Question: Rajiv and Laurie Amin are recent college

> What are the differences, if any, between the legal and tax classification of business entities?

> In general, how are unincorporated entities classified for tax purposes?

> Other than corporations, are there other legal entities that offer liability protection? Are any of them taxed as flow-through entities? Explain.

> How do corporations protect shareholders from liability? If you formed a small corporation, would you be able to avoid repaying a bank loan from your community bank if the corporation went bankrupt? Explain

> What is an operating agreement for an LLC? Are operating agreements required for limited liability companies? If not, why might it be important to have one?

> How do business owners create legal entities? Is the process the same for all entities? If not, what are the differences?

> What are the most common legal entities used for operating a business? How are these entities treated similarly and differently for state law purposes?

> What are the tax advantages and disadvantages of converting a C corporation into an LLC?

> If limited liability companies and S corporations are both taxed as flow-through entities for tax purposes, why might an owner prefer one form over the other for tax purposes? List separately the tax factors supporting the decision to operate as either a

> Compare the entity level tax consequences for C corporations, S corporations, and partnerships for both nonliquidating and liquidating distributions of noncash property. Do the tax rules tend to favor one entity type more than the others? Explain.

> Does a residence for tax purposes need to be situated at a fixed location? Explain.

> Explain how liabilities of an LLC or an S corporation affect the amount of tax losses from the entity that limited liability company members and S corporation shareholders may deduct. Do the tax rules favor LLCs or S corporations?

> Compare and contrast the FICA tax burden of S corporation shareholder-employees and LLC members receiving compensation for working for the entity (guaranteed payments) and business income allocations to S corporation shareholders and LLC members assuming

> According to the tax rules, how are profits and losses allocated to LLC members? How are they allocated to S corporation shareholders? Which entity permits greater flexibility in allocating profits and losses?

> Which entity types are generally allowed to use the cash method of accounting?

> Are C corporations or flow-through entities (S corporations and entities taxed as partnerships) more flexible in terms of selecting a tax year-end? Why are the tax rules in this area different for C corporations and flow-through entities?

> Why are S corporations less favorable than C corporations and entities taxed as partnerships in terms of owner-related limitations?

> In its first year of existence, KES, an S corporation, reported a business loss of $10,000. Kim, KES’s sole shareholder, reports $50,000 of taxable income from sources other than KES. What must you know in order to determine whether she can deduct the $1

> Does a C corporation gain more tax benefit by carrying forward a net operating loss to offset other taxable income two years after the NOL arises or by carrying the NOL back two years? Explain.

> A C corporation has a current year loss of $100,000. The corporation had paid estimated taxes for the year of $10,000 and expects to have this amount refunded when it files its tax return. Is it possible that the corporation may receive a refund larger t

> Is a current-year net operating loss of a C corporation available to offset income from the corporation in other years? Explain.

> How does a taxpayer determine whether a dwelling unit is treated as a residence or nonresidence for tax purposes?

> Conceptually, what is the overall tax rate imposed on interest paid on loans from shareholders to corporations?

> Cool Touch Cookware (CTC) has been in business for about 10 years now. Dawn and Linda are each 50 percent owners of the business. They initially established the business with cash contributions. CTC manufactures unique cookware that remains cool to the t

> Dawn Taylor is currently employed by the state Chamber of Commerce. While she enjoys the relatively short workweeks, she eventually would like to work for herself rather than for an employer. In her current position, she deals with a lot of successful en

> Sarah (single) purchased a home on January 1, 2008 for $600,000. She eventually sold the home for $800,000. What amount of the $200,000 gain on the sale does Sarah recognize in each of the following alternative situations? (Assume accumulated depreciatio

> Celia has been married to Daryl for 52 years. The couple has lived in their current home for the last 20 years. On October of year 0, Daryl passed away. Celia sold their home and moved into a condominium. What is the maximum exclusion Celia is entitled t

> Steve Pratt, who is single, purchased a home in Spokane, Washington for $400,000. He moved into the home on February 1 of year 1. He lived in the home as his primary residence until June 30 of year 5, when he sold the home for $700,000. a. What amount

