Question: During the current year, Covino Construction makes

> Susan loaned $2,000 to her minister a year ago. The loan is not evidenced by a note and does not bear interest. The minister has moved out of town without paying her back. She doesn't want to embarrass him by asking him to repay the loan. Identify t

> Jake loaned his cousin, Arnold, $10,000 in March 2015 to open a cybercafe in Santa Barbara. Arnold signed a loan agreement to pay Jake 7% interest annually, with the principal due in 2018. Jake received his 2015 interest payment but did not receive any

> Carla has a B.S. degree in history and is employed as an administrative assistant for a public accounting firm. After work, she attends Wittman College where she is enrolled in an accounting course. Her goal is to take the necessary courses to sit for

> Based on the information provided in the text, calculate Rufus and Rhonda's taxable income and their tax liability. Assume that they are cash basis taxpayers and want to be as aggressive as possible in taking their allowable deductions. In addition, yo

> Tom is a CPA for a large regional firm. In preparing the tax return for Espresso Industries, he notices that the firm has an unusually high amount of travel, meal, and entertainment expenses. Therefore, he decides to examine the supporting documentation

> What requirements must be met to deduct life insurance premiums paid on an employee's policy?

> Explain the criteria used to determine whether an educational expense is deductible or nondeductible and how education expenses are deducted on a taxpayer's return.

> Under what circumstances are business gifts deductible?

> The purpose of this assignment is to introduce you to the tax information provided by the Internal Revenue Service on its World Wide Web site (http://www.irs.gov/). Go to this site and look at the various types of information provided and write a short

> What records are necessary to properly document travel, entertainment, and gift expenses?

> How is the gross income from a rental property or a royalty property determined?

> What problems does the taxpayer who uses an automobile for both business and personal purposes encounter? What option(s) does the taxpayer have regarding the automobile expense deduction?

> How does an entertainment expense directly related to business differ from an entertainment expense associated with business?

> What requirements must be met for meal and entertainment expenses to be deductible?

> Most expenditures that have a business purpose and meet the ordinary, necessary, and reasonable requirements are deductible. However, specific rules must be adhered to in determining the deductibility of many expenses that meet this test. Why are these

> Explain the general requirements that must be met to obtain a deduction for moving expenses and the type of moving expenses that are deductible.

> Is the interest on education loans always deductible? Explain

> Who is eligible to make and receive contributions to a Coverdell Education Savings Account?

> How does the tax treatment of a conventional IRA differ from a Roth IRA?

> Are all taxpayers allowed a deduction for contributions to a conventional individual retirement account? Explain.

> Joey and Camilla are married and have three children, ages 8, 16, and 18. They own a commercial cleaning business that is organized as a sole proprietorship and makes $170,000 annually. They have $30,000 of other taxable income (net of allowable deduct

> How is the degree of completion of a long-term construction contract determined?

> Why are self-employed taxpayers allowed to deduct their medical insurance premiums and self-employment tax for adjusted gross income?

> What is an accountable employee expense reimbursement plan? What is the significance of such a plan?

> Why are deductions for adjusted gross income "better" than deductions from adjusted gross income?

> Are all legal fees paid by a taxpayer deductible? Explain.

> Are sales taxes deductible? Explain.

> Explain how a taxpayer determines qualified production activities income and how a taxpayer calculates their qualified production activities deduction.

> What activities qualify for the qualified production activities deduction?

> Explain how the tax benefit rule may apply to bad debt deductions.

> What accounting method must be used to account for bad debts that result from the sale of merchandise or the provision of services?

> Explain the difference in the of tax treatment business and nonbusiness bad debts.

> This chapter noted that returns on investment are taxable, whereas returns of investment are not taxable. What is the conceptual basis for this treatment? Cite examples of each type of return, and explain why they are or are not taxable.

> Victoria's son needs $5,000 for tuition at the Motown School of Dance. Victoria, who is in the 33% marginal tax rate bracket, intends to pay the tuition by selling stock worth $5,000 that she paid $2,000 for several years ago.

> Is all compensation paid to an employee deductible? Discuss the circumstances in which employee compensation cannot be deducted.

> Can education expense incurred by one taxpayer be deductible whereas the same expense incurred by another taxpayer is not deductible? Explain.

