Angela, who is single, incurs circulation expenditures of $153,000 during 2017. She is deciding whether to deduct the entire $153,000 or to capitalize it and elect to deduct it over a three-year period. Angela knows that she will be subject to the AMT for 2017 at both the 26% and 28% rates. Angela is in the 28% bracket for regular income tax purposes this year; she records regular taxable income of $153,000 before considering the circulation expenses. Angela expects to be in the 28% regular tax bracket in 2018 and 2019. Advise Angela on how to treat the expenditures in 2017. Consider the time value of money when comparing the tax savings of one alternative with the other. Use the tables in Appendix G for this purpose; Angela’s after-tax discount rate is 4%.
> Edgar uses the cash method to report the income from his software consulting business. A large publicly held corporation has offered to invest in Edgar’s business as a limited partner. What tax accounting complications would be created if Edgar and the c
> In 2016, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000, and the inventory on hand totaled $320,000. What is the am
> In December 2017, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for her business for the 2018 calendar year. How much of the premiums can Nell, Inc., deduct in 2017?
> Fred, a cash basis taxpayer, received a $15,000 bonus from his employer in 2017. The bonus was based on the company’s profits for 2016. In 2018, the company discovered that its 2016 profits were computed incorrectly. As a result, Fred received an additio
> A law practice was incorporated on January 1, 2017, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock. The corporation and the lawyer both use the cash method of accounting. The corporation does
> Pedro, who is a single taxpayer, had AGI of $328,000 for 2017. He incurred the following expenses during the year: Medical expenses before 10%-of-AGI Limitation…………………………………………………$12,000 State and local income taxes………………………..8,900 Real estate taxes…………
> Dino contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value greater than its adjusted basis, but less than the original cost. What is the
> Rafael and Lucy Gonzalez, married taxpayers, each contribute $2,900 to their respective § 401(k) plans in 2017. The AGI reported on their joint return is $38,000. Determine the amount of the couple’s “Saver’s Credit.”
> Assume that a partnership is profitable and that its tax year ends on December 31 but one of the partners’ tax year ends on September 30. Does the partner enjoy a tax benefit or detriment from the partnership’s use of a December 31 tax year-end? Explain.
> William, a high school teacher, earns about $50,000 each year. In December 2017, he won $1 million in the state lottery. William plans to donate $100,000 to his church. He has asked you, his tax adviser, whether he should donate the $100,000 in 2017 or 2
> What are the similarities between the crop method used for farming and the completed contract method used for long-term construction?
> On June 1, 2015, Father sold land to Son for $300,000. Father reported the gain by the installment method, with the gain to be spread over five years. In May 2017, Son received an offer of $400,000 for the land, to be paid over three years. What would be
> Arnold gave land to his son, Bruce. Arnold’s basis in the land was $100,000, and its fair market value at the date of the gift was $150,000. Bruce borrowed $130,000 from a bank that he used to improve the property. He sold the property to Della for $360,
> Evan is single and has AGI of $277,300 in 2017. His potential itemized deductions before any limitations for the year total $52,300 and consist of the following: Medical expenses (before the 10%-of-AGI limitation)……………$28,000 Interest on home mortgage……
> Irene has made Sara an offer on the purchase of a capital asset. Irene will pay (1) $200,000 cash or (2) $50,000 cash and a 6% installment note for $150,000 guaranteed by City Bank of New York. If Sara sells for $200,000 cash, she will invest the after-t
> Emerald Motors is an automobile dealer. The controller consults with you about the type of accounting used for a special offer to its new car customers. Emerald has offered to provide at no charge to the customer the first four recommended service visits
> Compare the cash and accrual methods of accounting for the following events: a. Purchased new equipment, paying $50,000 cash and giving a note payable for $30,000 due next year. b. Paid $3,600 for a three-year service contract on the new equipment. c. Co
> Under what conditions would the cash method of accounting be advantageous as compared with the accrual basis?
> Thomas receives tangible personal property as an inheritance from a decedent who died in 2017. The property was depreciated by the deceased, and Thomas will also depreciate it. At the date of the deceased’s death, the property was worth more than the dec
> Anne sold her home for $290,000 in 2017. Selling expenses were $17,400. She purchased it in 2011 for $200,000. During the period of ownership, Anne had done the following: . Deducted $50,500 office-in-home expenses, which included $4,500 in depreciation.
