant who lost his vision in 2016.  He collected $5,000/month on a disability policy that D had purchased and paid premiums totaling $15,000.  Because D is blind, he has no clients any more.

0

E

E’s uncle died in 2016 leaving him $1,000,000.  E elects to be paid in ten installments every three months.  In addition, the insurance company agrees to pay 1% interest on the unpaid balance.  In 2017, E received payments three, four and five, evenly spaced out in time.

21,000

  1. 250 – 50 = 200 x 0.96 = 192.00
  2. 90,000 – (40,000 + (1,000 x 20)) = 30,000
  3. 300,000/360      but         564 > 360            so           1,000 x 3 = 3,000
  1. 1,000,000 – 200,000 = 800,000 x 0.01 = 8,000                                          = 700,000 x 0.01 = 7,000                                          = 600,000 x 0.01 = 6,000                                                                                 21,000
  1. This is a story about people and their investments.  Complete the missing information.

PERSON

DETAILS

2017 INCLUDABLE INCOME, IF ANY

A

Receives a stock dividend of 20 shares.  The Wall Street Journal values this at $100.

0

B

Buys property from his employer for $1,000 which is offered to the public for sale at $6,000.

5,000

C

In 2017, wins a trip to Bali on Wheel of Fortune (a televised game show in the US) valued at $30,000.  Due to illness, C is unable to go on the trip and it is forfeited in 2018.

30,000

D

Does his neighbor’s tax return (a service valued at $250) in exchange for various handyman services around D’s house performed by the neighbor.

250

E

Sells a painting to his sister for $700.  E originally bought it at a yard sale for $20 but never like it much.

680

F

Received a $700,000 loan from her mother to start her investment portfolio.  She would have had to pay a bank 10% interest for this loan, but her mother is only charging her 1%.

0

  1. 700 – 20 = 680
  1.  T works for a public accounting firm, mostly because he finds the work enjoyable and relaxing.  T’s family is rich, and  T does not need the money he gets from his job.  In 2016, T volunteers to go to Cuba to set up the firm’s first office in that country.  Here is his itinerary: 

Depart Cleveland

5/1/2016

Return to Cleveland

12/15/2016

Return to Cuba

12/31/2016

Return to Cleveland

3/25/2017

Return to Cuba

4/2/2017

Return to Cleveland

4/28/2017

Things did not go well because the Cubans thought T was a CIA agent.  On 1/1/18, T quits his job.  T also owns 15% of a French partnership and 25% of a US Corporation (DEF).  Here is his and his business’s results:

2016

2017

T’s SALARY

$  185,000

$  90,000

ABC PARTNERSHIP INCOME

$100,000

$200,000

DEF INC. INCOME

$  50,000

$  60,000

Complete the following under the assumption that T receives no money in 2017 except his salary and T is single and has no deductions.  He does get $10,000 from the partnership and $5,000 from the corporation on 1/1/18.

INCLUDABLE INCOME

TAX RATE

2016

97,900

33

2017

30,000

28

2018

5,000

10

2016                       2017                       2018                 185,000                 90,000                   0             - 102,100            - 90,000                 82,900                   0            + 15,000              + 30,000              + 5,000

INCOME                               97,900                   30,000                   5,000                                            + 102,100           + 90,000                                                 200,000                 120,000

TAX RATE                             33%                        28%                        10%

  1.  S lives in Cleveland but also owns a small apartment in New York City which he stays in when his work calls for him to be there [S has a crippling fear of hotels].  Because S is usually in Cleveland, he lists the apartment on Airbnb.com enabling him to rent the apartment to strangers.  The rents S gets never are enough to cover the costs of the apartment.  Answer the following independent questions, assuming that S’s AGI is $100,000..

(a).  If S rents the apartment for 130 days, how long can S personally occupy the apartment and deduct all of his expenses?                    

                                                                        _____________________________________

                                                                              14 DAYS                                                    _ 

(b). If S rents the apartment only for Fashion Week (11 days) and gets $2,000, how much of these rents are includable income?

                        _0___________________________________

(c). If S has rents of $15,000 and expenses of $25,000 (over a two month rental), what is S’s net income from the rental if during 2017 he was only in NYC for seven days in May? 

 _(10,000)_____________________________

(d). Assuming the same rents and expenses as in “(c)” above, but personal use by S during all of June, what type of expense is S least likely to be able to deduct? 

                                                                                    __DEPRECIATION_____________________

(e). Assuming the rental period in “(a)” above and the personal use of “(d)” above, how much can S deduct for property insurance that costs him $500?

                                                                        __406.25______________________________

  1. 500 x 130/(30 + 130) = 406.25
  1.  Q is in the business of counterfeiting money.  Although this is an illegal activity, Q is good at it and it is profitable.  He is thinking about expanding his operations by stealing people’s credit card numbers and using them to buy stuff that can be quickly sold.  Answer the following questions, considering each to be independent.

(a).  Assuming Q incurred $40,000 of legal startup costs for the counterfeiting business four years ago, what if anything can Q deduct this year?                       

                                                                        _$2,666.66 or $2,333.33_________________

(b). in “(a)” above, what would Q’s startup cost have to had been five years ago if Q gets no startup cost deduction this year?

                         < $5,000_____________________________

(c). If Q spends $8,000 exploring the credit card opportunity but decides not to do it, how much can Q deduct? 

 _0____________________________________

Why?  ______NO DECISION + NOT IN THAT BUSINESS____________________________

(d). If in 2017 Q’s counterfeiting business has three expenses:  costs of goods sold $150,000, payments for stolen property $45,000, and employees $70,000, how much can Q deduct? 

                                                                                    _150,000 + 70,000 = 220,000______________

(e). If Q wants to stay in this business, but does not want to get convicted of income tax evasion, what should he do?

 __SET UP DUMMY LEGAL BUSINESS SO THAT ALL INCOME CAN BE REPORTED__

                                                                       

ACCOUNTING 305                                                             NAME_______KEY____________

EXAM 1                                                                                 2 OCTOBER  2018

ANSWER ANY 10 QUESTIONS. ESSAYS ARE WORTH 10 POINTS, PROBLEMS ARE WORTH 12 POINTS

  1. B is a wealthy individual. C is a not so wealthy individual. B thinks that the income tax system in the US treats people differently according to their wealth. C believes it does not do that. Discuss.

B is correct

  • Marginal tax rates get higher with AGI
  • Many deductions are disallowed for high AGI taxpayers
  • Social security benefits are more likely to be excluded by low MAGI taxpayers

C is correct

  • No difference in tax rates for people with AGI of 500,000 and 50,000,000
  • Many deductions can be taken by all taxpayers
  • Most exclusions apply to all taxpayers
  1. Consider whether something that D receives might be included or excluded from her taxable income. How do the concepts discussed by Murphy & Higgins in their textbook (Chapter 2) help us decide?

Some examples:

  • Type of accounting method: inclusion/exclusion might be a result of when things are deemed to have happened if near the end of the year.
  • Exclusion might be the result of the transaction belonging to another entity.
  • Exclusion might occur because it represents the tax free recovery of capital.
  • Losses are excluded if the result of a transaction with a related party under the arm’s length concept
  1. E is trying to decide whether or not something he spent money on is an appropriate business deduction. E does not want to spend any money on figuring this out and does not have any friends that would know. What should E do?

Tax research under Section 162 of the IRC not clear? Read Treasury regulations under 1.162. Still not clear? Maybe the IRS has created some authority – check Revenue Ruling or Revenue Procedures. Not sure? Many cases have been determined by the courts on this issue. Find one with similar facts, not too old and in the same federal circuit. Best of all would be a Supreme Court case, because it is a mandatory precedent for all other courts. Too busy for all that – consult a tax service using the index under “business expense” or maybe read a article in a tax magazine/journal on the subject.

  1. F has one child G. F is getting old. F wants to arrange things so that G gets some of the F’s considerable wealth. F wants to minimize the family’s payment of taxes. Discuss strategies that F might use.

Possible Strategies

  • Buy a big life insurance policy. No benefit will be included by G upon F’s death.
  • Make yearly gifts to G. No gift tax for F up to 15k/yr. No inclusion for G.
  • Make interest free loans to G where G spends the money given. No imputed interest for F. No tax for G unless repayment is forgiven.
  • Die having done nothing but name G as the sole beneficiary. With an estate valued at less than 10.8 million, no estate tax on F. Never any tax on the inheritance for G.
  1. H has heard that not all income is taxed the same way, and that sometimes the deductibility of losses is limited. Can you tell H how to get the most favorable treatment for both outcomes?

Capital assets are all property except inventory, business realty and business personalty. When they are sold, they produce capital gain/loss.

Capital results are netted first by holding period (short ≤ 1 year, long > 1 year) and if different, across holding periods with net gain offsetting net losses.

Net long term capital gains are taxed at a reduced tax rate that varies according to AGI, but is always lower than normal ordinary income rates.

Net capital losses can only be deducted to the maximum of $3,000 (assuming H is not a corporation).

  1. J is in an occupation that has a high probability of physical injury. Therefore, J is worried about having enough money if an injury occurs. What can you tell J about the tax consequences of the money that J might arrange to get if J is injured and cannot work.

Accidental injury on the job 🡪 workers compensation awards are tax free (excludable).

Injury due to fault of somebody else 🡪 sue for damages. Compensatory damages are excludable if for pain/suffering (personal losses) but not for economic (property) losses.

Disability policy collection 🡪 excludable from income if J had purchased the policy. If an employer had purchased the policy, excludable to the extent it is not for lost wages.

Medical expenses might be paid for by an employee’s medical insurance program producing no taxable income for J.

  1. K quit her job because she hates commuting.  K will now work from home.  Provide K some tax advice about this arrangement.

K might qualify for a home office deduction, wherein some of the expenses related to home upkeep can be deducted.

            First, does K qualify? Yes if K is seeing clients at home. No, if K has been provided another office by an employer. Yes if K is required by that employer to work from home. In all cases, K must maintain a part of the home for exclusive business use. Failure to do so will disqualify K’s deduction, notwithstanding other qualifications.

            Second, how can K calculate the deduction? Home expenses can never exceed Revenues minus non-home business expenses. K can never report a loss due to the home office deduction. Any expense related to the business can be deducted 100%. Any total house deductions can be deducted in accordance with the business/total square foot ratio.

            K is better off tax-wise working at home because commuting expenses could generally not be deducted.

  1. In 2018, these elderly people had the following results. Complete the last column.

TAXPAYER

SOCIAL SECURITY RECEIVED

AGI

TAX EXEMPT INTEREST

MARITAL STATUS

SOCIAL SECURITY TAXABLE INCOME

A

36,000

400,000

0

Married

30,600

B

10,000

100,000

19,000

Single

8,500

C

5,000

20,000

0

Married

0

D

17,000

25,000

6,000

Married

0

E

24,000

15,000

30,000

Single

20,400

F

7,000

0

12,000

Single

0

  • .85 * 36,000 = 30,600
  • .85 * 10,000 = 8,500
  • .5 [20,000 + .5 (5,000) – 32,000] = 0
  • .85 [25,000 + 6,000 + .5 (17,000) – 44,000] = 0
  • .85 (24,000) = 20,400
  • .5 [12,000 + 0 + .5 (7,000) – 24,000] = 0
  1. M purchased 1,000 shares of the Pivotal Company in 2016 for $50,000.  In 2017, the stock split 2 for 1 and M received an additional 1,000 shares.  In 2018, M received a 50 cent per share dividend.  In 2019, the company offered shareholders an additional 25 cent per share dividend or an additional 100 shares of stock.  M took the stock dividend.  In 2020, M sells half of his shares for $60 each.  In 2021, after a stock market crash, M sells the rest of his shares for $30 each.  Provide tax consequences for M.

YEAR

INCLUDABLE INCOME (LOSS)

2016

0

2017

0

2018

1,000

2019

500

2020

37,750

2021

6,250

2020:

            63,000 – 25,250 = 37,750

2021: (1,050 * 30) – 25,250

            31,500 – 25,250 = 6,250

  1. Accord Inc. employs N (age 41).  Beginning in 2016, N is paid $240,000 in salary every year.  N is covered by a group term life insurance policy for $500,000 at the cost to Accord of $950.  Accord also pays for N’s parking, costing Accord $1,500 every year, and provides N with reimbursement of his gym membership costing $2,400 a year and his cell phone charges of $1,800.  Accord sends N to Vietnam on September 1, 2017 and N returns on August 1, 2018.  N pays income taxes of $25,000 to Vietnam.

