Question: Larry is the sole proprietor of a

> In each of the following independent situations, determine how much, if Critical Thinking any, qualifies as a deduction for AG! under§ 222 (targeted tuition and related expenses). a. Lily is single and is employed as an architect. During 2018, she spent

> Tim is a real estate broker \Vho specializes in con1mercial real estate. Although he usually buys and sells on behalf of others, he also maintains a portfolio of property of his own. He holds this property, mainly unimproved land, either as an investment

> Elijah is employed as a full-rin1e high school teacher. The school district for which he works recently instituted a policy requiring all of its teachers to start working on a master's degree. Pursuant to this new rule, Elijah spent most of the summer of

> One of your clients, Texas, Inc., is considering electing S status. Both of Texas's equal shareholders paid $30,000 for their stock. As of the beginning of 2018, Texas's Subchapter C NOL carryforward is $110,000. Its taxable income projections for the ne

> Evaluate the following statement: Non-U.S. persons never are subject to U.S. taxation on U.S.-source investment income, so long as they are not engaged in a U.S. trade or business.

> Give a simple answer to Andre's question: "If I move to the United States, how will the Federal government tax my widget sales and capital gains?" Andre will be living in New York City, where state and local taxes are very high. Ignore the effects of tax

> Bill and Mary filed a joint Federal income tax return this year. Mary owns a 30%. interest in MAJIC Partnership, a women's dress boutique. Mary's share of the partnership's net income is $280,000. Her shares of the partnership's W-2 wages and unadjusted

> Hart Enterprises, a don1estic corporation, owns 100%. of OK, Ltd., an Irish corporation. OK's gross income for the year is $10 million. Determine whether any of the following transactions produce Subpart F gross income for the current year. a. OK earned

> Valence Corporation's Form 11205 shows ordinary income of $88,000 for the year. Daniel owns 40% of the Valence stock throughout the year. The following information is obtained from the corporate records. a. Compute Valence's book income or loss. b. Com

> Several of Egret Company's employees have asked the company to create a hiking trail that en1ployees could use during their lunch hours. The company owns vacant land that is being held for future expansion, but would have to spend approximately $50,000 i

> Paul suffers from emphysema and severe allergies and, upon the recommendation of his physician, has a dust elimination system installed in his personal residence. In connection with the system, Paul incurs and pays the following amounts during 2018. Th

> The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2018, Jessica contributed land valued at $600,000 to the partnership in exchange for a 500A. interest. She had purchased the land in 2010 for $420,000

> Aaron, a resident of Minnesota, has been a driver for Green Delivery Service for the past six years. For this purpose, he leases a truck from Green, and his compensation is based on a percentage of the income resulting from his pickup and delivery servic

> At die beginning of the year, Teal Corporation held accumulated E & P of $210,000. On March 30, Teal sold an asset at a loss of $200,000. For the calendar year, Teal incurred a deficit in current E & P of $305,000, which includes the loss on the sale of

> Luciana, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Luciana exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jo

> Tim is the vice president of western operations for J\1aroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company off ice. The company-provided home is equipped with high-

> Foldlt, a U.S. business, paid income taxes to Mexico relative to profitable sales of shipping boxes it made in that country. Can it claim a deduction for these taxes in con1puting U.S. taxable income' A tax credit? Both? Explain.

> Compute current E & P for Sparrow Corporation (a calendar year, accrual basis taxpayer). Sparrow reported the following transactions during 2018, its second year of operation. • Sparrow uses the UFO inventory method, and its UFO r

> In late 2018, the Polks come to you for tax advice. They are considering selling son1e stock investments for a loss and making a contribution to a traditional IRA. In reviewing their situation, you note that they have large n1edical expenses and a casual

> Emerald Corporation, a calendar year and accrual method taxpayer, provides the following information and asks you to prepare Schedule M-1 for 2018: Net income per books (after-tax) Federal income tax per books $268,200 31,500 15,000 Tax-exempt inter

> Harvey is a self-employed accountant with earned incon1e from the business of $120,000 (after the deduction for one-half of his self-employment tax). He has a profit sharing plan (e.g., defined contribution Keogh plan). What is the maximum amount Harvey