> In 2017, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to Chaya that have a fair market value of $22,000 at year-end. In addition, Chaya sold a 36-month s
> In 2017, Aurora received a $25,000 bonus computed as a percentage of profits. In 2018, Aurora’s employer determined that the 2017 profits had been incorrectly computed, and Aurora had to refund the $8,000 in 2018. Assume that Aurora was in the 35% tax br
> Can the earned income credit be characterized as a form of negative income tax? Why or why not?
> Gaffey Corporation obtained permission to change from a calendar year to a fiscal year ending May 31, beginning in 2017. For the short period January 1 through May 31, 2017, the corporation’s taxable income was $140,000. For computing the tax, assume a t
> Delaine is a 90% shareholder in a personal service corporation (PSC). The corporation paid Delaine a salary of $265,000 during its fiscal year ending September 30, 2017. a. Assume that the corporation cannot satisfy the business purpose test for a fiscal
> Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000. Costs of the contract for 2016, the first year, totaled $675,000. a. What was the gross profit reported
> Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a longterm contract. The gross contract price was $2,300,000. Jebali finished construction in 2017 at a cos
> Bart and Elizabeth Forrest are married and have no dependents. They have asked you to advise them whether they should file jointly or separately in 2017. They present you with the following information: If they file separately, Bart and Elizabeth will
> Mason canceled a note issued by Emma (Mason’s niece) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Mason of $30,000, a face amount of $55,000, and a fair market value of $42,000. Presuming th
> Mary receives tangible personal property as a gift. The property was depreciated by the donor, and Mary will also depreciate it. At the date of the gift, the property was worth more than the donor’s adjusted basis. What is the impact of these facts on Ma
> In 2017, Skylar sold an apartment building for $20,000 cash and a $300,000 note due in two years. Skylar’s cost of the property was $250,000, and he had deducted depreciation of $150,000, $60,000 of which was in excess of what the straight-line amount wo
> Missy, age 30, has owned her principal residence (adjusted basis of $225,000) for five years. During the first three years of ownership, she occupied it as her principal residence. During the past two years, she was in graduate school and rented the resi
> On December 30, 2017, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses. The buyer paid $5,000 down with the balance payable in $10,000 installments over the next eight years.
> For 2017, Essence Company, a calendar year taxpayer, will change from using the cash method for tax purposes to the accrual method. At the end of 2016, Essence had the following items: Accounts receivable………$200,000 Accounts payable…………….135,000 Bank lo
> The precursor to the Alternative Minimum Tax enacted by the Tax Reform Act of 1986 was the minimum tax, which was first devised in 1969. Find a discussion of the rationale for the original minimum tax and details about its creation. Describe the taxpayer
> Chloe, a self-employed dentist, tells you “My profits for the year total $300,000, so I don’t need to pay any more Federal self-employment taxes.” Evaluate Chloe’s comment.
> Samuel had worked for Pearl, Inc., for 35 years when he was discharged and his position filled by a much younger person. He filed and pursued a suit for age discrimination and received an award of $1.5 million. Under the contingent fee arrangement with h
> Jolene receives tax-exempt interest of $33,000 on bonds that are classified as private activity bonds. She properly excludes the $33,000 from her gross income for regular income tax purposes. Jolene asks your advice on the treatment of the interest incom
> Chuck is single and has no dependents. He does not itemize deductions. In 2017, he claims a $4,050 personal exemption and records taxable income of $120,000. Chuck’s AMT preferences total $51,000. What is Chuck’s AMTI for the year?