How much income (if any) should N report for these items?

SALARY 2017

160,000

SALARY 2018

115,900

LIFE INSURANCE 2018

540

PARKING 2018

1,500

GYM MEMBERSHIP 2018

2,400

PHONE 2018

1,800

240,000 – [80,000] = 160,000  

            lo [102,000]

240,000 – [160,000] = 115,900

                 [104,100]

1.20 * (500 – 50) = 540

  1. P owns a grocery store in Cleveland.  P believes that people want better and more convenient food.  P can’t decide whether he should buy an upscale food store or a food truck from which P would sell fish tacos.  P spends $8,000 investigating each of these ideas, ultimately deciding to stay in the grocery store world by buying the upscale food store. In addition, P has to train new employees to better service very demanding customers at his new store.  P spends $19,000 on training in addition to his normal employee cost of $40,000.  P spends $30,000 advertising his new store before it opens.  P’s normal advertising costs are $2,000 a month which increase to $3,000 a month after the new store has opened.  Answer the following regarding P’s deductions for the current year. 

EXPENSE

DEDUCTION

Taco truck investigation

0

Grocery store investigation

533.33

Pre-opening advertising

20,000

Regular advertising

24,000 or more up to  36,000

Training expenses

1,266.67

Non-training wage expense

40,000

8,000

19,000

30,000

57,000 > 55,000

8,000 / 15 = 533.33

30,000 / 15 = 2,000

19,000 / 15 = 1266.67

  1. T is thinking about retiring in 2018, but does not know if she can afford to do so.  If T works the entire year, T will be unable to move to Colorado and teach disabled children how to ski.  Since T already owns a home in Colorado, T will have to rent this house to others if she does not move there.  P will receive $100/day for rent.  Total expenses on the Colorado home is $75/day (whether anyone is there or not).  If T does retire, she will charge the parents of these disabled children a total of $10,000 for ski lessons which will partly offset T’s skiing-related expenses of $17,000.  Provide the tax consequences of these possibilities. 

P’s PERSONAL USE OF THE COLORADO HOUSE

P’s RENTAL PERIOD OF THE COLORADO HOUSE

P’s TAXABLE INCOME, IF ANY

200 days

100 days

875

20 days

180 days

0

20 days

240 days

(1,527)

300 days

10 days

0

P’s SKI LESSONS:

If this is a business

(7,000)

If this is NOT a business

10,000

ACCOUNTING 305                                                 NAME___________KEY_____________

EXAM 1                                                                     OCTOBER 1, 2019

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1.  Describe the life and transactions of a person who paid high federal income tax but little/none other taxes. Describe a person who was just the opposite.

This person has many forms of taxable income such as investments that provide interest and dividends, selling stock/bonds/other property always at a gain. But no job or business (avoiding payroll and self-employment taxes). This person spends most of his money on things not subject to sales tax (like services). He gives to charity, not relatives, during life and at death, avoiding gift and estate taxes accordingly. Note: it is impossible to pay high federal income taxes and avoid state income taxes since the latter is “piggy-backed” on the former.

A person with a lot of inherited wealth and lives in a mansion, spending freely on goods; owns an unprofitable business paying employment and unemployment taxes for a lot of employees. Gives generously to relatives during life and has a lot left over at death, leaving it to children, not charity or a spouse.

  1. Imagine that the federal income tax was altered into a “flat” tax.  How would the authors of your textbook revise their treatment of the income tax concepts?

Flat tax – all taxpayers pay at the same rate. Rich still pay more, but not as extreme, since only the base increases as income rises.

Concepts no longer needed, sine both pertain to progressive rates:

            Assignment of income

            Entity concept

No impact on these:

            Accounting method

            Recover of capital

            Substance over form

            All-inclusive income

            Tax benefit rule

            Legislative grace

            Realization

            Arms-length

            Administrative convenience

            Substantive revision

            Ability to pay

            Business purpose

            Wherewithal to pay

  1. Convince me that past tax cases are important in the tax research process.

Statutes and regulations use words that are never defined precisely enough to fully explicate their meaning. Whether these apply to uncontemplated situations is therefore problematic cases. Can apply the law to specific facts that offer others an observation of interpretation. We view these as precedents to be followed in the future if a set of similar facts were to again appear. If close facts appear we would have to decide if their logic applies or not. If a lot of time has gone by, we have to decide if important contexts or technologies have changed so as to proceed in a way inconsistent with the precedent. Cases also come from courts that are hierarchically arrayed so that we can judge the power that they have over the judicial system in the future.

  1. Sometimes people have to pay taxes on wealth additions not represented by their receipt of cash.  Sometimes they don’t. Provide examples and details.

Most pay taxes:

Barter transactions

Employee receipt of property (or use of property) not covered by fringe benefits exclusions

Group term life insurance coverage >$50,000 face

Forgiveness of debt to person forgiven

Imparted interest for person making a low/no interest loan

Employer-paid parking for employee

Employer-paid moving expenses for employee

Free food and lodging that does not qualify for tax free treatment

Bargain purchases of property from employer

Does not have to pay taxes:

            De minimis gifts from employer

            Free food and lodgings that meet the exclusion requirements

            Forgiveness of debt when debtor is insolvent

            Inherited non-cash property

            Gifts of property other than cash

  1. If you use your time productively, you will pay more income taxes.  True or false?

True

  • You work at a job that pays you handsomely for your time
  • You have a hobby that generates revenue
  • You drive for Uber when you have nothing else to do (second job)
  • You work hard at school to get a well-paid job in the future
  • You own a business and figure out how to make it very profitable
  • You learn a lot about investing and do so wisely such that you receive dividends and interest

False

  • You attend a college that will enable you to get a good job in the future but don’t have to pay while you’re still in school
  • You raise food for your own consumption
  • You find tenants willing to pay rent for your vacation home for <14 days/year
  1. Your employer often tries to reduce the economic consequences to employees when bad things happen to his employees.  Discuss the tax consequences of these efforts. 

No tax consequences for employer

  1. Pay hospital/doctoral expenses through medical insurance
  2. Disability payments for “pain and suffering”
  3. Small (<50,000 face) life insurance on employees

            Tax consequences for employees

  1. Disability payments for lost wages
  2. Worker’s compensation policy maintained
  3. Generous life insurance on employees’ lives (>50,000)
  1. If we assume that business owners are rational, why does the tax law sometimes force them to deduct less than what they spend on trying to make their business more profitable? 

Capital items need to be depreciated whereby their cost is not fully deducted in the first year. Matching with revenue is the general reason.

Startup costs benefit all years of the business so they are amortized over 15 years if the acceleration opportunity for small business does not apply.

Illegal expenses are not allowed because this would reward the activities that we as a society want not to happen.

Lobbying has a slippery slope towards bribery.

  1. X (age 70) has the following items in 2019:

TYPE

AMOUNT

DETAIL

Social Security benefits

$30,000

These are spousal benefits from X’s dead wife

Dividends

$2,000

This is the fair market value of stock distributions

Annuity proceeds

$6,000

X paid $100,000 for the policy in 1985 which pays X $500 every month.

Interest

$5,000

From City of Cleveland bonds purchased for $100,000

Unemployment benefits

$8,000

Received due to a temporary layoff from X’s job

Awards

$300

X was “Employee of the Month” in July

Stock Proceeds

$7,000

In 2017, X bought the stock for $19,000.  He needs the money for his mother.

Wages

$100,000

This does not include pension benefits of $15,000 since X is not yet retired

Antique toy sale

$40,000

Purchased last month in France for $35,000

Loan interest

$0

On a $500,000 loan to his son so that the son could repay a gambling debt.  Bank interest would have been 10%

Auto Sale

$2,000

Used in X’s business, purchased in 2010 for $25,000  and is now fully depreciated

Compute X’s gross income.

                                                            ORDINARY                          CAPITAL

                        30,000 x .85 =             25,500                                     (12,000)

                                                            6,000                                       5,000              

                                                            8,000                                       (7,000)

                                                            100,000

                                                            2,000

                                                            (3,000)            

                                                            138,500

  1.  G (age 35) has the following transactions:

AMOUNT

DESCRIPTION

INCLUDABLE INCOME

$100,000

Collection of life insurance policy from dead friend that G almost married once

0

$3,000

Cost of parking at G’s job; G’s employer paid half of it

1500

$2,500

Tuition paid by G’s employer for an Emotional Intelligence course.

0

$1,250

Fair market value of food consumed by G at company cafeteria.  G’s employer does not mind G eating but does not encourage it

1250

$75,000

Face value of group term life insurance for G’s job that G never hopes to collect upon

27

$350,000

Face value of disability policy that G’s employer spends $50 per year to cover G

0

$30

Value of free ticket given to G by his employer to a Cleveland Browns pre-season football game

0

Fill in the blank cells.

                                                75 - 50 = 25

                                                25 x 1.08 = 27

  1. T works for the U.S. State Department.  In January 2018, T began work as the U.S. Ambassador to Ireland.  She is paid $140,000/year for her services and took up residence in Dublin at the U.S. Embassy on August 1, 2018.  She has returned to the U.S. for Christmas 2018 (Dec. 16-Jan. 1), Christmas 2019 (Dec. 24-Dec. 27) and the entire month of June 2019 (June 1-June 30).  She returned to the U.S. when she left the government on January 2, 2020 after it was discovered that she had taken $50,000 in illegal bribes in Ireland during 2019.  Answer the following, assuming T is married, using only the information provided:

GROSS INCOME (2018)          ______________$140,000_____________________

GROSS INCOME (2019)          ______________$84,100______________________

HIGHEST MARGINAL TAX RATE (2018)  _____________22%________________

HIGHEST MARGINAL TAX RATE (2019)  _____________24%________________

TESTING    330/365                                                TESTING

START         8/1/18                                                          Jan 2/19

                       7/31/19                                                        Jan 1/20

                                [NO]                           [YES]

                                   

   TAX RATE 2019

                                                INC:

  1. W is a professional thief.  He has made a living breaking into people’s houses, stealing their property and selling it.  Believing he is getting too well-known for the work, he is thinking about either moving to Hawaii where he could become a hotel room thief or moving to Cleveland where he would set up a phone scam operation (where he would call people and trick them into sending him money).  W spends $7,000 on a trip to Hawaii to check out hotels and $5,000 on a trip to Cleveland to see about the phone scam possibilities.  W decides to start up the Cleveland operation by buying some helpful information about phone scamming from the “dark web” for $16,000 and by paying off some dishonest police for $5,000.  He also rents an office for $3,000 a month on September 1 (paying six months in advance), trains employees at a $20,000 cost and pays normal wages of $60,000 during 2019.  He spends $3,000 on free food for his staff so that they will not take any breaks from the phones.   Complete the empty column.

EXPENSE

DEDUCTION

Hawaii trip

7000

Cleveland trip

1266.67

Information

16,000

Police payment

0

Rent

18,000

Training expenses

5066.67

Wages

60,000

Food

3000

START UP COSTS

           

ALLOWABLE ACCELERATION & SUBSEQUENT AMORTIZATION

                       

                   

  1. Q is an accountant, but she really wants to be an author.  She finds it impossible to write fiction when she has to work and deal with her family.  Therefore, she buys a cabin in the woods where she can get away from distractions and write a best seller.  Because she does not quit her accounting job, she can only write in the cabin when she is on vacation and on some long weekends.  The rest of the time, Q rents the cabin to hunters and nature lovers.  Unfortunately, Q has limited luck in selling anything she has written.  However, some people want to rent Q’s cabin when she is not there.  Q incurs a good deal of expenses (wi-fi, insurance, computer, taxes, paper, phone, food, house depreciation) related to the cabin.  Complete the following with a sentence or two: 

What might Q do to increase the chances of favorable tax treatments in the early years?

Do not stay more than 14 days or 10% of the rental period, whichever is greater.

Act serious about the writing. Send stuff out regularly for publication.

What if Q’s first significant writing revenue doesn’t happen for four or five years?  Does this change tax consequences? Why/why not?

No profit for 3/5 years might be a problem. “Rule of thumb” only.

Still might be a rental business, and many expenses could offset rents.

Comment on the tax treatment of Q’s expenses.

Only hope is the rental business side – so forget the paper & probably the computer as deductions.

If rents do not cover the other deductions, depreciation is likely to be disallowed.