> Assume in Problem 34 that Julio takes a capital loss carryover of $50,000 Decision Making into the current tax year. Julio records no other capital gain transactions during the year. What amount of the capital loss may Julio deduct in the current year in

> Egret Corporation, a calendar year C corporation, was forn1ed on March 6, 2018, and opened for business on July 1, 2018. After its formation but prior to opening for business, Egret incurred the following expenditures: What is the n1aximum amount of th

> Sean Moon is president, secretary, treasurer, sole director, and sole shareholder of Streetz, an S corporation real estate company. He n1anages all aspects of the con1pany's operations, and he is the only person working at the company that holds a real e

> In each of the following independent situations, determine the dividends received deduction for the calendar year C corporation. The corporate shareholders own less than 20% of the stock in the corporations paying the dividends. Almond Banana Cherry

> Orange, Inc., a calendar year corporation in Clemson, South Carolina, elects S corporation status for 2018. The con1pany generated a $74,000 NOL in 2017 and another NOL of $43,000 in 2018. Orange stock always is owned by the same four shareholders, each

> Kristen, an independent management consultant, is based in Atlanta. During March and April of 2018, she is contracted by a national hardware chain to help implement revised human resource policies in Jackson (Mississippi) temporarily. During this period,

> If the beginning balance in Swan, Inc.'s OAA is $6,700 and the following transactions occur, what is Swan's ending OAA balance? Depreciation recapture income $ 21,600 Payroll tax penalty (4,200) Tax-exempt interest income Nontaxable life insurance p

> Casey is in the 12% marginal tax bracket, and Jean is in the 35% marginal tax bracket. Their employer is experiencing financial difficulties and cannot continue to pay for the company's health insurance plan. The annual premiums are approximately $8,000

> Which of the following items are exclusions from gross income? a. Alimony payments received from a divorce settlement in 2016. b. Damages award received by the taxpayer for personal physical injury-none were for punitive damages. c. A new golf cart won i

> In January of the current year, Wanda transferred machinery worth $200,000 (adjusted basis of $30,000) to a controlled corporation, Oriole, Inc. The transfer qualified under§ 351. Wanda had deducted $165,000 of depreciation on the machinery while it was

> Burgundy, Inc., and Violet Gomez are equal partners in the calendar year BV LLC. Burgundy uses a fiscal year ending April 30, and Violet uses a calendar year. Burgundy receives an annual guaranteed payment of $100,000 for use of capital contributed by Bu

> George is a U.S. citizen who is employed by Hawk Enterprises, a global company. Beginning on June 1, 2018, George began working in London. He worked there until January 31, 2019, when he transferred to Paris. He worked in Paris the remainder of 2019. His

> In 2018, Kathleen Tweardy incurs $30,000 of interest expense related to her investments. Her investment income includes $7,500 of interest, $6,000 of qualified dividends, and a $12,000 net capital gain on the sale of securities. Kathleen asks you to con1

> Barney Chang and Aldrin, Inc., a don1estic C corporation, have Digging Deeper decided to form BA LLC. The new entity will produce a product that Barney recently developed and patented. Barney and Aldrin each will own a 50%. capital and profits interest i

> Sam and Drew are equal n1en1bers of the SD LLC, formed on June 1 of the current year. Sam contributed land that he inherited from his uncle Garza in 2009. Garza had purchased the land in 1984 for $30,000. The land was worth $100,000 when Garza died. The

> Ramon had AG! of $180,000 in 2018. 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

> During the current year, Paul, the vice president of a bank, made gift5 in the following amounts. In addition, on professional assistants' day, Paul takes Sarah to lunch at a cost of $82. Presuming that Paul has adequate substantiation and is not reimb

> Wesley and Camilla (ages 90 and 88, respectively) live in an assisted care facility and for 2017 and 2018 received their support from the following sources: a. Which persons are eligible to treat Wesley and Camilla as dependents under a n1ultiple suppo

> In determining Blue Corporation's current E & P for the current tax year, how should taxable income be adjusted as a result of the following transactions? a. A capital loss carryover from one year ago, fully used this year. b. Nondeductible business mea