> Christopher regularly invests in tech company stocks, hoping to become wealthy by making an early investment in the next high-tech phenomenon. In 2011, Christopher purchased 3,000 shares of FlicksNet, a film rental company, for $15 per share shortly afte
> In May, Rebecca’s daughter, Isabella, sustained a serious injury that made it impossible for her to continue living alone. Isabella, who is a novelist, moved back into Rebecca’s home after the accident. Isabella has begun writing a novel based on her rec
> Geoff incurred $900,000 of mine and exploration expenditures. He elects to deduct the expenditures as quickly as the tax law allows for regular income tax purposes. a. How will Geoff’s treatment of these expenditures affect his regular income tax and AMT
> In December of each year, Eleanor Young contributes 10% of her gross income to the United Way (a 50% organization). Eleanor, who is in the 28% marginal tax bracket, is considering the following alternatives for satisfying the contribution.
> Lloyd owns a beach house (four years) and a cabin in the mountains (six years). His adjusted basis is $300,000 in the beach house and $315,000 in the mountain cabin. Lloyd also rents a townhouse in the city where he is employed. During the year, he occup
> Cheryl incurred $8,700 of medical expenses in November 2017. On December 5, the clinic where she was treated mailed her the insurance claim form it had prepared for her with a suggestion that she sign and return the form immediately to receive her reimbu
> Helen Carlton acquired used equipment for her business at a cost of $300,000. The equipment is five-year class property for regular income tax purposes and for AMT purposes. Helen does not claim any additional first-year depreciation. a. If Helen depreci
> Lonzo owns two apartment buildings. He acquired Forsythia Acres on February 21, 1998, for $300,000 ($90,000 allocated to the land) and Square One on November 12, 2017, for $800,000 ($100,000 allocated to the land). Neither apartment complex qualifies as
> Archie runs a small mineral exploration business (as a sole proprietorship). In 2015, he purchased land (for $68,000) where he suspected a magnesium deposit was located. He incurred $18,000 of exploration costs related to the development of the magnesium
> Kathy owns and operates a grocery store as a sole proprietor. She pays wages to her husband Joe and their 17-year-old daughter Marla, both of whom work at the store. Should Kathy withhold FICA taxes from the wages paid to Joe and Marla? Explain.
> Lisa holds nonrefundable Federal income tax credits of $65,000. Her regular income tax liability before credits is $190,000, and her tentative minimum tax is $150,000. a. What is Lisa’s AMT? b. What is Lisa’s regular income tax liability after credits?
> In the current year, an individual taxpayer has net long-term capital gain from disposition of capital assets and has unrecaptured § 1250 gain. What would the circumstances have to be for the unrecaptured § 1250 gain to be taxed at 25%?
> Calculate the 2017 AMT exemption amount for the following cases for a married taxpayer filing jointly, and for a married taxpayer filing separately. In addition, in an Excel formula, express your solution for Case 2 for the taxpayer who is married filing
> In the current year, Dylan earned taxable and tax-exempt interest from the following investments. Investment……………………………………………………………………….Interest Income 10-year municipal bond (issued in 2009)………………………………………….$1,300 10-year private activity bond (issued
> Arthur Wesson, an unmarried individual who is age 68, reports 2017 taxable income of $160,000 and a regular tax liability of $37,050. Arthur itemizes his deductions, and he records AMT positive adjustments of $40,000 and tax preferences of $35,000. a. Wh
> Nell, Nina, and Nora Sanders, who are sisters, sell their principal residence (owned as tenants in common) in which they have lived for the past 25 years. The youngest of the sisters is age 60. The selling price is $960,000, selling expenses and legal fe
> Use the following data to calculate Chiara’s 2017 AMT base. Chiara files as a single taxpayer and itemizes her deductions. Taxable income……………………………………………….$148,000 Positive AMT adjustments (does not include personal exem
> Singh Inc., a calendar year taxpayer, reported the following transactions. Singh is not a small corporation for AMT purposes. Taxable income………………………………………………………………………………………$2,600,000 Depreciation for regular income tax purposes on realty (placed in
> On December 27, 2017, Roberta purchased four tickets to a charity ball sponsored by the city of San Diego for the benefit of underprivileged children. Each ticket cost $200 and had a fair market value of $35. On the same day as the purchase, Roberta gave
> In the current year, Redland Corporation’s regular tax liability was $28,000, and its AMTI was $232,000. Redland is not a small corporation, and this is not its first year of operations. a. Compute Redland’s current-year AMT. b. How would your answer to
> Bonnie, who is single, reports a zero taxable income this year. Bonnie itemizes her deductions and takes the personal exemption. She reports positive AMT timing adjustments of $200,000 and other AMT positive adjustments of $100,000 for the year. What is
> Clint, a self-employed engineering consultant, is contemplating purchasing an old building for renovation. After the work is completed, Clint plans to rent out two-thirds of the floor space to businesses; he would live and work in the remaining portion.