What if Q gets mad about the mess that renters create and reduces greatly how much she rents the cabin, preferring that the cabin be unoccupied for most of the year. 

This reduces Q’s personal use allowance to 14 days, and will allocate more expenses to the personal and non-deductible part. No deduction if rental period is <14 days.

ACCOUNTING 305                                                             NAME____________KEY

EXAM 1                                                                                 1 OCTOBER 2020

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. X just arrived in the US. X asks you how the government collects taxes from people. Tell X what you know.
  • Income Tax
  • Filed by taxpayers once a year
  • Payroll withholdings during the year
  • Estimated taxes by the self-employed or unemployed with investment income
  • Property Tax
  • Bill sent to owner of real property once/twice a year
  • Payroll Tax (social security cut off)
  • Employer contributions all year long
  • Employee withholdings all year long
  • Sales tax/Excise tax
  • Collected by vendors upon transactions, remitted to government
  • Gift and Estate tax
  • Filed by taxpayers or their representatives only if events have occured
  1. How can a taxpayer recover his investment on a tax free basis?

As an offset against sale proceeds

SP – Adj Basis(COST) = gain/loss

A periodic depreciation deductions during period of ownership

Only for business assets

Various methods, different for realty and non-realty

Though insurance recoveries

Cost – insurance recovery = new adjusted basis.

  1. To what extent does the US tax law allow an individual to make sure that his/her family will have plenty of tax-free money if that individual can no longer earn money by working?
  • Life insurance proceeds an excludable from income tax
  • Inheritances are excludable for income tax
  • Gifts made by an individual are excludable from income tax by recipients
  • Social security benefits are never fully taxable. 85% maximum, maybe tax free
  • Annuity income allows for some of the cash inflows to escape from taxation every year until cost is fully recovered
  • Disability policy benefits- tax free if from a self-purchased policy or if for anything other than lost wages.
  1. Y is a very active investor. Sometimes Y buys stock and keeps it for many years. Other times Y changes his mind about an investment shortly after buying it, and sells it. Discuss tax issues.

Y will have capital assets and therefore sales will provide capital gains and losses All these results will have to be vetted to properly determine tax consequences.

Process

Net results by holding period. > 1 yr = LT and≤ 1 year = short term

  1. If one of these two is a gain and the other is a loss, net across holding period with the larger constituting the classification.
  1. If both are losses, or both are gains – no more netting.
  1. Impose rules.
  • LTCG – get lower rates
  • STCG – Taxed at ordinary rates
  • STCL – deduct losses on $3000 whichever is smaller
  • LTCL – deduct losses if there is any room under the $3000 after start TCLs were considered.
  1. You are considering two jobs. One comes with a free apartment to live in. The other comes with free parking near your office. Discuss tax issues.

If the apartment is:

  1. Not money to rent an apartment, but an actual apartment.
  2. In the same structure as where you will work
  3. Given to you to convenience the employer (keeping you close by!)
  4. Required that you take it as part of the job.

Then it is tax free, and therefore makes this job very attractive since rent is a large expense for most people who do not own.

If the parking space is on property owned by the employer, it is a tax-free fringe benefit, and might be an attractive part of the job if parking is expensive. If it is elsewhere and its cost is being paid by the employer, it is taxable and therefore less valuable to the employee.

                        Both can be discriminatory

  1. To what extent does the tax law change the way people operate their businesses?

Most of this influence would be felt on the things that business people spend money on because if it is not deductible, it is more expensive. But that which cannot be deducted as a business expense still might be worth doing. Therefore, any thing which is just slightly worth the money might not be when tax consequences are factored in.

These would include:

  1. Expenses that have to be capitalized – since most deductability will be delayed perhaps for years
  2. Illegal expenses or fine reimbursements to employees that are pursuing company advantage
  3. Lobbying costs
  4. Expenses that mostly benefit family members, or are otherwise excessively personally motivated.
  5. Expenses related to the ultimately unpursued contemplation of switching businesses.

Might also pursue income sources that are excluded from taxation, like municipal bonds.

Try harder to make money and act serious, if the activity is close to what others would call a hobby.

If the business is a small corporation, it might alter dividend strategy.

  1. How is tax research different and similar to researching any topic?

Different

  • Distinction between primary and secondary materials departs from the substantive persuasiveness of materials as the criteria of importance
  • Within primary material, must recognize the official power of the author and give what the most powerful say more prominence. A stupid thing said by a powerful author has importance.
  • Much more formal and precise

Similar

  • Need to establish the facts of the situation
  • Need to decide when the past is relevant and when it is not (have things changed?)
  • The basic logic of what is similar to the past and what is different from it

8   R purchased 800 shares of GM Inc. for $8,000 in 2013. In 2014, she receives a $400 cash dividend. In 2015, she receives a stock dividend of 100 shares. In 2016 she receives the choice of $400 or 100 shares and she chose to receive the stock. In 2017, R sells 600 shares for $3,000. In 2018, R sells the other 400 shares for $4,000. Complete the following table:

Year

R’s Taxable Income

2013

0

2014

400

2015

0

2016

400

2017

(2040)

2018

640

2017:               3000 – [ ( 8400 / 1000 ) x 600 ]  = (2040)

2018:               4000 – [ ( 8400 / 1000 ) x 400 ] = 640

  1. Q lives in Cleveland but spends some time every year in her winter home in Florida. When she is not there, she rents the Florida home to tourists. She has the following history:

Year

Rents

Rental Period (days)

Q’s use (days)

Expenses

2017

10,000

13

7

15,000

2018

15,000

99

10

20,000

2019

20,000

90

0

28,000

2020

25,000

160

15

30,000

Complete the following; assuming Q also has a salary of $100,000 in every year.

Allowable Deductions

Taxable Income

(limited to these facts

2017

0

100,000

2018

20,000 or 18,165

95,000 or 96,835

2019

28,000

92,000

2020

30,000 or 27,429

95,000 or 97,571

  1. In 2018, R had the following results from business and investment activity: Salary of $100,000, Partnership income from ABC: $30,000, Partnership losses from EFG: $15,000, Partnership losses from XYZ: $10,000. Over the next three years, the following results are made

110,000

120,000

130,000

(20,000)

(10,000)

70,000

60,000

40,000

(10,000)

(50,000)

(25,000)

(8,000)

Salary

 

ABC

 

EFG

 

XYZ

 

            On December 2021, R sells XYZ for $1,000,000. R had purchased it in 2018 for $1,100,000.

Compute taxable income for the following years,

105,000

100,000

125,000

179,000

Unknown or (3,000)

  1. G has the following transactions in 2020

                                                                                Proceeds                                  Buy                Sell

Transaction Type     Asset Type     (market value)           Cost             Date                Date        

                                Sale                        Stock                     $10,000                 $8,000            8/1/19         4/7/20

                                Sale                        Inventory              20,000                 15,000           2/10/19      2/25/20                

                                Sale                        Bonds                     4,000                     17,000          1/6/20        1/8/20

                                Purchase             Painting                  7,000                     6,000            2/1/11        ---

                                Sale                        Gold                        11,000                 6,000            12/15/11     8/1/20

                                Sale                        Car                            3,000                    30,000           1/2/18         5/6/20

                                Sale                        collection               45,000                 78,000          12/12/15    1/6/20

                                Sale                      machine                13,000                 27,000          3/4/16        6/3/20

                The machine was used in G’s business. What will be the impact (if any) on G’s tax liability in 2020 and thereafter?

                                LT:                                                          ST:                                                          ORD:

Gold                      5,000                                     Stock     2,000                                     Inv.        5,000

Collection            (33,000)                                Bonds   (13,000)                                Mach     (14,000)

                                (28,000)                                                (11,000)                                                (9,000)

                                                                2020                                                                      CARRYOVERS THEREAFTER

                                                Ord. Loss             (11,000)                                                STCL       (8,000)

                                                Cap. Loss             (3,000)                                                  LTCL       (28,000)

  1. W, age 70, purchases an annuity for $1,000,000 in December 2020. He also pays a $600 commission for this. Starting in March 2021, W will receive $10,000 every month for as long as either he or his wife (age 51) shall live. How much should be included in his 2021 taxable income, if anything?

 = 3227.74 MONTHLY EXCLUSION

10,000 – 3227.74 = 6,772.26 MONTHLY INCLUSION

6,772.26 x 10 = 67,722.60  INCLUSION FOR 2021

ACCOUNTING 305                                                               KEY

EXAM 1                                                                                 SEPTEMBER 16, 2010

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. Describe the structure of income tax rates. Comment on its consequences for some of the specific tax rules that you know about.

Rates are progressive. As taxable income increases, some of it (the last layer) is exposed to a higher rate.

Without progressive rates

  • It would be unnecessary to have imputed interest rules
  • There would be no need to prohibit the assignment of income
  • Filling status would not matter as much
  1. Income tax is paid for discrete periods of time, normally a year. How do we know what transactions belong in each period?

Tax payers have a “normal” accounting method either cash basis or accrual basis. Former counts transactions when they are settled (usually many cash exchanges). Latter does not depend on settlement but instead are deemed to happen when the obligation to settle (in the future) has been fixed.

Major exceptions:

  • Interest (almost always) is on the accrual method.
  • Prepaid expenses are sometimes put on a matching basis, ignoring settlement
  • Constructive Receipt
  • Claim of right
  • Hybrid with inventory on accrual, rest on cash
  1. Provide illustrations of the recovery of capital concept.

Calculation of gain/loss from sale of property.

Annuity exclusion ratio

Calculation of final loss at the end of annuity payments

Depreciation (recovery over many years)

Recovery from a property insurer, followed by a sale of the asset.

  1. When doing tax research, what are the differences between using a section of the Internal Revenue Code and a tax case as authority for the position you would like to take?

Code Section

  • Definition
  • Cover all jurisdictions
  • Cannot be signed
  • Attempts to cover all situations related to the phenomenon

Court Cases

  • Always context specific
  • Stronger in some jurisdictions than others (under Supreme Court case).
  • Easier to ignore or to qualify its importance
  • Always limited to its exact facts
  1. How are Social Security benefits taxed, if at all?

May be tax free or can be taxed up to 85% of their amount.

The lower (higher) your modified adjusted gross income the more (less) likely you are to have generous tax treatment.

There is a middle tier for middle income taxpayers where it is likely that half their benefits will be taxed.

Tax exempt interest counts for purposes of determining the income position of the taxpayer.

The breakpoints between the tiers are sensitive to marital status.

  1. X owns an interest in a partnership. Y owns shares in a corporation. Both entities are profitable and distribute 40% of their profits to their owners in 2010. Discuss the tax treatment for X and Y.

Partnership

            X pays taxes on his share of the entity’s income.

            X pays no taxes on the amount he receives (already paid).

Corporation

            Y says no taxes on corporate income (the corporation pays this).

            Y pays taxes on the money she receives from the corporation (taxed 15% in

                        2010).

  1. Explain the reason for the below-market loan tax rules. Are they inconsistent with the rules regarding the taxation of gifts?
  • They prevent taxpayers from shifting income to lower brackets.
  • They prevent taxpayers from disguising compensation to employees, and corporations from disguising dividends.
  • They do not apply to people making small loans.

__________________

They are not inconsistent with gifts (which are tax free) because gifts involve permanent change in ownership, therefore justifying tax exempt treatment. Also, tax consequences (if any) attach to the person giving up the money. Also, there is an effort to exempt small transactions.

  1. Comment upon the unique aspects of interest for tax purposes.
  • Interest is earned on an accrual system by everyone.
  • Interest that is disguised (changes in maturity value) is still interest.
  • Interest has completely opposite effects depending on who pays it to the taxpayer.
  • “Tax free” interest has the tendency to make other types of income more subject to tax.
  1. On a particular transaction, X receives no money or tangible property or service but still has to pay income tax. How can this be?
  • Interest-free loan made by X to somebody else.
  • Forgiveness of debt by somebody relieving X.
  • Life insurance premium paired by X’s employer when policy’s full value exceeds $50,000
  • The accrual basis of tax accounting.
  1. B gets free food at work. Discuss income tax consequences, if any.

If B’s food is

  • In kind
  • On employer’s premises, and
  • Provided for the convenience of B’s employer

It is Tax Free

            Otherwise, taxed at the FMV, unless it is de minimus.