> Steve and Stephanie Pratt purchased a home in Spokane, Washington for $400,000. They moved into the home on February 1, of year 1. They lived in the home as their primary residence until November 1 of year 1 when they sold the home for $500,000. The Prat

> Steve and Stephanie Pratt purchased a home in Spokane, Washington for $400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $700,000. a. What a

> Lauren owns a condominium. In each of the following alternative situations, determine whether the condominium should be treated as a residence or nonresidence for tax purposes? a. Lauren lives in the condo for 19 days and rents it out for 22 days. b. Lau

> Several years ago, Junior acquired a home that he vacationed in part of the time and rented out part of the time. During the current year Junior: • Personally stayed in the home for 22 days. • Rented it to his favorite brother at a discount for 10 days.

> A self-employed taxpayer deducts home office expenses, including depreciation expense. The taxpayer then sells the home at a $100,000 gain. Assuming the taxpayer meets the ownership and use tests, does the full gain qualify for exclusion? Explain.

> Alisha, who is single, owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. She purchased the home at the beginn

> Assume Rita’s consulting business generated $13,000 in gross income for the current year. Further, assume Rita uses the actual expense method for computing her home office expense deduction. a. What is Rita’s home office deduction for the current year?

> Assume Rita’s consulting business generated $15,000 in gross income. a. What is Rita’s home office deduction for the current year? b. What would Rita’s home office deduction for the current year be if her business generated $10,000 of gross income inst

> Brooke owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. The home office is 300 square feet and the entire ho

> Assume that in addition to renting the condo for 100 days, Alexa uses the condo for 8 days of personal use. Also assume that Alexa receives $30,000 of gross rental receipts. Answer the following questions: a. What is the total amount of for AGI deductio

> Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions: a. What effect does the rental activity have on her AGI for the year? b. Assuming that Alexa’s AGI from other sources is $90,000, what effect does the rental activi

> Assume Alexa receives $30,000 in gross rental receipts. a. What effect do the expenses associated with the property have on her AGI? b. What effect do the expenses associated with the property have on her itemized deductions?

> Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo? b. What is the total amount of itemized

> Assume Natalie uses the IRS method of allocating expenses to rental use of the property. a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo? b. What is the total amount of itemized deduc

> Dillon rented his personal residence at Lake Tahoe for 14 days while he was vacationing in Ireland. He resided in the home for the remainder of the year. Rental income from the property was $6,500. Expenses associated with use of the home for the entire

> What limitations exist for self-employed taxpayers in deducting home office expenses, and how does the taxpayer determine which expenses are deductible and which are not in situations when the overall amount of the home office deduction is limited?

> Jenae and Terry Hutchings own a parcel of land as tenants by entirety. That is, they both own the property but when one of them dies the other becomes the sole owner of the property. For nontax reasons, Jenae and Terry decide to file separate tax returns

> Kirk and Lorna Newbold purchased a new home on August 1 of year 1 for $300,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be .5 percent of the property’s value. Because the taxing jurisdiction collec

> Craig and Karen Conder purchased a new home on May 1 of year 1 for $200,000. At the time of the purchase, it was estimated that the real property tax rate for the year would be one percent of the property’s value. How much in property taxes on the new ho

> Jesse Brimhall is single. In 2016, his itemized deductions were $4,000 before considering any real property taxes he paid during the year. Jesse’s adjusted gross income was $70,000 (also before considering any property tax deductions). In 2016, he paid r

> In year 1, Peter and Shaline Johnsen moved into a home in a new subdivision. Theirs was one of the first homes in the subdivision. In year 1, they paid $1,500 in real property taxes on the home to the state government, $500 to the developer of the subdiv

> Jennifer has been living in her current principal residence for three years. Six months ago Jennifer decided that she would like to purchase a second home near a beach so she can vacation there for part of the year. Despite her best efforts, Jennifer has

> On January 1, year 1 Brandon and Alisa Roy purchased a home for $1.5 million by paying $500,000 down and borrowing the remaining $1 million with a 7 percent loan secured by the home. Later the same day, the Roys took out a second loan, secured by the hom

> On January 1 of year 1, Jason and Jill Marsh acquired a home for $500,000 by paying $400,000 down and borrowing $100,000 with a 7 percent loan secured by the home. On January 1, of year 2, the Marshes needed cash so they refinanced the original loan by t

> In year 0, Eva took out a $50,000 home-equity loan from her local credit union. At the time she took out the loan, her home was valued at $350,000. At the time of the loan, Eva’s original mortgage on the home was $265,000. At the end of year 1, her origi

> Compare and contrast the manner in which employees and employers report home office deductions on their tax returns.