> Norman was the sole shareholder and operator of two successful video arcades. While he was in the hospital with heart problems, his wife, Helen, filed for divorce and took a number of legal steps, including obtaining a temporary restraining order agains

> Brad graduated from law school in Detroit in May 2016. He had lived in the area for 5 years before enrolling in law school. Following his graduation, he prepared for the Michigan bar exam, which he took in July 2016. In August 2016, Brad moved some of h

> Felix and Ismael were college roommates. Five years after they graduate, Ismael is a tax manager in a large public accounting firm, and Felix is still in his first job as an engineer for a construction company. Felix is not sure whether he wants to stay

> Rosita's grandmother dies in November 2016 and leaves her an investment portfolio worth $180,000. In January 2017, when Rosita receives ownership to the investments, the portfolio consists of $112,000 of tax-exempt securities and $68,000 of taxable secu

> Allison and Paul are married and have no children. Paul is a lawyer who earns a salary of $80,000. In November 2016, Allison quit her job as a copy editor and began exploring the possibility of breeding and showing horses. She would run the business o

> Manuel and Fernando own and operate an electronics store, Electronica, as an S corporation. Manuel owns 70%, and Fernando owns 30%. For the current year, the store reports the following: Sales revenue …………………………………………$1,000,000 Long-term capital gains…

> Andy, Azim, and Ashwin operate the Triple-A Steak House, a popular restaurant and bar. The three, who have been friends since childhood, are equal partners in the establishment. For the year, Triple-A reports the following: Sales revenues ……………………………

> What effect does an asset's adjusted basis have in determining the gain or loss realized upon its sale?

> Determine how each of the following expenses would be deducted for tax purposes. If the expense is not deductible, explain why not. a. Chander paid $500 in interest on a loan he used to purchase equipment for his retail business. b. Peter paid $500 in in

> Using the information below, prepare a spreadsheet that will calculate an individual's taxable income. The spreadsheet should be flexible enough to accommodate single and married taxpayers as well as changes in the information provided below. A templat

> Discuss how an individual would deduct each of the following expenditures. If more than one treatment is possible, discuss the circumstances under which each type of deduction would be obtained: a. Amos purchased 500 shares of Lietzke stock for $50 per

> Alexandra is a veterinarian employed by Fast Vet Services. Susan is a self-employed veterinarian. During the current year, Alexandra and Susan have the same amounts of income and deductions. Why might a deductible expense paid by Susan affect her taxa

> Martin Corporation is an accrual basis taxpayer that manufactures cellular phones. The company provides a 5-year limited warranty on its phones and estimates that warranty expenses will be 1.5% of sales. During the current year, Martin has sales of $12

> Lonnie owns 100% of Quality Company's common stock. Lonnie, the president of Quality, is a cash basis taxpayer. Quality is short of cash as of December 31, 2017, the close of its tax year. As a result, it is necessary to accrue a $50,000 bonus payable

> Kai, a cash basis taxpayer, is a 75% owner and president of Finnigan Fish Market. Finnigan, an S corporation, uses the accrual method of accounting. On December 28, 2017, Finnigan accrues a bonus of $40,000 to Kai. The bonus is payable on February 1, 201

> The Parr Corporation incurs the following expenses. When can it deduct the expenses if it uses the accrual method of accounting? the cash method? a. Parr Corporation mails a check for $5,000 to the United Way on December 26, 2017. The company's cance

> Joy incurs the following expenses in her business. When can she deduct the expenses if she uses the accrual method of accounting? the cash method? a. Joy rents an office building for $750 a month. Because of a cash-flow problem, she is unable to pay th

> Explain the difference in determining the amount of income recognized from a conduit entity versus a taxable entity.