  1. D purchased 1,000 shares of stock on 9/15/05 for $36,000. He received the following cash dividends

Year

Amount

2006

1,000

2007

1,500

2008

800

In 2009, he received 50 shares as a stock dividend, which he took instead of the $1,200 in cash that the company offered him. In 2010, he received another 30 shares as a stock dividend. In 2011, he sold 540 shares for $16,200. Record the proper amount of gross taxable income from these transactions, if any, for each year (2006-2011).

                        2006 – includes $1,000 in income

                        2007 – includes $1,500 in income

                        2008 – includes $800 in income

                        2009 – includes $1,200 in income

                        2010 – no tax consequences

                        2011 – calculate basis

                                    (36,000 + 1,200) = 37,000

                                                Half sold – half basis

                                                            37,000    = 18,600

                                                                2

                                                Gain equation

                                    16,200 -18,600 = (2,400)

  1. G had the following transactions in 2010:

Asset

Date Purchased

Date Sold

Proceeds

Cost

Personal Auto

10/1/05

9/1/10

10,000

29,000

Stock

9/6/09

5/4/10

11,000

8.000

Corporate Bonds

7/1/09

7/1/10

4,000

7,500

Municipal Bonds

4/8/01

9/30/10

17,000

20,000

Painting

2/24/09

3/23/10

16,000

500

Inventory

6/1/07

12/21/10

40,000

34,000

G’s painting was his own work. Compute and characterize the tax consequence for 2010. Aggregate as needed.

            Capital Gain Netting Process

            Stock               STCG  3000 

                                                                        STCL  500

            Corp Bonds     STCL  3500

                                                                                                                        LTCG 12,000

            Muni Bonds    LTCL  3000

                                                                        LTCG 12,500

            Painting           LTCG  15,500

            Ord. Income

            Inventory 6,000

* Loss on personal auto is not deductable

  1. In 2000, J and J’s husband purchased a joint annuity for $100,800. This entitled J to receive $500 a month (starting February 2000) for as long as either one of them is alive. When J was 60 years old and her husband was 75, he died on 11/24/10. Compute the amount, if any, which should be included in the couple’s income for 2010.

Combined Age in 2000

            (60 – 10) + (75 – 10) = 115

Exclusion Ratio

            100,800 = 280

                360

Inclusion

            500 – 280 = 220 x 12 = 2640

  1. M, a divorcee age 66, has received the following items in 2010: Interest from a bank account $1,000, interest from municipal bonds $30,000, lottery winning $15,000, Social Security benefits $8,000, gifts from children $3,000, share of partnership income $7,000, alimony $2,000, pension $4,000, life insurance proceeds $75,000. Compute gross income.

Interest                     $ 1,000

Lottery            15,000

Soc. Sec*        6,800

Part.                 7,000

Alimony          4,000

Pension            4,000

Total                $35,800          

* 8,000 x .85

  1. P, age 58, receives the following from her employer during 2010 (non-cash items are stated in fair market value)

$100,000 Salary

   10,000 medical insurance coverage

   15,000 pension plan contributions

    2,000 life insurance premiums for $90,000 coverage

    1,000 free food (gift certificates)

    3120 free parking (municipal lot)

    3,000 discounts on employer services (30% off)

       100 office supplies (taken without approval)

The salary was earned exclusively from the Madrid (Spain) office of the firm where P was located from December 10, 2009 to July 6, 2010 and from July 31, 2010 to December 8, 2010.    

Compute gross income, making all necessary assumptions explicit.

                                    100,000

                                  - 91, 500

                                                            = $8,500.00     Salary

(90 – 50) = 40 x 5.16 = 206.40          Life Ins. Premiums

                                    1,000.00          Food

3120 – 2760    = 360.00          Parking

                                    3000 – 3000 x2           = 1000.00        Discounts

                                                   3

                                                                        100.00             Office Supplies

                                                                        $11,166.40      Total

ACCOUNTING 305                                                       NAME_______Key___________________

EXAM 1                                                                      12 FEBRUARY 2015

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. If you were the supreme emperor of a new country and you wanted to create an income tax for the very first time, what criteria would be useful to determine whether you had put in a good tax?

From Adam Smith

  1. Economy
  2. Equality
  3. Certainty
  4. Convenience

(Each should be defined)

Also

  1. Pay as you go
  2. Capital recovery
  3. Realization
  1. Select any one tax currently used in the USA other than the income tax and tell me everything you know about it. Here are two possible choices:

Gift

         Charged to donors, not donee

         Excludable to extent of $14000 year per donee

        Also a life time credit exists, but if used it reduces the estate tax exclusion

        Based on FMV of property given, if not cash

Property taxes

         Collected by state/local government, not federal

         Rates vary widely (intra-state, inter-state)

         Revenues often used to support schools

         Usually realty not personalty

         Exemptions exist for older people, charitable organizations

  1. How do we know when something of value received by a person is taxable for income tax purposes?  How do we know when some expense incurred by a person is deductible for those same purposes? Receipt

The assumption is that all inflows are taxable, unless a specific exclusion exists. The all-inclusive income concept

Outflow

The assumption is that nothing is deductible unless a specific provision exists.       Legislation grace concept

Other criteria for receipts

  1. Amount of income
  2. Types of taxpayers
  3. Where income is earned

Other criteria for outflows

  1. Taxpayer motive
  2. Timing
  1. B receives no money or property from C.  However, as a result of a decision made by C, B has a new tax liability.  D receives no money or property from E, but as a result of a decision made by D, D has a new tax liability.  Discuss.

            C`s decision – some possibilities:

            Forgiveness Of debt owed by D

            Provision of more group term life insurance to D

            Using a large free loan from D, creates an asset rather than spending it.

            C is a judge and awards punitive damages to D

            D`s decision – some possibilities:

            Property improvements made in lieu of rental income

            Not to collect interest owed, creating imputed interest.

            D makes a large gift to E, owing gift tax

            D adopts accrual method and extend a service to E that E does not pay for

  1. F sells a variety of things on eBay.com in 2015.  How will this be treated on her tax return, if at all?

If F is in the business of selling these things, these items are inventory and therefore produce ordinary income.

If these things are business equipment for F`s business, they produce ordinary income.

Anything else including personal items, produces capital gains. No impact if asset is personal and it is sold at a loss

Always the calculation needed is: Revenue from sales – Cost = taxable income

  1. Describe the largest fringe benefits package that could be received by an employee that would create no taxable income. Life insurance with a face value of $50000, and no more

Medical expense insurance

Disability benefits reimbursing the exchange

Free parking where FMV < $245 month

Pension contribution for retirement

Free food, meeting the three-part test (provide detail)

Free lodging, meeting the four-part test (provide detail)

  1. K pays his mother’s real estate taxes and for his girlfriend’s cosmetic surgery. Can K deduct these expenses?  Any tax consequences for Mom and the girlfriend? Must establish a business relevance for these expenses. For example, Mom is employed as somebody that must occupy these premises to be available to customers. Perhaps girlfriend is an employee model advertising K’s goods. People are more likely to buy if girlfriend is pleasant to see.

K probably has made a gift to mom and the girlfriend. No income tax consequences for donness.

  1. In 2015, M (age 65) retired from his employment.  He received the following items:

Type

Amount

Taxable

Salary

$60,000

$60000

Social Security benefits

$10,000

$8500

Retirement Gift*

$1,560

$1160

Annuity Payment **

$5,000

$1667

Partnership cash  Distribution***

$7,000

$10000

* This was the fair market value of a clock, the only one the company has ever given

** In January 2000, M bought an annuity for $100,000.  He receives monthly income from it

*** M owns 20%.  The partnership made $50,000 in 2015.

10000*.85=8500

1560-400=1160

5000-100000/360*12]=

.20*50000=10000

  1. N owns and trains monkeys.  Because it is N’s passion in life, N is unconcerned about making money at this.  N makes most of his money as a self-employed tax preparer.  Here is N’s 2015 information:

Monkey revenue

$2,000

Non-monkey business income

$100,000

Monkey expenses

$9,000

Non-monkey deductions from AGI

$15,000

Non-money business expenses

$17,000

Municipal bond Interest income

$1,000

      Provide the following information

Taxable income

$84700

Monkey expenses eligible for deduction if N had no other income

$2000

Monkey expenses deductible

$300

Adjusted Gross Income

$85000

Capital gain (loss)

$0

               N-m Bus Inc     100000

             M Bus Rev           2000

                                        102000

                N-M Bus Exp   17000

               AGI                   85000

M Bus Exp        2000

2 % AGI            1700

Deductible M Exp               300

Taxable Income               84700

  1. Q works for an American consulting business and has been assigned to a project that requires her to be in Saudi Arabia for long periods of time.  In 2015, Q earns $120,000 from this job.  Q also earns $15,000 from investments in Saudi Arabia and sells City of Cleveland bonds for $20,000 (originally purchased in 2011 for $27,000). In 2015,  Q returned to the USA for December only.  Provide the following information: Includable income from salary___9100_____________________________ Includable income from SA investments___15,000________________________ Tax impact from Cleveland bonds_____________(3,000)__________________ Tax rate applied to Q’s income (assuming Q is single)_______25%_______________ Changes to the above answer, if any, had Q had returned to the USA on November 20th and stayed through the end of the year_  No FEI exclusion – first answer = 120,000___

120,000 – 100,800 = 9,100

20,000 – 27,000 =  = 3,000

  1. T owns 200 shares each of three stocks, all purchased on 1/1/14 and partially sold on 1/3/15.

NAME

PURCHASE PRICE

SALE PRICE

# SHARES SOLD

IBM

$8,000

$3,500

100

APPLE

$62,000

$20,000

50

MICROSOFT

$14,000

$10,000

150

During 2014, these stocks paid the following:

NAME

DIVIDEND TYPE

DIVIDEND AMOUNT

IBM

Cash

$400

APPLE

Stock

10 shares worth $3,000

MICROSOFT

Stock/cash

$600 or 20 shares.  T chose the shares

Complete the following:

NAME

ORDINARY INCOME

CAPITAL GAIN

IBM

400

(500)

APPLE

0

5238.10

MICROSOFT

600

(45.46)

                  3,500 – (8,000/2) = (500)

                        20, 0000 – (62,000 / 210 x 50) = 5,238.10

                        10,000 – [(14,000 + 600) / 220 x 150]

  1. X operates a frozen yogurt business in Cleveland.  Business is so good that he wants to establish other locations and think about other business ideas.  In 2015, he explores the following:

LOCATION

TYPE

EXPENSES

DECISION

Columbus

Frozen yogurt

$35,000

Yes

Cincinnati

Sports memorabilia

$18,000

Yes

Toledo

Bookstore

$20,000

No

Dayton

Frozen yogurt

$30,000

No

Complete the following:

Total expenses that would qualify for deduction

83,000

Deduction from proration of start-up expenses, if any, assuming businesses began on May 1

2,666.67

“Bonus” first year deduction of start-up expenses, if any

2,000

            35 + 18 + 30 = 83,000

            (18+35) – 2 = 51

                        51 x  = 2,266.67

            35 + 18 = 53

                        55 – 53 = 2

ACCOUNTING 305                                                             NAME______KEY____________

EXAM 1                                                                                 11  FEBRUARY  2016

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. J says that taxes in the USA are unfair because wealthy people have to pay much more. You think J is wrong. What would you say?

The income tax rates are progressive meaning that wealthy people multiply a higher base of taxable income times higher rates. However, they are not steeply progressive since the top rate is only about 3x the lowest rate. Also the fairness of this is based on the higher ability to pay that the wealthy have.

Other taxes are not progressive, meaning that the wealthy do not necessarily pay more. Sales tax is at the same rate for everyone, as are excise and other transfer taxes. Property taxes are based on the value of the property taxed, not the wealth of the owner. Gift and estate taxes provide generous deductions and thresholds, meaning that most of wealthy can escape them. The largest portion of payroll taxes are capped at a reasonable amount, meaning no tax beyond that point.

  1. Using any two tax concepts, make the case that they are logically not consistent.

The wherewithal to pay says that people should be taxed when they receive cash. This conflicts the return of capital which says maybe no tax when money received.

Substances over form would have us look into the reasons transactions occur or their real economic impacts, but related party rules gives no credit for transactions no matter what the substance might be.

  1. Why do we need to read previously decided tax cases?

Court cases clarify the meaning of the words used in statues like the Internal Revenue Code and the Treasury regulations.

Court cases allow the context of events to be given consequence, even if such is not included in the official laws.

Court cases serve as precedents. Under stare decisis, the law tries to be consistent with the past. Court cases tell us what past resolutions have been made, so that taxpayers can predict tax consequences.