> On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home. a. What is the amount of the interest expense the Franklins m

> Lewis and Laurie are married and jointly own a home valued at $240,000. They recently paid off the mortgage on their home. In need of cash for personal purposes unrelated to the home, the couple borrowed money from the local credit union. How much intere

> Javier and Anita Sanchez purchased a home on January 1, year 1 for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The San

> Javier and Anita Sanchez purchased a home on January 1 of year 1 for $500,000 by paying $50,000 down and borrowing the remaining $450,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sa

> Javier and Anita Sanchez purchased a home on January 1, 2016 for, $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanc

> Troy (single) purchased a home in Hopkinton, MA on January 1, 2007 for $300,000. He sold the home on January 1, 2016 for $320,000. How much gain must Troy recognize on his home sale in each of the following alternative situations? a. Troy rented the home

> How are acquisition indebtedness and home-equity indebtedness similar? How are they dissimilar?

> Lars and Leigha saved up for years before they purchased their dream home. They were considering (1) using all of their savings to make a large down payment on the home (90 percent of the value of the home) and barely scraping by without the backup savin

> Juanita owns a principal residence in New Jersey, a cabin in Montana, and a houseboat in Hawaii. All of these properties have mortgages on which Juanita pays interest. What limits, if any, apply to Juanita’s mortgage interest deductions? Explain whether

> Using the Web as a research tool, determine which countries levy a double-tax on corporate income. Based on your research, what seem to be the pros and cons of the double-tax?

> A taxpayer purchases and lives in a home for a year. The home appreciates in value by $50,000. The taxpayer sells the home and purchases a new home. What information do you need to obtain to determine whether the taxpayer is allowed to exclude the gain o

> Marathon Inc. (a C corporation) reported $1,000,000 of taxable income in the current year. During the year it distributed $100,000 as dividends to its shareholders as follows: • $5,000 to Guy, a 5% individual shareholder. • $15,000 to Little Rock Corp.,

> Is it possible for a rental property to generate a positive annual cash flow and at the same time produce a loss for tax purposes? Explain.

> Under what circumstances would a taxpayer who generates a loss from renting a home that is not a residence be able to fully deduct the loss? What potential limitations apply?

> In what circumstances is the IRS method for allocating expenses between personal use and rental use for vacation homes more beneficial to a taxpayer than the Tax Court method?

> Compare and contrast the IRS method and the Tax Court method for allocating expenses between personal use and rental use for vacation homes. Include the Tax Court’s justification for departing from the IRS method in your answer.

> A taxpayer stays in a second home for the entire month of September. He would like the home to fall into the residence with significant rental use category for tax purposes. What is the maximum number of days he can rent out the home and have it qualify?

> Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home, and she plans on renting the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year.

> Is it possible for a taxpayer to receive rental income that is not subject to taxation? Explain.

> Is a homeowner allowed a property tax deduction for amounts included in the monthly mortgage payment that are earmarked for property taxes? Explain.

> A taxpayer sold a piece of real property in year 1. The amount of year 1 real property taxes was estimated at the closing of the sale and the amounts were allocated between the buyer and the taxpayer. At the end of year 1, the buyer receives a property t

> Consider the settlement statement in Appendix A to this chapter. What amounts on the statement are the Jeffersons allowed to deduct on their 2016 tax return? Indicate the settlement statement line number for each deductible amount (discuss any issues tha

> Is the break-even period generally longer or shorter for points paid to reduce the interest rate on initial home loans or points paid for the same purpose on a refinance? Explain.

> Compare and contrast the employer’s responsibilities for providing a defined benefit plan to employees relative to providing a defined contribution plan.