> Mason performs various home repair services for Isabella. In determining whether Mason is an employee or an independent contractor, comment on the relevance of each of the factors listed below. a. Mason perforn1s services only for Isabella and does not

> a. In each of the following independent situations, determine the corporation's income tax liability. Assume that all corporations use a calendar year for tax purposes and that the tax year involved is 2017. b. Using Microsoft Excel (or a similar softw

> Linda, age 37 who files as a single taxpayer, had AG! of $280,000 for 2018. She incurred the following expenses and losses during the year: Calculate Linda's allowable itemized deductions for the year. Medical expenses (before the 7.5%-of-AGI limit

> Rosa's employer has instituted a flexible benefits progran1. Rosa will use the plan to pay for her daughter's dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 24% n1arginal tax bracket and estimates that

> Rex, age 55, is an officer of Blue Company, which provides him with the following nondiscriminatory fringe benefits in 2018. • Hospitalization insurance premiums for Rex and his dependents. The cost of the coverage for Rex is $2,900 per year, and the ad

> A new client, John Dobson, recently formed John's Premium Steakhouse, Inc., to operate a new restaurant. The restaurant will be a first-time business venture for John, who recently retired after 30 years of military service. John transferred cash to the

> Compute the taxable incon1e for 2018 in each of the following independent situations: a. Drew and Meg, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AG! of $125,000 and itemized deduc

> In 2018, Muhammad purchased a new computer for $16,000. The computer is used 100% for business. Muhammad did not make a § 179 election with respect to the computer. He does not claim any available additional first-year depreciation. If Muhammad uses the

> Wesley, who is single, listed his personal residence with a real estate agent on March 3, 2018, at a price of $390,000. He rejected several offers in the $350,000 range during the sumn1er. Finally, on August 16, 2018, he and the purchaser signed a contra

> Alex, who is single, conducts an activity this year that is classified as a hobby. The activity produces the following revenues and expenses. Without regard to this activity, Alex's AGI is $42,000. Detern1ine the amount of gross income that Alex must r

> In 2018, Susan's sole proprietorship earns $300,000 of self-employment net income (after the deduction for one-half of self-employment tax). Calculate the maximum amount Susan can deduct for contributions to a defined contribution Keogh plan.

> Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer-qualified retirement plans. Their total AG! in 2018 is $192,000, and they earn salaries of $87,000 and $95,000, respectively. What

> Janet, age 29, is unmarried and is an active participant in a qualified retirement plan. Her modified AG! is $65,000 in 2018. a. Calculate the amount Janet can contribute to a traditional IRA and the amount she can deduct. b. Assume instead that Janet is

> Ashley (a single taxpayer) is the owner of ABC LLC. The LLC (a sole proprietor ship) reports QB! of $900,000 and is not a "specified services" business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,0

> Christine is a full-rime teacher of the fourth grade at Vireo Academy. During the current year, she spends $1,400 for classroom supplies. On the submission of adequate substantiation, Vireo reimburses her for $500 of these expenses-the maximum reimbursem

> Rick Beam has been an independent sales representative for various textile manufacturers for many years. His product5 consist of soft goods such as tablecloths, curtains, and drapes. Rick's customers are clothing store chains, department stores, and smal

> Caden and Lily are divorced on March 3. 2017. For financial reasons, however, Lily continues to live in Caden's apartment and receives her support from hin1. Caden does not claim Lily as a dependent on his 2017 Federal income tax return but does so on hi

> Belinda spent the last 60 days of 2018 in a nursing home. The cost of the services provided to her was $18,000 ($300 per day). Medicare paid $8,500 toward the cost of her stay. Belinda also received $5,500 of benefits under a long term care insurance pol

> On December 1, 2016, Lavender Manufacturing Company (a corporation) purchased another company's assets, including a patent. The patent was used in Lavender's manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate

> Siena Industries (a sole proprietorship) sold three§ 1231 assets on October 10, 2018. Data on these property dispositions are as follows. a. Determine the an1ount and the character of the recognized gain or loss fron1 the disposition of eac

> Jinjie owns two parcels of land (§ 1231 assets). One parcel can be sold at a loss of $60,000, and the omer parcel can be sold at a gain of $70,000. Jinjie has no non recaptured § 1231 losses from prior years. The parcels could be sold at any time because