  1. K receives no cash but has to pay income tax anyway. M gets cash but doesn’t have to pay taxes. Discuss.

K possibilities:

          Barter: services received for services rendered

          K loaned money and charged no interest – imputed

          K is a landlord whose tenant makes improvements in lieu of rent

          K has his loan forgiven and is not insolvent

M possibilities:

          Sale of capital asset for less than its cost and no other capital transactions

This is a real loan or a mistake or a deposit, all of which have to be repaid

Gift

Inheritance

Life insurance proceeds, non-business key person insurance proceeds

  1. Q receives $10,000 for a specific reason in 2016, and has to include an amount greater than zero but less than $10,000 in her tax returns for that year. Discuss.

Social security benefits

Annuity payments where Q has not recovered all of Q’s investment

Life insurance proceeds to which interest has been added for delay in payment

Revenues from a sale offset by costs

  1. What kind of compensation would you look for in a job if you wanted to minimize your tax liability?

Generous fringe benefits:

  • Medical service coverage
  • Life insurance coverage of $50,000
  • Disability coverage for anything except lost wages
  • Free food provided at work for the convenience of the employee
  • Free place to live, for convenience of employer, and required
  • Modest discounts on what the company sells
  • Free not-too-expensive parking or mass transit subsidy
  • Pension contributions
  1. In order to have something that customers want to pay you for, you spend money on it or related to it. Under what circumstances will you get no tax advantage out of this spending?
  • It is illegal to do this (e.g. bribes of police)
  • It is really personal, more than business
  • It is lobbying
  • You are in the illegal drug services and this is no CGS.
  • This is a fine or penalty
  • This is a hobby and you are a high AGI taxpayer
  1. G, a cash-basis single taxpayer, works for his brother H.  He receives the following in 2016.  Complete the last column.

TYPE

AMOUNT

NOTES

TAXABLE TO G

Salary

$100,000

G’s services are really worth only $75,000.

100,000

Stock

$10,000

H paid $8,000 for this in 2011.  G planned to sell it upon receipt but has not yet done so.

10,000

Free Food

$6,000

H is a “foodie” and he shares his passion for fine dining with these catered lunches

6,000

Discounts

$3,000

10% off retail price, but available only to executives like G.

3,000

Life Insurance Policy

$77,000

G is 30 years old and has worked for his brother all year.

25.92

Free Parking

$4,000

In a garage next to where G works.  G drives to work always and gives the attendant a $100 tip for Christmas.

1000

Free Magazines

$2,000

G takes them home from the office after they are out of date.

0

Loan

$300,000

G pays his brother 1% interest.  A bank would charge 10%.

0

Free use of athletic facilities

$2,500

These are at a nearby gym.  H believes that employees are more productive when fit.

2500

  1. E is an active investor.  During 2016, she has the following transactions and is wondering about tax consequences.  Complete the last column indicating how much E will have to include in her 2016 income tax return.

INFLOW AMOUNT

NATURE

HISTORY

TAXABLE CONSEQUENCE

  $7,000

Stock Sale

Purchased in 2008 for $16,000.

(3000)

$12,000

Annuity Receipts

Purchased in 2000 for $200,000 when E was 57 years old ($1,000 per month).

4258.08

  $2,000

Interest

From City of Cleveland bonds purchased for $25,000 in 1985.

0

$44,000

Bond Sale

Corporate bonds purchased at the end of 2015 for $41,500.

0

  $6,000

Dividends

From stock purchased in 2010 for $100,000.

6,000

$72,000

Bond Sale

State of Ohio bonds purchased in 2004 for $70,000

0

Capital:

7-16            = (9000) 44-41.5       = 2500 72-70          = 2000

                   (4500) -> (3000)

Annuity:

(20,000/310)         =645.16

1,000-645.16         = 354.84

                             x12 = 4258.08

  1. The following events happened to R over the last two years. Assume every year is a complete year.  Complete blanks with positive amounts for inclusions and negative amounts for deductions.

TAX IMPACT FOR R

EVENT

2014

2015  

    2016

In 2014, R rents property to S for $5,000 a month.  In 2015, R and S agree to reduce the rent to $4,000 because S is going to fix the property.  In 2016, R sells the property for $10,000 more than he would have received due to the improvements S made.

60,000

60,000

60,000 (ORD)

(2,000)(CAP)

R receives a 10 share stock dividend in 2014.  R could have received $10,000 in cash, instead he took the stock.  R originally purchased 100 shares for $990,000.  In 2015, R sells 40 shares for $369,000.  In 2016, R sells all remaining stock for $600,000.

10,000

5,364

54,545

In 2014, R borrowed $1 million from Donald Trump in 2010 for his business at 10% interest.  On 1/1/15, Donald says that R only has to pay back $800,000.  On 1/1/16 Donald says don’t bother paying anything back.  R has plenty of assets but it always helps to have friends.

(100,000)

200,000

(80,000)

800,000

369,000 – ((990,000+10,000)/110 x 40) = 5364

600,000 – ((990,000 +10,000)/110 x 60) = 54,545

  1. W owns an apartment in New York City. Sometimes she rents her apartment through Airbnb.com to people who want to visit the  City during the year.  In 2016, W has the following results for 200 rental days (W occupied the apartment the rest of the time). Calculate W’s taxable income for 2016.

TYPE

AMOUNT

DETAILS

Maintenance costs

    $5,000

Incurred regularly over the year

Rents

  $12,000

Net of Airbnb charges of $1,000.

Other income

$100,000

W is an airline pilot.  This is wages.

Property taxes

  $10,000

Paid to New York City for the apartment

Depreciation

  $13,000

On apartment

100,000 SAL 12,000  RENTS

112,000 AGI 9760     

102,240 TI

5,000 10,000 13,000

28,000 x (200/366) = 15,300 -> 12,000                                                  -2,240 = 9760

  1. P operates a business and incurs the following expenses. Complete the last column for P’s 2016 tax return.

TYPE

AMOUNT

DETAILS

DEDUCTION

Salaries

$200,000

Total payroll includes $7,000 to P’s spouse who performs no service for the business but had the idea for the business and owns the property the business uses.

193,000

Investigation Expenses

 $15,000

Total expenses for a trip to Cincinnati to see if P should set up a branch office.  P decided not to do this.

15,000

Computer repairs

   $5,000

Fixing the motherboard after P spilled beer into the server during an office party.

5,000

Start-up costs

$70,000

These were paid in 2005 when the business began.

4,667

Taxes

  $7,000

Local property taxes including late charges of $300.

6,700

70,000/15 = 4,667

ACCOUNTING 305                                                             NAME______KEY_____________

EXAM 1                                                                                 15  FEBRUARY  2017

ANSWER ANY 10 QUESTIONS. ESSAYS ARE WORTH 10 POINTS, PROBLEMS ARE WORTH 12 POINTS

  1. Consider the federal income tax, property taxes and the estate tax. What similarities does the income tax have with the other taxes? What differences?

Federal Income Tax

Property Tax

Estate Tax

Differences

Frequency of collection

Yearly

Semi-annual

Once

Basis

Yearly transactions

FMV

FMV

Many are exempted

No

Yes

Yes

Similarities:

Audited

Yes

Yes

Yes

More for people who own things

Yes

Yes

Yes

Mixed

Progressive

Yes

No

Yes

Paid to who

Federal government

State + local government

Federal government

  1. Consider the all-inclusive income concept and the legislative grace concept. How do other tax concepts relate to these two?

Illustrate the power and scope of all-inclusiveness income

            Assignment of income

            Wherewithal to pay

            Constructive receipt

            Annual accounting method

            Entity

            Administrative convenience

Illustrate legislative grace or not

            Allow Length – loss is disallowed

            Recovery of capital

            Realization

            Business Purpose

Not related

            Pay as you go

            Ability to pay

  1. Select any tax provision you wish. Illustrate how court cases might help us better appreciate the meaning of that provision.

Prizes and Awards are taxable unless given for civic achievement – cases decide what civic achievement might be

Unreasonable compensation cannot be deducted – cases can show what comparisons are appropriate to determine what is reasonable

Deducting business exploration expenses is allowed when somebody decides not to pursue the opportunity if the taxpayer is already in that business/trade – cases could help us identif what is the same business and what is not

  1. Your friend has an opportunity to go on a foreign assignment for her job. She asks you about the tax consequences. Tell her what you know.

Foreign earned income can be excluded from income

  • Up to $101,300 in 2016
  • Must be earned from services rendered abroad
  • While earning these services, taxpayer must be away from the U.S., a minimum of 330 out of any consecutive 365-day period
  • The exclusion will not lower the tax rate to be applied to non-excluded income
  • If the qualifying period stretches across > 1 year the $101,300 can be deducted for each year
  • Does not change based upon foreign taxes paid.

If the Foreign Earned Income exclusion is not taken, the taxpayer can claim a credit for foreign taxes paid.

  • Not subject to $ limitation
  • Not limited to earned income
  1. X, age 64, will start receiving social security benefits next year. Help X avoid paying too much taxes on this money by providing some ideas that X could use.
  • Avoid anything that would increase adjusted gross income. Like employment.
  • Do not invest in municipal bonds. Although interest on these bonds are not taxable, they are considered when calculating X’s wealth position. Higher wealth means more of a chance social security benefits will be taxed.
  • Get married. This increases the base amounts that will be subtracted in determination of X’s wealth position.
  • Defer benefits until you are poorer (X stops working or spends down investments)
  1.  
  1. You purchase a stock in January 2016. Why is there an important difference between selling it in December 2016 or in February 2017?

Selling it in December 2016 produces a short term transaction. If this is a gain, and there are no other capital transactions or previous carryovers, this will result in ordinary gain (taxed at higher rates). Selling it in February means it is long term. If this is a loss, it is still deductible (up to $3,000) whether short or long term if it is by itself during that tax year. The netting process may be effected by its classification if there are other transactions.

Selling in 2016 means consequences for 2016 tax return. Gain-> more taxes, Loss-> less taxes. Selling in 2017 pushes all tax consequences into 2017. A two month wait differs tax consequences for 12 months.

  1. Why do we need a rule that says your business expenses cannot be deducted if they are unnecessarily high? Provide examples of disallowed expenses for this reason.

Unnecessarily high business expenses may indicate a personal motivation that would be inconsistent with the expense being a business-motivated expenditure. Taxpayers cannot deduct their personal living costs. Unreasonably high business expenses may also indicate an effort to shift income from where it is highly taxed to where it is less taxed. Allowing this would be inconsistent with the progressive nature of the income tax.

Examples:

  • Hobby where expenses > revenues
  • High compensation paid to infant son
  • Large amount of rent paid by a business to the owner’s son
  1. A, B, and C are all individual tax payers.  In addition to 2017 amounts shown in their columns, each sold a car used in their business in December 2017 for $10,000.  It had been purchased in April 2015 for $40,000 and had had $25.000 depreciation taken on it by the taxpayer.  Complete the missing cells.

A

B

C

SALARY

440,000

300,000

500,000

NET LTCG

50,000

43,000

13,000

NET STCL

61,000

50,000

36,000

NET STCL

30,000

61,000

50,000

NET STCG

82,000

45,000

61,000

INCOME TAXED AT 39.6%

440-5+21=456

300-5=295

500-5=495

INCOME TAXED AT 20%

20

0

0

CAPITAL DEDUCTION, IF ANY

0

3

3

CARRYOVER AMOUNT AND TYPE, IF ANY

0

18 LTCL

2 STCL

12 LTCL

{LTCG: 50      } – LTCG: 20 {LTCL: 30      } {STCL: 61      } – STCG: 21 {STCG: 82      }

{43} – (18) {61} {50} – (5) + 3 = (2) {45}

13        \           (37)     \ (50)      /                         \         (12)

36        \           25        / 61        /

  1.  A, B, and C are all annuity investors.  Details about their investments are provided below.  Complete the missing cells.

A

B

C

INITIAL COST

500,000

600,000

700,000

AGE AT ACQUISITION

45

57

62*

MONTHLY INCOME

1,500

2,600

1,800

NUMBER OF PAYMENTS RECEIVED BEFORE 2017

100

320

300

2017 TAXABLE INCOME, IF ANY

1333.33

31,200

1112

AMOUNT RECEIVED IN 2017 EXCLUDED FROM TAXATION, IF ANY

16,667.00

0

20,488

*This is a joint annuity with C’s spouse (age 47 at acquisition)

500,000/360 = 1388                            600,000/310 = 1935                            700,000/410 = 1707

1500-1388                                           2600-1935                                           1800-1707

$111.11 x 12                                       664.51 x 12                                         93 x 12

  1.  Y owns the following investments that generate the following inflows in 2017.  Complete the last column. Treat each item independently. 