> Damon's Lawn and Garden Supply, an accrual basis taxpayer, is the exclusive dealer for Tru-Cut lawn mowers. In 2017, Damon's agrees to pay the Dash Corporation, the manufacturer of Tru-Cut, an additional $15 per lawn mower. In exchange, the Dash Corpor

> Gonzo Company is an accrual basis taxpayer. It provides medical insurance for its employees through a self-insured reimbursement plan. Gonzo pays $150 per month per employee into the plan fund. The fund is then used to reimburse employees' medical exp

> Shawna earns $95,000 as a biologist for Berto Corporation. She also consults with other businesses on compliance with environmental regulations. During the current year, she earns $40,000 in consulting fees. Determine the amount of self-employment tax

> Appliance Sales Corporation sells all types of appliances. In addition, it offers purchasers of its appliances the option of purchasing repair contracts. During the current year, Appliance estimates that repairs totaling $13,100 will be made under the

> The Kane Corporation is an accrual basis taxpayer. State law requires that Kane acquire workers’ compensation insurance from a third-party carrier or maintain a self-funded insurance plan. Kane has decided to create a self-fund workers’ compensation pla

> On July 1, 2017, Andaria borrows $30,000 from the First Financial Bank. The loan is for 1-year at an annual interest rate of 10%. How much interest can Andaria deduct under each of the following situations? a. The bank deducts the interest from her the l

> The Adelaide Advertising Agency, a cash basis taxpayer, bills its clients for services it renders and any out-of-pocket expenses it pays to third parties on behalf of its clients. For example, in creating a television commercial for a client, Adelaide ch

> Charlotte owns a custom publishing business. She uses 500 square feet of her home (2,000 square feet) as an office and for storage. All her business has come from telemarketing (telephone sales), direct mailings, or referrals. In her first year of ope

> Hromas uses a separate room in his home as an office. The room is 500 square feet of the total 2,000 square feet of the house. During the current year, Hromas incurs the following household expenses: / How much of a deduction is Hromas allowed for th

> Explain how the capital recovery concept applies to the taxation of annuities. Consider both purchased annuities and pension payments in your answer.

> Haysad owns a house on Lake Tahoe. He uses a real estate firm to screen prospective renters, but he makes the final decision on all rentals. He also is responsible for setting the weekly rental price of the house. During the current year, the house re

> Matilda owns a condominium on the beach in Rehoboth, Delaware. During the current year, she incurs the following expenses related to the property: Mortgage interest…………&aci

> Mel and Helen own a beachfront home in Myrtle Beach, S.C. During the year, they rented the house for 5 weeks (35 days) at $800 per week and used the house for personal purposes 65 days. The costs of maintaining the house for the year were Mortgage int

> Return to the facts of problem 67. Assume that you are the CPA in charge of preparing the tax return for each of the taxpayers in the problem. Based on the Standards for Tax Services (which can be found at www.cengagebrain.com), explain what you should

> Lee and Sally own a winter retreat in Harlingen, Texas, that qualifies as their second home. This year they spent 40 days in their cabin. Because of its ideal location, it is easy to rent at $120 a day and was rented for 80 days this year. The total u

> Sharon is single and a data-processing manager for the phone company. She also owns and operates a sports memorabilia store. Sharon goes to shows, subscribes to numerous magazines on sports memorabilia, and maintains a Web page on the Internet. She has

> As a hobby, Jane creates and sells oil paintings. During the current year, her sales total $8,000. How is the tax treatment of her hobby different from the treatment of a trade or business, if a. Her business expenses total $5,600? b. Her business expe

> Determine the current tax deduction allowed in each of the following situations: a. Sam owns and operates SoftPro, a software programming business. In June, the firm files for bankruptcy. Eighteen months earlier, Karl, had recommended SoftPro as a good

> Determine the current tax deduction allowed in each of the following situations: a. Doug, John's son, buys a new car that is titled in Doug's name. John pays for Doug's auto license tag. The tag costs $220: $40 for registration plus $180 in property ta

> Tracy and Brenda are equal partners in Crescent Home Furniture, which is organized as an S corporation. For the year, the company reports sales revenue of $330,000 and business expenses of $195,000. Crescent also earns $15,000 in taxable interest and d

> What is the difference between earned income and unearned income?

