What constitutes the payment of an expense by a cash basis taxpayer?
> 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
> Shuana works as a lawyer for a large law firm where professional dress is expected. Her friend, Carissa, is a nurse at a local hospital. Shuana spends $1,500 a year on clothing, shoes, and accessories that she wears to work. Carissa spends $500 on uni
> The following basic information is provided for preparing Laurie and Lynn Norris 2016 tax return: • The Norris’ contribute $250 to the political campaign of Fred Smithers who was running for Santa Fe city council. • Lynn spent $4,300 in lawyer and accoun
> Mark Pari is a self-employed electrician who exclusively uses a room in his home to perform the administrative functions related to his business. The room is 250 square feet of the 2,500 total square feet of his home. Mark’s income from his business bef
> Teresa owns a condominium in Florida. During the current year, she incurs the following expenses related to the property: Mortgage interest…………………………………$ 10,200 Property taxes …………………………………………..1,500 Utilities………………………………………………………800 Maintenance fees……
> It has often been said that only the rich can benefit from professional tax planning. Based on the information presented in this chapter, why is this statement at least partially true?
> Calvin and Lorna live in Nebraska and own rental property in the Ozark Mountains. They have always prepared their own tax return and have allocated their rental expenses including their mortgage interest and property taxes using the ratio of personal da
> Spencer and Richard own S&R Sports, a regional chain of 15 sporting goods stores. They have decided to expand their business by opening three new stores. The stores will employ 90 people, most of whom will work part-time. Over the years, S&R Sports ha
> Many legislative, administrative, and judicial resources are available on the Internet. Court cases can be located using a search engine provided by your browser or a tax directory site on the Internet. Using a search engine or one of the tax directory
> What is a cash equivalent? How does a cash equivalent affect the reporting of income?
> In April of the current year, the Mojena Corporation, a computer power supply manufacturer, was found guilty of price fixing under the Sherman Anti-Trust Act and fined $50,000. In addition, The United States sued Mojena under Section 4A of the Clayton A
> Use the RIA Checkpoint database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Regulation section(s) into your solution and explain how the authority answers the tax issue in question. Give the most specific cita
> Use the RIA Checkpoint database to answer the following questions. Cut and paste the relevant Internal Revenue Code and Regulation section(s) into your solution and explain how the authority answers the tax issue in question. Give the most specific cita
> The Showgate Hotel Casino is an accrual basis taxpayer and maintains its records on a calendar year. It has 3,000 slot machines, one of them a progressive machine whose jackpot increases based on the amount wagered. The casino guarantees that a person
> Russell is employed as a prosecutor for the town of Swansee. He also works 15-20 hours a week raising purebred Labradors. Over the last 7 years, he has reported an average net income from this activity of $7,000 per year. However, in two of those year
> Gary and Wes operate a wholesale meat company. The company sells to restaurants, golf clubs and other dining establishments. Recently they spent $20,000 for market and demographic surveys, financial projections and real estate appraisals to help them d
> In auditing the Philbin Corporation's repair expense account, Sara finds a $28,000 entry. Since the amount is so large, she obtains supporting documentation. The invoice lists the Fradin Roofing Company as providing the service, but no description of t
> Evaluate the following statement: "The goal of good tax planning is to pay the minimum amount of tax."
> Based solely on the definitions in the chapter, is the sales tax a proportional, regressive, or progressive tax? Explain and state how the tax might be viewed differently.
> Leonard owns an apartment complex. During the current year, he pays $14,000 to have all the apartments painted and re-carpeted. Gena purchases an apartment complex during the current year. Before she can rent out the apartments, she pays $14,000 to ha
> Buford purchased a new automobile in March for $23,000. In April, he receives a $500 rebate check from the manufacturer. The rebate was paid to all customers who purchased one of the manufacturer's automobiles in March. Should Buford include the $500
> Harry and Sydney each inherited 50% of the stock in their father's corporation when he died. Harry had been working for their father and wanted to retain control of the business. Sydney was not really interested in the family business and wanted to sel
> Dan owns a successful sports bar in downtown Providence. The state is considering legislation that would restrict the sale of alcohol in restaurants and bars on Saturdays and Sundays until after 7:00 P.M. The association of Providence restaurant owners
> What is the fundamental requirement that must be satisfied to deduct a business expense?
> What is the general purpose of the economic performance test?
> What is/are the criterion (criteria) for the deduction of an expense by a cash basis taxpayer?
> Discuss how well the rules for deducting expenses implement the ability-to-pay concept.
> The rules for deducting business expenses assure that virtually all expenses related to a trade or business or a production of income activity are deductible at some time during the life of the activity. However, few personal expenditures are deductible.
> What is the effect on a partner's individual tax return if a partnership does not report separately the partner's pro rata share of investment expenses and instead includes these expenses in determining the partnership's ordinary taxable income?