TYPE

PURCHASED

2017 TRANSACTION

2017 TAXABLE INCOME

State of Vermont bonds

$100,000 in 2010

Paid 3% interest

0

City of Cleveland bonds

$80,000 in 2008

Sold for $65,000

(15,000) or

(3,000)

GM Stock

$60,000 in 2012

Dividend of $600

600

Ford Stock

$40,000 (800 shares) in 2003

25 stock dividend

0

Loan to X’s son. Son invested the proceeds

$300,000 in 2016 (no interest)

$5,000 repayment from son

30,000

Loan to X’s daughter.  Daughter invested the proceeds

$200,000 in 2015 (10% interest)*

Repayment of $4,000 forgiven

0

Apartment

$500,000 in 2010

Rent $10,000 received, instead of $15,000 due because tenant is fixing the property at the landlord’s request

15,000

*This is the market rate of interest for all loans.

  1.  E and F are hotel employees.  Complete the column indicating their taxable income on elements of their total compensation.

E

F

Salary of $60,000

60,000

60,000

Life Insurance (1)

0.72 x 60 = 43.20

162.00 = 1.08 x 150

Free parking (2)

300-255 = 45 x 12 = 540

600

Medical insurance (3)

0

0

Guest Room (4)

0

7,000

Tuition (5)

6,000 - 5,250 = 750

0

  • E has a policy with a $110,000 face value.  F’s policy has $200,000 face value.  E is 25 years old, F is 35 years old.
  • In 2017, the insurance cost the employee $1,000 for each employee. E’s medical bills are $10,000, F has none.  All medical bills paid by employer’s insurance. 
  • The employer pays $300 per month for each parking spot. E uses his every day.  F uses it 20% of the time.
  • For E, this is required due to the nature of his work. For F it is optional, but F takes it because he has a long commute.  The value of the room is $7,000.
  • E takes advantage of $6,000 worth of this. F takes $5,000 worth of this.
  1.  T is a high school music teacher who also gives music lessons to students and other people.  T has a special sound proof room where the lessons are provided, which is one out of ten equal sized rooms in a house that T paid $200,000 several years ago.  In 2017, he has the following results:

SALARY

$80,000

LESSON REVENUE

$3,000

SUPPLIES EXPENSE

$1,000

EQUIPMENT EXPENSE

$800

INSURANCE EXPENSE

$100

Depreciation on T’s house is $12,000 and his mortgage interest is $3,500.  5% of T’s cell phone bill of $1,800 relates to his music lesson activity.  Calculate T’s adjusted gross income from this information.  Will any expenses carryover to 2018?

SAL                80,000                                     3,000                                     -1,000                                     -800                                     -100

                                    1100                         DEP    1200                         INT.    350

                                    (450)

80,000 (AGI)

450 (carryover loss)

ACCOUNTING 305                                                      NAME_____KEY____________

EXAM 1                                                                      15 FEBRUARY 2018

ANSWER ANY 10 QUESTIONS. ESSAYS ARE WORTH 10 POINTS, PROBLEMS ARE WORTH 12 POINTS

  1. Most people in the US pay most of their taxes to the federal government on their income. Describe people for whom this would not be true.

More property taxes:

Owns very valuable real property that creates no current income but might appreciate in the future. 

More estate/gift taxes 

Same as above, but not limited to real property. Wants to pass property to relatives.

More payable taxes

Poor people with deductions against their income taxes, but have all their money coming from their job.  

If a person had no job on investments and did not own a house, but had a lot of cash that they spend on tings, most of their taxes would be sales taxes.

If a person had a business that involved buying gasoline on alcohol, but they failed to make net income from it, most of their taxes could be excuse taxes.

  1. Explain the tax benefit concept.

If a tax payer receives a tax benefit as a result of a mistake in period 1, this can be corrected in period 2 by making that which is not usually taxable, taxable. Likewise, if the mistake penalizes the taxpayer in period 1, a special deduction (of something usually not deductible) is allowed in period 2. 

  1. X does tax research using authoritative secondary sources. Describe what X might have done and evaluate its appropriateness.

Secondary tax research material constitutes anything that which has not been produced by the government. This would include the "tax services" like CCH and RIA to which tax preparers subscribes in order to streamline tax research. Secondary materials also include articles about tax found in journals and magazines. 

Secondary tax research materials do not have the weight of authority possessed by primary materials. “Authority” means approval, not necessarily logical

  1. T would like to transfer assets to his daughter but does not want to pay more taxes. T might need to get these assets back in the future. Discuss possibilities and their tax consequences.

In order to do this, T will have to make a loan to his daughter. Gifts are no good since T will not have the power to get the property back. To avoid income tax consequences of imported interest, T should do at least one of these:

  1. Charge his daughter a realistic (high enough) rate of interest
  2. Do not loan more than $100,000
  3. Have his daughter invest in assets that do not produce more than $1000 of taxable income
  4. Avoid the appearance of a tax avoidance motive
  1. A terrible thing happened to M which resulted in time in the hospital and missed work. M is also concerned about the tax consequence of this incident and its financial aftermath. Discuss.

M might have medical insurance from his employment. M would not be taxed on the benefits he receives when this pays for his hospital/doctor expenses.

M might have disability insurance from his employment. M would be taxed if these benefits compensate him for lost wages, but not if they are for his pain and suffering.

M might have purchased his own disability insurance policy. All benefits received are excludable from taxable income.

M might have sue the person that hurt him. Here, compensation for his injuries would be excludable. However, this would not be time for his economic losses, or if the court awards punitive damages.

  1. Your friend is thinking about quitting his job and going into business for himself. He has not yet decided what this business will be. Could you provide a general outline about the tax consequences if he either goes into a business or not?

Your friend can deduct expenses related to the exploration of business opportunities not taken, but only if they relate to a business that he/she is already in.

If your friend does start a business, expenses that are “startup” in nature, will have to be deducted over the first 180 months (15 years) of the life of the business. However, if total startup costs are less than $50,000, your friend can deduct up to $5,000 of these costs in year one in addition to the normal amortization. One dollar of this privilege is lost for every dollar that start-up costs exceed $50,000. Thus, it becomes zero at $55000 total start. Accelerated amounts mean that there will be less to amortize.

  1. Young doctors are often required to work 18 hour shifts in hospitals. To make this possible, hospitals provide these doctors food in the hospital cafeteria at no charge. Hospitals also provide sleeping areas for the doctors during and between their work periods. Some doctors have decided to more or less live at the hospital. Discuss tax consequences.

The doctors will not be taxed on the fair market value of the free food they consume because it is

1)     In kind (food itself)

2)     On premise of employment (hospital cafeteria)

3)     For the convenience of the hospital (keeping doctors on call benefits patients)

However, they could be taxed for the privilege of sleeping at the hospital, since it was not required as a condition of their employment.

It could be de minims for those that do not live at the hospital.

  1. G, a single taxpayer, had the following results over a three year period of investing.

TYPE TRANSACTION

2016

2017

2018

Short Term Capital Loss

11,000

12,000

24,000

Long Term Capital Gain

42,000

18,000

72,000

Short Term Capital Gain

7,000

14,000

17,000

Long Term Capital Loss

55,000

8,000

60,000

Interest Received

2,000

2,000

2,000

Dividends Received

6,000

7,000

4,000

2016

2017

2018

STCL

11000

12000

STCL

24000

STCL

STGL

7000

14000

STCG

17000

STCG

GTCL

4000

1000

STCL

7000

STCL

CARRYOVER

1000

STCG

72000

LTCG

LTCG

42000

18000

LTCG

60000

LTCL

LTGL

55000

8000

LTCL

12000

LTCG

LTCL

13000

13000

LTCL

CARRYOVER

3000

LTCL

5000

LTCG

2000 LTCL

Deduction (if any) for capital losses:

                2016      ____3000______________

                2017       _____2000_____________

                2018      _______0______________

Capital Gains that will be taxed (if any):

                2016      _______0______________

                2017       _______0_____________

                2018      _______5000___________

Carryover (if any) for 2019

                Type      _______N/A____________

               Amount               __________0__________

  1. R is very involved in the dog show world. While not working as an accountant, R travels to dog shows all over the country with her champion poodle, Spotify.  R enjoys this very much even though Spotify has rarely won.  R’s previous dogs also were big time losers but R loves to be part of the action of dog preparation and competition.  During 2018, R has the following financial results:

SALARY

$100,000

INTEREST RECEIVED

$    2,000

PRIZES WON BY SPOTIFY

$  15,000

DOG TRAINING EXPENSES

$  8,000

DOG FOOD

$   4,000

DOG GROOMING PRODUCTS

$   2,000

TRAVEL TO DOG SHOWS

$ 10,000

Calculate R’s taxable income for 2018.

SALARY

100000

INTEREST

2000

Prizes

15000

AGI

170000

Allowable deductions – 2% AGI

1500-2340

Deductions from AGI

12660

Taxable income

114340

  1. V, is single and 67 years old, with a job and an annuity. In 2018, the job pays him $200,000 salary and gives him $500,000 life insurance protection.  He purchased the annuity ten years ago in January for $300,000 and it pays him $2,500 every month.  He is thinking about getting married to W, age 20.  If he does, (in January 2019) he will get a new job that pays him $230,000 a year but has no life insurance.  He will also (in January 2019) cash in his annuity for $200,000 to buy a new house for W.  Answer the following, assuming if V does not do anything, his 2018 results will be the same as 2017. 

If V does not get married:

                Taxable income from his job        __________206858_____________________

                Taxable income from annuity      ______________________18367.12_______

If V does gets married:

                Taxable income from his job        ____________230000___________________

                Taxable income from annuity      __________________27741_____________

 
   
  1. In 2017, P received the following from his job as a bank teller for a bank and his investment:

                                Salary                                    $60,000

                                Award                                   $ 1,000

Stock Dividend  10 shares

Free Parking                       $ 4,800

Pension                $ 8,000

The cash award was when P was named “Teller of the Month”.  The parking is based on the $400/month cost paid by the employer for P.  The stock dividends relate to bank stock purchased by P (1,000 shares for $60,000) that P took instead of $800 cash.  The pension is non-discriminatory.

On July 1, 2018, P is fired for illegally selling his parking space to a friend for $2,000 on March 1, 2018.  To pay his living expenses, P sells 500 shares of his bank stock for $40,000.  Answer the following:

2017

                P’s income from his job 30000 + 1000 + (4800 – 3060) = 62780                                   ___________________________________________

                P’s income from his investment (if any)  800                         ___________________________________________

                P’s other income (if any)                                               0              ___________________________________________               

2018

                P’s income from his job 30000 + [(400 -255) x 2] = 30290                                ___________________________________________

                P’s income from his investment (if any)  9901                       ___________________________________________

                P’s other income (if any)                                               2000                       ___________________________________________     

40000 - (60800 ÷ 1010 x 500)

40000 – 30099 = 9901

  1. Q, who lives in Las Vegas, is a full-time gambler and has been quite successful at it, having quit his job as an accountant many years ago. In 2017, Q had the following results:

                                Winnings                                             $ 550,000

                                Losings                                                 $ 375,000

                                Travel                                                    $   40,000

                                Tax Consulting Revenue $     5,000

                                Bribes                                                   $   10,000

                                Interest Paid                                      $     5,000

                                Research Expenses                         $   15,000

The travel was mostly to other gambling locations in the country where Q believed his luck would be better.  10% of the travel days were spent sightseeing as Q attempted to reduce his stress.  Another 40% of it related to Q’s girlfriend who Q believes gives Q luck to be around him.  The bribes are payments made to casino employees for information that Q believed helped him win.  The research related to various gambling books and seminars that Q believed helped him gamble better. The interest paid involved payments to people in organized crime that threatened to kill Q unless he made good on his debts.  Q continues to do tax work for some of his old clients in his spare time.  Answer the following for Q:

                                Gross income                                     $ ______18000 or 555000 or 140000___

                                Deduction for travel                        $ ________20000______________         _

                                Deduction for bribes                       $ _________0________________________       

                                Deduction for interest                   $ ________5000___________________

                                Deduction for research  $ _________15000_________________

Winnings

550000

Losings

375000

Net

175000

Tax Cons. Rev

5000

GI

180000

Travel

-          20000

Interest

-          5000

Research

-          15000

AGI

140000

Travel

Total

40000

Sightseeing

-          4000

Girlfriend

-          16000

← BUS

20000

ACCOUNTING 305                                                             NAME____KEY_______________

EXAM 1                                                                                 14 FEBRUARY 2019

ANSWER ANY 10 QUESTIONS. ALL ESSAYS ARE WORTH 10 POINTS, ALL PROBLEMS ARE WORTH 12 POINTS

  1.  Is it true that a family’s efforts to minimize its federal tax liability will increase its liability for other taxes? It is time:

   Money saved from fed income tax if invested will increase state & local income taxes

--- will allow you to buy a more expensive house and increase property taxes.