> In 2017, Bianca earned a salary of $164,000 from her employer, CallMart. How much in FICA and Medicare taxes will CallMart withhold from Bianca’s salary?
> Lynn, age 45, is single and has no dependents. Her income and expenses for the current year are reported as follows. Income Salary…………………………………………………………………$33,000 Taxable interest on corporate bonds………………………..3,700 Business income………………………………………………….64,
> Farr is single, has no dependents, and does not itemize her deductions. She shows the following items relative to her current-year tax return. Bargain element from the exercise of an ISO (no restrictions apply to the stock)…………………………………………………………………
> Renee and Sanjeev Patel, who are married, report taxable income of $273,000. They computed positive AMT adjustments of $38,000, negative AMT adjustments of $14,000, and AMT preference items of $67,500. The couple itemizes their deductions. a. Compute the
> Pat, who is age 66 and single with no dependents, received a salary of $90,000. She reports interest income of $1,000, dividend income of $5,000, gambling winnings of $4,000, and interest income from 2014 private activity bonds of $40,000. The dividends
> Determine the appropriate amount of 2017 additional Medicare tax for Mario, a single individual. His wages total $440,000.
> Jane and Robert Brown are married and have eight children, all of whom are eligible to be claimed as the couple’s dependents. Robert earns $94,000 working as an accountant, and Jane earns $38,000 as a teaching aide. Given their large family, the Browns l
> Gabriel, age 40, and Emma, age 33, are married with two dependents. They reported AGI of $110,000 for the year, including net investment income of $3,000 and gambling winnings of $2,500. They incurred the following expenses during the year, all of which
> During the current year, Yoon earned $10,000 in interest on corporate bonds and incurred $13,000 of investment interest expense related to the bond holdings. Yoon also earned $5,000 interest on private activity bonds that were issued in 2013 and incurred
> Walter, who is single, owns a personal residence in the city. He also owns a cabin near a ski resort in the mountains. He uses the cabin as a vacation home. In August, Walter borrowed $60,000 on a home equity loan and used the proceeds to reduce credit c
> Ramon had AGI of $180,000 in 2017. He is considering making a charitable contribution this year to the American Heart Association, a qualified charitable organization. Determine the current allowable charitable contribution deduction in each of the follo
> Thomas purchased a personal residence from Rachel. To sell the residence, Rachel agreed to pay $5,500 in points related to Thomas’s mortgage. Discuss the deductibility of the points.
> Wolfgang is age 33. His AGI is $125,000. He reports the following itemized deductions for the year. Medical expenses [$15,000 _ (10% _ $125,000)]......................................$2,500 State income taxes………………………………………………………………………………4,200 Charitabl
> Would an individual taxpayer receive greater benefit from deducting an expenditure or from taking a credit equal to 25% of the expenditure? How would your response change if the item would only be deductible from AGI?