> Kerry is employed as a ticket vendor at an off-track betting parlor in New York. No credit is extended to customers, and employees are not allowed to bet on races. Kerry is a compulsive gambler and occasionally places bets without paying for them. In

> Ying pays an adviser $300 to help manage her investments and provide investment advice. The adviser's fee is not directly related to any particular investment owned by Ying. She owns $40,000 worth of municipal bonds that pay her $2,400 in interest and

> During the current year, Maureen pays Universal Bank and Trust $1,600 for investment advice. The fee is not directly related to any particular investment owned by Maureen. The company provides her with the following summary of her investments: Fair M

> During the current year, the Fremantle Corporation, a real estate development firm, incurs $2,200 of expenses lobbying and testifying before the city council to change the zoning rules. The firm also spends $3,500 testifying before the state legislature

> Are the following payments deductible? a. A contribution to a fund to finance Honest Abe's campaign for mayor. b. A contribution to the Hardcore Gamblers' Association to fund efforts to persuade the public to vote for parimutuel betting on licensed turtl

> What is the basis for valuing assets transferred by gift and at death?

> What is the proper tax treatment for each of the following expenses? a. Bernilyn, a commercial real estate broker, is late for a meeting with her boss when she is stopped and ticketed $150 for speeding. She is using a company car when she receives the ti

> What is the proper tax treatment for each of the following expenses? a. All apartment house construction in Sandy Beach must comply with local and state building codes. To ensure that these codes are observed, Rex, a city building inspector, regularly v

> Neal and Ned spend $25,000 on travel, surveys, and financial forecasts to investigate the possibility of opening a bagel shop in the city. Because their suburban bagel shop has been so successful, they would like to expand their operations. What is the

> Rebecca is the head chef at a local restaurant and is exploring the possibility of leaving her current job and opening her own restaurant in a nearby town. She has spent $15,000 investigating potential locations for the restaurant and $14,000 on an anal

> For each of the following situations, discuss whether the expense is currently deductible or must be capitalized: a. The Mickleham Hotel installs a $125,000 sprinkler system to comply with recently enacted fire regulations. b. The Healesville Corporation

> What type of income does a sole proprietor of a business receive?

> Discuss whether the following expenditures meet the ordinary, necessary, and reasonable requirements: a. The Brisbane Corporation is being sued in connection with allegations that it produced a faulty product. Brisbane has hired an expert witness to test

> Discuss whether the following expenditures meet the ordinary, necessary, and reasonable requirements. a. Sadie owns 5 shares of Megaconglomerate stock. She spent $4,000 to attend the annual shareholders' meeting. b. Sam runs a successful medical practic

> Big Star Auto regularly advertises on local television. Carla, the owner of Big Star pays her 6-year-old grandson $250 for each commercial in which he appears for Big Star. During the current year, the grandson appeared in 100 commercials. Big Star wa

> In 2017, RayeAnn acquires a car for $14,000. She uses the car in her advertising business and for personal purposes. Her records indicate the car is used 70% for business and that the total operating expenses, including depreciation, are $3,800. a. How

> Hamid owns and lives in a duplex. He rents the other unit to an unrelated married couple for $850 per month. During the current year, he incurs the following expenses related to the duplex: Mortgage interest………………………………………………………………..$ 7,500 Property t

> How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer.

> Don was a senior vice president of a bank until its officials found he had embezzled more than $1,000,000. Don had set up fictitious checking accounts and deposited the funds into the accounts. He then created fictitious loans to himself. The embezzled

> Max owns an office building that he rents for $750 a month. Under the terms of the lease, the tenant is responsible for paying all property taxes and costs related to the building's operation and maintenance. The only cost to Max in relation to the lea

> Fernando is a retired auto mechanic. Since retiring four years ago, he has made stained glass windows. Because he has only occasional sales, Fernando treats this activity as a hobby. A friend of Fernando's recommends him to a local merchant who is renova

> Marcus is the vice president of human resources for Griffin Industries. He spent one week testifying before Congress on the impact health care legislation will have on small business. His trip cost $2,750. Identify the tax issue(s) posed by the facts p

> How is a deferral different from an exclusion?

> Chin, a cash basis taxpayer, borrows $25,000 on a 2-year loan from State Bank to purchase business equipment. Under the terms of the loan, State Bank deducts $4,500 in interest on the loan and gives Chin the $20,500 net proceeds. Chin will repay State

> Angela owns a duplex. She rents out one unit and lives in the other. During the current year, she pays $4,500 in interest on the loan she used to buy the duplex, $900 in property taxes on the duplex, and $1,200 in dues to the duplex association which m