   --- will allow you to buy a more expensive house and increase property taxes.

   --- will increase your wealth which will increase gift taxes if you give it away and estate taxes if you do not.

   --- will increase your sales taxes if you spend it on most things.

It is not time:

   --- will not increase your excise taxes because you are probably not going to spend much more on gasoline and cigarettes.

   --- will not change your payroll tax, because you are probably not going to quit your job.

  1. Explain the tax benefit rule.  What change to the federal income tax would make tax benefit rule less necessary? Inflows erroneously not included (excluded in year 1, can be offset with an opposite treatment in year 2.

Example: Taxes taken as a deduction above the proper amount in year 1, can create a taxable refund in year 2.

Change: Don’t require tax payers to file a tax return every year – this would give more time for the true behavior to be known, less mistakes 🡪 less need to correct.

  1. Tax practitioners are under considerable pressure to work quickly.  How do they do tax research in a reasonable amount of time? Use of tax services, like RIA or CCH which are organized as “one stop shopping” for tax research. All materials organized around IRC section. Plenty of user-friendly guidance. Much easier and quicker than dealing with the original materials that are scattered in different places.
  1. X receives no cash but has taxable income.  Y receives nothing but has taxable income.  Provide instances where these statements can be true. X: no cash 1. Bargain purchase
  1. scholarships when work is expected
  2. free food voucher from employer
  3. free apartment from employer, no required
  1. all things listed for y below

Y: nothing

  1. Partnership income, not distributed
  2. Debt forgiveness
  3. Imputed interest
  4. Group term life insurance
  1. B works for an employer that provides many benefits other than wages.  C works for a company that provides about the same wages and almost nothing else.  Does the federal income tax make B and C more equal or less equal? more equal – B is taxed on the benefits
  1. Free parking
  2. Moving reimbursement
  3. Group term life insurance > 50,000 face
  4. Disability back pay

Less equal – B is not taxed on benefits

  1. Medical insurance coverage
  2. Pension contributions
  3. Group term life insurance < 50,000 face
  4. Disability – personal injury
  1. D spends money trying to make her business more profitable.  E spends money trying to select the best investments and to sell them at the best time.  Explain the general ways that the tax law might treat D and E differently and similarly. Differently

D is in a business while E is not

D’s spending if deductible will reduce what is ordinary income

E’s spending might offset capital gain income

D might have an easier claim on a home offer deduction

Similarly

Both will have to establish the relevancy of the spending it the revenue generation

Both will have to choose whether they are on the cash basis or the accrual basis

  1. F receives money from an insurance company.  Is it taxable? This depends first upon what type of insurance it is and what relationship F has to the insurance company.

Life insurance

            If F is a regular beneficiary, proceeds are tax free (as long as they are not interest)

            If F is a creditor, proceeds are taxable but can be offset by the amount of the loan

Annuity

            Proceeds are taxable to the extent that they exceed the recovery of capital which will be divided by the number of expected payments, related to life expectancy.

Property Insurance

            Proceeds are taxable but this might be offset by F’s tax cost of the property that was destroyed or stolen, and not previously recovered as a deduction.

Disability Payment

            Proceeds are tax free if F purchased the policy.

            Proceeds are taxable if F collects on an employer – purchased policy and it is for lost wages.

  1. Q has the following transactions.

TYPE

COST

SELLING PRICE

BUY DATE

SELL DATE

Stock A

8,000

3,000

4/17/18

4/17/19

Bond A

11,000

17,000

6/3/18

6/4/19

House

125,000

100,000

9/23/17

4/3/19

Stamp collection

400,000

415,000

10/11/17

1/5/19

Car

30,000

27,000

2/1/16

3/2/19

Stock B

110,000

90,000

11/10/16

1/15/19

Bond B

22,000

4,000

6/6/18

6/6/19

Stock C

19,000

38,000

8/1/18

5/3/19

Q purchased the house hoping it would go up in value and has never lived in it.  Bond A is a municipal bond.  The car was used in Q’s business and $5,000 of deprecation had been taken on it over the years.

Answer the following questions:

2019 ordinary income, if any ____2,000______________________________

2019 long term capital gain, if any_____0_______________________________

2019 total capital loss, if any _______(40,000)___________________________

2019 deduction, if any            ___3,000___________________________________

Carryover to 2020, if any, amount and type___STCL 1, TLCL 24_________________

ST                                LT

SA       (5)                    BA      6         

BB       (18)                  IT        (25)

SC       19                    ST       15

STCL  (4)                    SB       (20)     

                                    LTCL (24)

  1.  In 2005, M purchased 200 shares of Pepsico for $6,000.  From 2005-2015, Pepsico paid a $0.50/share cash dividend.  In 2016, Pepsico distributed to M 20 shares of stock. In 2017.  Pepsico gave shareholders a choice of a 10% stock dividend or a $1.00/share cash dividend.  M selected the stock.  In 2018, M sold 100 shares of Pepsico for $6,000.  In 2019, M sold the rest of his shares for $2,000.  Assume no other facts. 

Answer the following:

M’s 2010 taxable income, if any ______$100________________________________

M’s 2016 taxable income, if any______0_____________________________________

M’s 2017 taxable income, if any_____220___________________________________

M’s 2018 taxable income, if any________3430________________________________

M’s 2019 taxable income, if any_____(1650)________________________________

 

2010: .50 * 200 = $100

2016: Stock Dividend

2017: 1.00 * 220 = $220

2018: 6000 – (100 * (6220/(200+20+22))) = $3430

2019: 2000 – (6220 – 2570) = (1650)

10 (a).  In 2015, R borrowed $200,000 from his father at 10% interest, to be repaid in 2025.  R made full interest payments from 2016-2018.  In 2019, R lost his job and could not afford to pay because R had no assets other than stock worth $500,000 that R’s father had told him never to sell.  In 2019, R’s father told R that he would not have to pay interest and would only have to repay $50,000 in 2025, which R does repay at the end of that year.  Answer the following:

R’s income in 2015, if any                 ______0_________________________________

R’s father’s income in 2016, if any    _____50,000______________________________

R’s father’s income in 2025, if any    ______5,000______________________________

R’s income in 2019, if any                 _________450,000_________________________

2016: .10 * 500,000 = 50,000

2025: .10 * 50,000 = 5,000

2019: 500,000 – 50,000 = 450,000

10(b).   S rented a store front from T in December 2016, agreeing to pay $2,000/month.  S needed to make changes to have the property right for S’s business and successfully negotiated a $200/month rent reduction for seven months in 2017.  The changes that S made cost $2,200 and increased the value of the property by $3,000.  S continued renting the property until 2019. 

T’s 2017 rent taxable income, if any  ____22,600___________________________

T’s 2018 taxable income, if any_________24,000___________________________

S’s 2017 rent deduction, if any________24,800_________________________

S’s 2018 rent deduction, if any________24,000____________________________

T17: (2000 * 12) – (200 * 7) = 22,600

T18: 2000 * 12

S17: 22,600 + 2200

  1. In 2019, Z works at a zoo earning $60,000 salary.  In his 2019 spare time, Z prepares tax returns for people from his home.  Z collects $4,000 for this tax work.  To do his tax work, he uses a room in his house which has 400 square feet (his house is 2000 square feet).  His expenses are: $1000 tax software and supplies; utilities (electricity, etc.) $1,200; property taxes $2,000; mortgage interest $8,000; cell phone $1,500; maid service $800; property insurance $3,200.  Compute taxable income, assuming Z is single with no children. 

SAL 60,000

            Tax Return Inc. 4,000

            Reg. Expenses   1,000

            Home office      3,000

                                        0

STD DED                                           12,000

            Taxable Income                      48,000

House Detail

1,200

2,000

8,000

800

3,200

(15,200 / 5) = 3040

  1.  In 2018, Ohio legalized medical marijuana sales.  In 2019, H thought he wanted to get into this business, so he spent $6,000 attending seminars on how to do it ($4,000 registration, $2,000 travel).  He also put $7,000 down on a store’s rental and paid $10,000 for the marijuana.  Once he found how much state regulation there would be, he changed his mind about the venture.  Instead, H opened a martial arts program, something new to him.  For this, he needed to rent a different space for which he paid $12,000 (he forfeited his deposit on the first store).  He paid $15,000 training his employees, $9,000 advertising his grand opening.  He sold the marijuana to the children that came to his martial arts program for $25,000.

List his allowable deductions assuming H wants to minimize his 2019 taxes.

Marijuana Cost $10,000

Rent                  $12,000

Startup Costs    $5,000

Acceleration

Amortization of $1,266.67*

Other startup costs

*15,000 + 9,000 = (24,000-5,000) = (19,000/15) = 1,266.67

ACCOUNTING 305                                                                         NAME_KEY__________________

EXAM 1                                                                                                 SEPTEMBER 27, 2011

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. Summarize how the US government collects the income tax. (do not consider the tax formula).
  • Self- reporting obligation imposed upon taxpayers under the threat of fines
    • interest changes, collections and jail in the event of non-compliance
  • audit process
    • returns selected strategically for their enhanced revenue collection potential
  • pay-as-you-go
    • employers are obligated to withhold income tax from employee’s wages and remit to government
    • tax payers with non-wage income are obligated to estimate future taxes and remit in advance
  • Self-employed have to pay extra as substitute for missing social security contribution
  1. Discuss any two of the income tax concepts, except the recovery of capital.

                Possibilities:

  1. Ability to pay
  2. Administrative convenience
  3. Arms-length
  4. Pay as you go
  5. Entity
  6. All-inclusive income
  7. Legislative Grace
  8. Accounting Period- including Constructive Receipt and Claim of Right

(Credit given for a good explanation of the concept and for examples illustrating how it operates) (no credit for doing more than two concepts)

  1. How do the specific rules of tax accomplish the general objective of capital recovery?

   Some Examples:

  1. Calculation of gain/loss on investments allow proceeds to be offset by the cost of the investment             
  2. Depreciation deduction
  3. Annuity exclusion calculation-prorated recovery over life expectancy
  4. Amortization of qualified start-up costs
  1. Provide examples where taxpayers have to include income on transactions that have not produced cash for those taxpayers.
  2. Imputed interest to those that make below-market loans to others
  3. Owners of conduit entities (partnerships, S Corporations) on the income that is their share
  4. Barter transactions
  5. Stock dividend FMV when shareholder has the option to take each dividend
  6. FMV of prizes and awards
  7. Forgiveness of Debt
  8. All credit sales if taxpayer uses accrual accounting
  1. Explain the taxation differences between a dollar you received from an ex-spouse, a dollar received from the federal government because you are old, and a dollar received from a stock that you have sold.

                Ex-spouse $

                May be fully taxed or not taxed at all depending on its character

                                -alimony: fully

                                -child support: not

                                -property settlement: not

                Federal Gov’t

                May be not taxed, taxed up to 50% or taxed up to 85%

                                -depends on level of modified AGI

                                                -break points

                Stock

                -May be taxed at reduced rates if part of net long term capital gains

                -May be part of a limited CG deduction if part of net losses

                -Must be netted together with all other CG transactions to determine tax consequences

  1. X has taxable income as a result of a property received as a stock dividend and taxable income related to a municipal bond transaction. Explain.

                -Stock dividend must have been in lieu of a cash dividend

                                -even if cash not taken

                                -basis adjustments to all stock held

-Municipal Bonds must have been sold producing a taxable difference between the

                Proceeds and the original investment

                -or bond was not issued by a qualified government (i.e. foreign)

  1. Y has a choice between two jobs – one with a higher salary and the other with more generous fringe benefits. Z has a choice between two jobs with the same salary and fringe benefits that are of different types but with the same fair market value. How do the tax consequences influence which jobs Y and Z choose?