> Geraniun1, Inc., has the following net § 1231 results for each of the years shown. What is the nature of the net gain in 2017 and 2018? Таx Year Net 5 1231 Loss Net 5 1231 Gain 2013 $18,000 2014 33,000 2015 42,000 2016 $41,000 2017 30,00

> Joyce, a widow, lives in an apartment with her two minor children (ages 8 and 10), whom she supports. Joyce earns $33,000 during 2018. She uses the standard deduction. a. Calculate the an1ount, if any, of Joyce's earned income credit. b. During the year,

> Tom Howard and Frank Peters are good friends (and former college roommates). Each owns investment property in the other's hometown (Tom lives in Kalan1azoo, MI; Frank lives in Austin, TX). To make their lives easier, they decide to exchange the investmen

> Jenna, a longtin1e client of yours, is an architect and the president of the Communications local Rotary chapter. To keep up to date with the latest developments in her Digging Deeper profession, she attends continuing education seminars offered by the a

> Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are employed outside the home and, during 2018, earn salaries as follows: $16,000 (Jim) and $5,200 (Mary Jean). To care for their children while they work, th

> Your client, Jasper, is an employee of a defense contractor and was assigned to work on a military base in Australia. As a condition of his employment, he \Vas required to live in housing that was provided to military personnel. The housing provided was

> Paul and Karen Kent are married, and both are employed (Paul earns $44,000 and Karen earns $9,000 during 2018). Paul and Karen have two dependent children, both under the age of 13 (Samuel and Joy). So they can work outside the home, Paul and Karen pay $

> In Decen1ber of each year, Eleanor Young contributes 10%. of her gross income to the United Way (a 50% organization). Eleanor, who is in the 24% marginal tax bracket, is considering the following alternatives for satisfying the contribution. Eleanor ha

> The Wilmoths plan to purchase a house and would like to determine the after tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 24% Federal incon1e tax bracket and the Solo state income tax bracket (i.e., an

> Bob and Carol have been in and out of marital counseling for the past few years. Early in 2018, they decide to separate. However, because they are barely able to get by on their current incomes, they cannot afford separate housing or the legal costs of a

> Norma, who i5 single and uses the cash method of accounting, lives in a state that imposes an income tax. In April 2018, she files her state income tax return for 2017 and pays an additional $1,000 in state income taxes. During 2018, her withholdings for

> Emma Doyle is employed as a corporate attorney. For calendar year 2018, she had AG! of $100,000 and paid the following medical expenses: Bob and April would qualify as Emma's dependents, except that they file a joint return. Emma's medical insurance po

> Adrian was awarded an academic scholarship to State University for the 20182019 academic year. He received $6,500 in August and $7,200 in December 2018. Adrian had enough personal savings to pay all expenses as they came due. Adrian's expenditures for th

> In 2018, David is age 78, is a widower, and is a dependent of his son. How does this situation affect the following' a. David's own individual filing requirement. b. The standard deduction allowed to David. c. The availability of any additional standard

> Patrick and Eva are planning to divorce in 2018. Patrick has offered to pay Eva $12,000 each year until their 11-year-old daughter reaches age 21. Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000.

> Compute the taxable income for 2018 for Aiden on the basis of the following information. Aiden is married but has not seen or heard from his wife since 2016. Salary Interest on bonds issued by the City of Boston $80,000 3,000 Interest on CD issued b

> One income exclusion that some states allow that the Federal government does not is for lottery winnings. Does your state have an exclusion for lottery winnings' If so, how does it work? Why do you think a state might allow winnings from its own state lo

> Con1pute the taxable income for 2018 for Emily on the basis of the following information. Her filing status is single. Salary Interest income from bonds issued by Xerox $85,000 1,100 Alimony payments received (divorce occurred in 2014) 6,000 Contrib

> Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2017, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Gerald holds no suspended at-risk or p

> Harrier, who is single, is the owner of a sole proprietorship. Two years ago, Harriet developed a process for preserving doughnuL5 that gives the doughnut a much longer shelf life. The process is not patented or copyrighted, and only Harriet knows how it