> Derek and Meagan Jacoby recently graduated from State University and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $75,000 from her grandfather who recently passed away. The couple is de

> James and Kate Sawyer were married on New Year’s Eve of 2015. Before their marriage, Kate lived in New York and worked as a hair stylist for one of the city’s top salons. James lives in Atlanta where he works for a public accounting firm earning an annua

> Gerry (age 56) and Elaine (age 54) have been married for 12 years and file a joint tax return. The couple lives in an apartment in downtown Manhattan. Gerry’s father, Mortey, recently retired from Del Boca Vista Corporation (DBVC) where he worked for man

> Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice-president of the brakes division. Tommy’s 2016 salary is $360,000. CAP allows Tommy to participate in its nonqualified def

> Alex is 31 years old and has lived in Los Alamos, New Mexico, for the last four years where he works at the Los Alamos National Laboratory (LANL). LANL provides employees with a 401(k) plan and for every $1 an employee contributes (up to 9 percent of the

> Ian retired in June of 2015 at the age of 69 (he turned 70 in August of 2015). Ian’s retirement account was valued at $490,000 at the end of 2014 and $500,000 at the end of 2015. He has had all of his retirement accounts open for 15 years. What is Ian’s

> Jacquiline is unmarried and age 32. Even though she participates in an employer-sponsored retirement plan, Jacquiline contributed $3,000 to a traditional IRA during the year. Jacquiline files as a head of household, her AGI before the contribution is $43

> Penny is 57 years old and she participates in her employer’s 401(k) plan. During the year, she contributed $2,000 to her 401(k) account. Penny’s AGI is $29,000 after deducting her 401(k) contribution. What is Penny’s 2016 saver’s credit in each of the fo

> Desmond is 25 years old and he participates in his employer’s 401(k) plan. During the year, he contributed $3,000 to his 401(k) account. What is Desmond’s 2016 saver’s credit in each of the following alternative scenarios? a. Desmond is not married and h

> What does it mean if an employer “matches” employee contributions to 401(k) plans?

> Reggie is a self-employed taxpayer who turns 59 years old at the end of the year (2016). In 2016, his net Schedule C income was $300,000. This was his only source of income. This year, Reggie is considering setting up a retirement plan. What is the maxim

> Describe the minimum distribution requirements for defined benefit plans. Are these requirements typically an item of concern for taxpayers?

> Rita is a self-employed taxpayer who turns 39 years old at the end of the year (2016). During 2016, her net Schedule C income was $300,000. This was her only source of income. This year, Rita is considering setting up a retirement plan. What is the maxim

> Hope is a self-employed taxpayer who turns 54 years old at the end of the year (2016). In 2016, her net Schedule C income was $120,000. This was her only source of income. This year, Hope is considering setting up a retirement plan. What is the maximum a

> Elvira is a self-employed taxpayer who turns 42 years old at the end of the year (2016). In 2016, her net Schedule C income was $120,000. This was her only source of income. This year, Elvira is considering setting up a retirement plan. What is the maxim

> Sarah was contemplating making a contribution to her traditional individual retirement account for 2016. She determined that she would contribute $5,500 to her IRA and she deducted $5,500 for the contribution when she completed and filed her 2016 tax ret

> Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and her IRA is now worth $50,000. She is trying to decide whether she should roll over her traditional IRA into a Roth IRA. Her current marginal

> Seven years ago, Halle (currently age 41) contributed $4,000 to a Roth IRA account. The current value of the Roth IRA is $9,000. In the current, year Halle withdraws $8,000 of the account balance to use as a down payment on her first home. Assuming Halle

> Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to a Roth IRA ($4,000 a year). The current value of the Roth IRA is $16,300. In the current year, Sherry withdraws $14,000 of the account balance to

> John is trying to decide whether to contribute to a Roth IRA or traditional IRA. He plans on making a $5,000 contribution to whichever plan he decides to fund. He currently pays tax at a 30 percent marginal income tax rate but he believes that his margin

> Brady Corporation has a profit sharing plan that allocates 10 percent of all after-tax income to employees. The profit sharing is allocated to individual employees based on relative employee compensation. The profit sharing contributions vest to employee

> Jimmer has contributed $15,000 to his Roth IRA and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 25 percent, what amount of tax