                Y’s Choice

   Since fringe benefits might be excluded from taxable income, Y should pick the job with the fringe benefits. However, this is not true if Y does not want the fringe benefits and would not buy such things anyway. Then, paying the extra tax involved with the high salary job is the best choice.

Z’s Choice

   Z should choose the job that has the highest mix of tax-free fringe benefits. List examples… However, it is better to have a taxable fringe benefit that you would buy anyway than the tax free fringe benefit that you cannot use/do not want at any price.

  1. A is taxed on a scholarship. B is taxed on life insurance proceeds. C is taxed on property originally received as an inheritance. Provide explanations.

A provided services such that made the “scholarship” more like employment, or A received money above that which was needed to pay tuition, fees, books (i.e., living expenses)

B must be an investor/creditor who purchased the life insurance policy of another. B’s gain is equal to: proceeds – debt / investment. B might be receiving interest from an insurance coupon paying the benefits or the installment plan.

C has sold the property received as an inheritance. C will be taxed on a value appreciation that occurs after the death of the first owner (more or less). C might have also received income produced by the inherited property that was earned after the date of death but before distribution.

  1. D spends some money trying to make her business more profitable. Assuming no general rules apply, how can D know if this spending is deductable?
    • Ordinary- typically incurred by someone in this line of work
    • Necessary- not personal or random
    • Reasonable in amount: relative to expected benefits, no excessive salaries to consider
    • Not capital in nature: if so, full amount cannot be deducted; depreciation this year only
    • Must have a legal obligation to pay—not the debt of another
    • Not in violation of public policy- (i.e., fines, lobbying)
    • Properly belonging to this tax year, as judged by the accrual/cash basis rules
  1. You are an IRS auditor examining a tax return that has claimed a home office deduction. What should you look into?
  1. Does the taxpayer have another office?
  2. Does the taxpayer regularly see clients or customers at this location?
  3. Does the taxpayer use the home office exclusively for business?
  4. Does the home office actively produce taxable income corresponding to the expenses of the home office?
  5. If this is prior year, considerations 1-3 (above) had to be true last year as well.

11.In her spare time, F buys and sells horses. This activity is done casually and mostly because F enjoys being part of the horse world. In 2011, F has the following results:

Revenues: $28,000 Expenses: $45,000

The expenses can be classified as follows:

                                Cost of Goods Sold: $17,000                                 Depreciation: $17,000                                 Property Taxes: $6,000                                 Wages: $10,000

F has AGI from other sources of $100,000. What is F’s taxable income, assuming she is  single without dependents

                                                               

100,000

28,000

128,000

AGI

3,700

Pers. Exempt

25,440

Standard Deduc

98,860

Taxable Income

                Misc. Itemized

28,000

Allowable Expense

-2,560

2% AGI

25,440

Deduct

                go [25,440, 5800]

  1. G, an employee of a Cleveland company, was paid $100,000 for both 2010 and 2011. This is G’s only item of income. To earn this money, G had to spend significant amounts of time in the firm’s Canadian location. Specifically, G left the US on 7/1/10 and returned on 6/15/11. G was also back in the USA in November for Thanksgiving 2010 (5 days) and in December for Christmas 2010 (7 days). Calculate G’s 2010 and 2011 tax liability assuming no other deductions and “single” filing status.

                                                2010

Sal

100,000

FEIE

46,450

53,550

PE

-3650

St. Ded

-5700

Taxable Income

44,200

Rate

x  .28

Tax Liability

12,376

                                2011

Sal

100,000

FEIE

46,450

53,550

PE

-3760

St. Ded

-5800

Taxable Income

44,000

Rate

x  .28

Tax Liability

12,320

  1. H, age 90, receives the following items in 2011.

                                Type                                      Amount                               Notes

                Annuity Payments                           $20,000                                 He has lived well beyond his life                                                                                                                                                                expectancy.

                Death Benefit Payment $4,000                                   from his wife’s former employer.

                Interest                                                $3,000                                   A market rate interest loan to his son        

            Gold Watch                                           $1,800                                   Former employer’s qualified plan.

                Stock Sale                                            $70,000                                 Cost of these assets was $90,000.

                Social Security Payments              $12,000                                 Total received in 2011

                Pension Payments                       $30,000                   Total received in 2011

How are these items taxed, assuming H is single?

Included

20,000

[-20,000, -3000]

 

4,000

(3,000)

200

  3,000

=12,000 (.85)

 

10,200

30,000

AGI   $64,400

ACCOUNTING 305                                                       NAME________KEY__________________

EXAM 1                                                                      13 FEBRUARY 2014

ANSWER ANY 10 QUESTIONS. THEY ARE EQUALLY WEIGHTED

  1. What makes the federal income tax different than the other taxes collected by governments in the USA? What makes it similar?

Differences:

FIT based on transactions, not on valuations (property tax)

FIT usually based on what you get, not based on what you give to others (gift tax, estate tax)

FIT rates vary with taxpayer wealth (sales taxes, excise tax)

FIT is general, not highly specific (excise tax)

FIT is progressive unlike some that are flat or regressive (sales tax)

Similarities:

State income tax “piggybacks” FIT

Payments made for other taxes (property, state income) are sometimes deductions for FIT

Monies collected support public purposes

FIT is progressive just like some (estate, gift)

  1. Discuss how the concepts of federal taxation might conflict with each other. Do any of the concepts cover similar ideas with another?

Wherewithal to pay conflicts with ability to pay, substance over form, recovery of capital

Constructive receipt conflicts with claim of right, cash basis of accounting

All-inclusive income conflicts with legislative grace (generally)

  1. A, B and C all own contracts with the Nolo Insurance Company. Nolo pays each of these people $9,600 during 2014.  A reports no taxable income.  B reports $9,600 taxable income.  C reports an amount greater than 0, but less than $9,600. 

A is a beneficiary of a life insurance policy.  Life insurance benefits are wholly excluded as long as ownership is not an investment.

A receives money reimbursing A’s medical expenses under an employer medical insurance policy

B owns an annuity and has already recovered his entire investment tax free.  By virtue of living long, all money received is taxable.

B works for the insurance company and the money is a salary

C has an annuity and is still prorating the excludable and includable portions of the money received <formula>.

C receives an award for many years of good work as an employer of Nolo, under a qualified plan. Excludable up to $1,600. Rest taxable

  1. D gets all of his money from the sale of his labor. E gets all of his money from investments.  What are the best ways that D and E can avoid taxable income?

D: Work in a foreign country enough to qualify for the Foreign Earned Income Exclusion

Take a job that has the Tax-free Fringe Benefits that D wants and would otherwise pay money for

          Retirement Award earned by years of good work

            Maximize Pensions

E: In general, recovery of capital, E should not invest in things that produce income, only things that go up in value, and E should select stock that pay stock dividends (no option of cash). E could invest in life insurance contracts.

  1. F goes on a business trip from Cleveland to Denver. G buys something for his business.  Both are denied deduction for some of their expenses.  Why?

F: Some component of the trip that which was personal in nature. If F is exploring a business, deciding not to do it, when F is not currently in that business. If F decides to invest in  a new business and has travel and other startup expenses > $5,000, some will have to be amortized over many years

G:        Illegal

            Capital

            Unreasonable in amount

            Personal

            Unrelated to the business (unnecessary)

  1. H has a job that offers free food every day. J works for a hotel.  H hates to cook and rarely has to eat anything except her employer’s food.  J has broken up with his wife, and has moved into the hotel, where he gets a free room. Discuss tax issues.

H can exclude if all of these are true:

  1. in kind- yes
  2. on premise- yes
  3. for the convenience of employer- maybe. This has nothing to do with how much H             depends upon it

J can exclude if all of these are true:

  1. in kind- yes
  2. on premises- yes
  3. for convenience of employer- probably not. What sort of work does J do?
  4. required- no. obviously, J had the job before he moved into the hotel
  5. Consider the following taxpayers and their inflows of wealth. Calculate how much of this income is taxable income, assume married filing jointly status.

Person

Wages

Social Security

Other

Total taxable income

K

100,000

10,000

6,000*

114,500

L

12,000

10,000

8,000**

20,000

M

30,000

10,000

2,000***

35,400

* profits from the sale municipal bond

** Death benefit payment from the employer of L’s deceased wife.

*** fair market value of a gold watch received from a qualified retirement award plan

K: 100,000 + .85(10,000) + 6,000

L: 12,000 + 0 + 8,000

M: 30,000 + .5(5,000) + (2,000 – 1,600)

  1. N had the following property sales in 2013. How should these be treated in N’s tax return?                             

ASSET TYPE         

OWNERSHIP PERIOD   

GAIN(LOSS)

STOCK

2 YEARS

$10,000

BONDS               

18 MONTHS       

$(2,000)

PAINTING

6 MONTHS

$37,000

INVENTORY

15 MONTHS

$15,000

RENTAL HOUSE

8 YEARS   

$(50,000)

TOYS

42 YEARS

$5,000

GOLD        

7 WEEKS

$(20,000)

                      LT                               ST

            10,000                         37,000

            (2,000)                         (20,000)

            (50,000)                                   17,000

            5,000                                      

            (37,000)

                                                (20,000)

                                                3,000 deduction (capital)

                                                17,000 c/o

                                    15,000 ordinary income deduction                       

  1. P received the following in 2013 from her employer. How much should she report in taxable income?

ITEM

AMOUNT         

DETAILS

MEDICAL COVERAGE       

$12,000

According to “Obamacare,” this is the fair market value of such a policy

LIFE INSURANCE COVERAGE 

$70,000

P is 50 years old and did not die during the year.  P’s coverage is  in place for the full year. 

EMPLOYEE DISCOUNTS      

$3,000         

P got 30% off the stuff his employer usually sells for $10,000

FREE PARKING 

$3,600         

P gets a spot right next to the building that costs his employer $300 a month.

FREE COFFEE

$2,800         

P has an employee card that entitles him to as many as two cups a day from the Starbucks next door.

RETIREMENT PLAN

$11,000

This is the employers contribution to P’s pension

            70 – 50 X 2.76 =                     55.20

            3,000 – 2,000 =                       1,000.00

            3,600 – (245 X 12) =              660.00

                                                            2,800.00

                                                Total    $4,515.20

  1. Q received the following in 2013. How much total taxable income (if any) results?
    1. His $100,000 gambling debt in Las Vegas has been settled. He paid $70,000.  Later he returned to that casino and won $15,000.
    2. He received stock dividends from his IBM investment worth $18,000. He could have received cash but he wants to increase his stock portfolio and give it to a charity someday. He did not sell any stock in 2013.
    3. He was paid $20,000 in rent by his tenant. Under a rent reduction agreement, the tenant also spent $8,000 to make improvements that increased the value of the building by $6,000.
    4. He won a slander lawsuit for $10,000 against a local TV report who called him a “thug” on a news show.
    5. He received $14,000 in worker compensation when he was injured on the job.

100,000 – 70,000 = 30,000

                                    15,000

                                    18,000

                                    20,000

                                    6,000

                                    10,000

                                    99,000

  1. R started a business in January 2013. He incurred the following early expenses:

WAGES                         $25,000

TRAVEL                       $16,000

ADVERTISING             $15,000

LEGAL FEES                $12,000

ACCOUNTING FEES   $ 8,000

The wages included $3,000 of training new employees. All other expenses were reasonable in amount and related to getting the business going. How much can R deduct in 2013?

                        25,000 – 22,000 =                  3,000

                                                                        16,000

                                                                        15,000

                                                                        12,000

                                                                        8,000

                                                                        54,000

                        55,000 – 54,000 =                   1000 bonus

            54,000 – 1,000 = 53,000/15 =    3,533.33 amortization

                                                                        22,000 non-start up wages

                                                                        $26,533.33

  1. The Tepid family owns a home in Cleveland and a beach property in Florida. In 2013, they spent 21 days vacationing in Florida. During the rest of the year, they rented the Florida property for for six months, earning $25,000.  Their Florida property also had expenses, as follows:

MAINTENANCE          $5,600

DEPRECIATION           $30,000

                             TAXES                          $10,000

Assuming other income of $200,000, personal exemptions of $12,000 and other           itemized deductions of $20,000, calculate taxable income.        

25,000

25,000                                         2% AGI      - 4,500

225,000 AGI                                                   20,500

  • 20,000
  • 12,000
  • 20,500

$172,000 Taxable income

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