> Bridgette is known as the "doll lady." She started collecting dolls as a child, always received one or more dolls as gifts on her birthday, never sold any dolls, and eventually owned 600 dolls. She is retiring and moving to a small apartment and has deci

> In 2018, Bertha Jarow had a $28,000 loss from the sale of a personal residence. She also purchased from an individual inventor for $7,000 (and resold in two montl1s for $18,000) a patent on a rubber bonding process. The patent had not yet been reduced to

> Terri, age 16, is a dependent of her parents in 2018. During the year, Terri earned $5,000 in interest income and $3,000 from part-time jobs. a. What is Terri's taxable income? b. What is Terri's net unearned income? c. What is Terri's tax liability'

> Paige, age 17, is a dependent of her parents in 2018. During 2018, Paige Digging Deeper earned $3,900 pet sitting and $4,100 in interest on a savings account. What are Paige's taxable income and tax liability for 2018?

> Jayden calculates his 2018 income tax by using both the Tax Tables and the Tax Rate Schedules. Because the Tax Rate Schedules yield a slightly lower tax liability, he plans to pay this amount. a. Why is there a difference? b. Is Jayden's approach permiss

> Roy and Brandi are engaged and plan to get married. During 2018, Roy is a full-time student and earns $9,000 from a part-time job. With this income, student loans, savings, and nontaxable scholarships, he is self-supporting. For the year, Brandi is emplo

> Which of the following individuals are required to file a tax return for 2018' Should any of these individuals file a return even if filing is not required' Why or why not? a. Patricia, age 19, is a self-employed single individual with gross income of $5

> A nonresident alien earns money in the United States that is subject to Federal income tax. What guidance does the IRS provide about what tax form needs to be used and when it should be filed? In terms of the proper filing date, does it matter whether th

> Morgan (age 45) is single and provides more than 500/o of the support of Rosalyn (a family friend), Flo (a niece, age 18), and Jerold (a nephew, age 18). Both Rosalyn and Flo live with Morgan, but Jerold (a French citizen) lives in Canada. Morgan earns a

> Charlotte (age 40) is a surviving spouse and provides all of the support of her four minor children who live with her. She also maintains the household in which her parents live and furnished 6001o of their support. Besides interest on City of Miami bond

> Taylor, age 18, is a dependent of her parents. For 2018, she has the follow income: $4,000 of wages from a summer job, $1,800 of interest from a money market account, and $2,000 of interest from City of Boston bonds. a. What is Taylor's taxable income fo

> For tax year 2018, determine who is considered a dependent of another taxpayer in each of the following independent situations: a. Leo and Amanda (ages 48 and 46, respectively) are husband and wife and furnish more than 500%. of the support of their cwo

> On September 18, 2018, Gerald received land and a building from Frank as a gift. Frank's adjusted basis and the fair market value at the date of the gift are as follows: No gift tax was paid on the transfer. a. Determine Gerald's adjusted basis for the

> Determine the amount of the standard deduction allowed for 2018 in the following independent situations. In each case, assume that the taxpayer is the dependent of another taxpayer. a. Curtis, age 18, has income as follows: $700 interest from a certifica

> During the year, Eugene had the four property transactions summarized below. Eugene is a collector of antique glassware and occasionally sells a piece to get funds to buy another. What are the amount and nature of the gain or loss from each of these tran

> Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2018. Blue had the following expenses in connection with the project: The new product will be introduced for sale beginning in July 2020. Dete

> Maple Company owns land (adjusted basis of $90,000; fair market value of S 125,000) that it uses in its business. Maple exchanges it for another parcel of land (worth $100,000) and stock (worth $25,000). Determine Maple's: a. Realized and recognized gain

> Sarah exchanges a building and land (used in its business) for Tyler's land and building and some equipment (used in its business). The assets have the following characteristics: a. What are Sarah's recognized gain or loss and basis for the land and bu

> Ashby and Curtis are married and have a 2-year-old son, Jason. Curtis works full-tin1e as an electrical engineer, but Ashby has not worked outside the home since Jason was born. As Jason is getting older, Ashby thinks that Jason would benefit from attend