> Sarah has investments in four passive activity partnerships purchased several years ago. Last year the income and losses were as follows: Activity ………………….Income (Loss) A……………………………………$ 30,000 B……………………………………(30,000) C…………………………………….(15,000) D…………………………
> Sammy and Monica, both age 67, incur and pay medical expenses in excess of insurance reimbursements during the year as follows. For Sammy……………………………….$16,000 For Monica (wife)…………………………4,000 For Chuck (son)……………………………2,500 For Carter (Monica’s father)……
> Valentina, who is single, itemizes deductions and has no dependents. In the current year, she earned $6,000 of municipal bond interest income, and she paid state income taxes of $5,600, mortgage interest of $8,000, and $3,900 of interest on a home equity
> Pedro, age 57, is the sole owner of his principal residence, which he has owned and occupied for 10 years. Maria, his spouse, has also lived there 10 years. He sells the house for a realized gain of $340,000. a. Can Pedro use the § 121 exclusion if he an
> In 2017, Liza exercised an incentive stock option that had been granted to her in 2014 by her employer, White Corporation. Liza acquired 100 shares of White stock for the option price of $190 per share. The fair market value of the stock at the date of e
> Burt, the CFO of Amber, Inc., was granted incentive stock options in 2012. Burt exercised the options in February 2016, when the exercise price was $75,000 and the fair market value of the stock was $90,000. Burt sold the stock in September 2017 for $150
> Rust Company is a real estate construction business with average annual gross receipts of $3 million. Rust uses the completed contract method on a particular contract that requires 16 months to complete. The contract is for $500,000, with estimated costs
> Dart Corporation (a calendar year C corporation) would like to invest some of its excess earnings from retail operations in real estate. Dart is considering a purchase of 10 acres of land in a city whose economic prospects are good and whose population i
> A retailer’s store is destroyed by a tornado but is insured for its replacement cost. Consequently, the retailer has a $40,000 gain after receiving the insurance proceeds. The store is not replaced because the retailer spends the insurance proceeds on ad
> How could the AMT be calculated without using regular taxable income as a starting point? Be specific.
> Kelly recently was promoted and received a substantial raise. She talks to her tax adviser about the potential tax ramifications. After making some projections, her adviser “welcomes her to the AMT club.” Kelly believes that it is unfair that she must pa
> During the year, Rachel earned $18,000 of interest income on 2011 private activity bonds. She incurred interest expense of $7,000 in connection with amounts borrowed to purchase the bonds. What is the effect of these items on Rachel’s taxable income? On
> During the year, Ricardo made the following contributions to a qualified public charity: Cash……………………………………………………………………………………$220,000 Stock in Seagull, Inc. (a publicly traded corporation)………………280,000 Ricardo acquired the stock in Seagull, Inc., as an
> Joan is a self-employed consultant. What is her exposure to the Federal selfemployment tax? Discuss the tax rates that apply to Joan’s profits and the income base amounts for the year.
> A friend tells you that she does not worry about the AMT because she does not itemize deductions and, as a result, she does not generate many AMT adjustments. Evaluate your friend’s assertion.
> Wesley, who is single, listed his personal residence with a real estate agent on March 3, 2017, at a price of $390,000. He rejected several offers in the $350,000 range during the summer. Finally, on August 16, 2017, he and the purchaser signed a contrac
> Matt, who is single, always has elected to itemize deductions rather than take the standard deduction. In prior years, his itemized deductions always exceeded the standard deduction by a substantial amount. As a result of paying off the mortgage on his r
> Celine will be subject to the AMT in 2017. She owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the building’s value, the realized gain would be $85,000. Ed has offered to purchase the
> In 1998, Douglas purchased an office building for $500,000 to be used in a business. Douglas sells the building in the current tax year. Explain why the recognized gain or loss for regular income tax purposes is different from any recognized gain or loss
> Howard’s roadside vegetable stand (adjusted basis of $275,000) is destroyed by a tractor-trailer accident. He receives insurance proceeds of $240,000 ($300,000 fair market value $60,000 coinsurance). Howard immediately uses the proceeds plus additional c
> Evaluate the validity of the following statements: If the stock received under an incentive stock option (ISO) is sold in the year of exercise, there is no AMT adjustment. If the stock is sold in a later year, there will be an AMT adjustment then.
> Evaluate the validity of the following statement: In a year in which depreciable personal property is sold, the amount of the AMT gain adjustment equals the amount of the current year’s AMT depreciation adjustment.
> Alfred is single, and his AMTI of $350,000 consists of the following. What tax rates are applicable in calculating Alfred’s TMT? Ordinary income………………..$250,000 Long-term capital gains…………70,000 Qualified dividends……………….30,000
> Andrew and Monica, unrelated individuals, use the same Federal income tax filing status (head of household). However, Monica’s AMT exemption amount is $52,800, while Andrew’s is $0. Explain.
> An AMT liability results if the tentative minimum tax (TMT) exceeds the regular income tax liability. But what happens if the regular income tax liability exceeds the TMT? Does this create a negative AMT that can be carried to other years? Explain.