> Why must a conduit entity report certain deductions separately?
> Randy is studying finance at State University. To complete the finance major, he has to take a basic income tax course. Because Randy does not intend to be a tax expert, he considers the course a waste of his time. Explain to Randy how he can benefit fro
> What is the difference between realized income and recognized income?
> What are the two primary categories of business expense? Why is it necessary to classify business expenses in these two categories?
> Why does the computation of adjusted gross income apply only to individual taxpayers and not to other tax entities such as corporations?
> All allowable deductions of individual taxpayers are classified as either for adjusted gross income or from adjusted gross income. Why are deductions for adjusted gross income usually more advantageous than deductions from adjusted gross income?
> What tests must be met for an accrual basis taxpayer to deduct an expense?
> What are the criteria for the current deduction of a prepaid expense by a cash basis taxpayer?
> Under what circumstances can a taxpayer deduct the costs of a home office?
> What is/are the requirement(s) for determining whether a residence used for personal purposes is a vacation home or a true rental property?
> Explain the rationale for the treatment of deductions related to hobbies, vacation homes, and home offices.
> Why are expenses related to the production of tax-exempt income not deductible?
> One of Adam Smith's four criteria for evaluating a tax is certainty. Does the income tax definition of gross income promote certainty in the U.S. tax system? Explain.
> What is the purpose of the standard deduction for individuals?
> Explain why the income tax concepts support a deduction for some of the expenses of an illegal business.
> Explain the rationale for not allowing a deduction for political and lobbying expenditures.
> Why are start-up costs related to the investigation of a business opportunity treated differently depending on the current trade or business of the taxpayer?
> How do you distinguish a currently deductible expenditure from a capital expenditure? Give examples of each type of expenditure.
> When are capital expenditures deductible?
> What requirements must be met to deduct a trade or business expense? an expense related to the production of income?
> What is the difference between a trade or business and a production of income activity and why is it important to distinguish a trade or business activity from a production of income activity?
> How are mixed-use expenditures and expenses related to mixed-use assets treated for tax reporting?
> Malloy Industries manufactures air conditioners. The machines used to manufacture the air conditioners are usually insulated with asbestos. Because of health risks associated with asbestos, the Occupational Safety and Health Administration (OSHA) lower
> How is the definition of income for income tax purposes different from the definition used by economists to measure income?
> During the current year, Benjamin and Valerie were notified that their 2015 tax return was being audited. The IRS commissioner has disallowed all the losses attributable to Valerie's cattle breeding and showing venture. Valerie was raised on a small r
> How do deductions for adjusted gross income and deductions from adjusted gross income of an individual differ?
> Conrad purchases a condominium in Aspen, Colorado. Because of his hectic work schedule, Conrad is unsure how much he will be able to use the condo over the next few years. A friend of his who has a condo in Aspen tells him that the condominium is both a
> Carol is a single mother who owns a wholesale auto parts distributorship. The business is organized as a sole proprietorship. Her business has advanced, and she can no longer devote the time necessary to do her own tax return. Because she always has pr
> Reggie wants to invest $10,000. His options are a. Gibraltar Corporation bonds with an annual interest rate of 8%, b. State of Hawaii bonds with an annual interest rate of 5%, c. Series EE savings bonds; a $10,000 investment will pay $14,300 in 5 years
> Leyh's Outdoor Adventures, Inc., would like to begin providing life insurance coverage for its employees. Three employees are officers; each earns $100,000 per year. The other three employees each earns $40,000 per year. Ricardo, president of Leyh's, com
> May was injured when a forklift tipped over on her while she was moving stock in the company warehouse. Because of her injuries, she could not work for three weeks. Her employer paid her $400, which was half her normal wages for the three-week period.
> Theresa is an employee of Hubbard Corporation with an annual salary of $60,000. Hubbard has a cafeteria plan that lets all employees select a total of 10% of their annual salary from a menu of nontaxable fringe benefits. Theresa selects medical insuran
> Assume the same facts as in problem 27, except that Earl is not a residence hall assistant and his general scholarship is for $10,000.
> Courtney is an employee of Freemont Company. An average of three times a week, she works out during her lunch hour at a health club provided by Freemont. Discuss the taxability of Freemont’s provision of the health club in the following situation. a. T
> What is an installment sale?
> Determine whether the taxpayer has received taxable income in each of the following situations. Explain why any amount(s) may be excluded: a. Jim is an employee of Fast Tax Prep, Inc. All employees of Fast Tax Prep are eligible for a 50% discount on th
> Don is the production manager for Corporate Manufacturing Facilities (CMF). CMF works three production shifts per day. Because Don is so integral to operations, the company requires him to live in housing that CMF owns so he can be available for any em
> How is the calculation of taxable income for an individual different from the calculation of a corporation's taxable income?
> Adam works during the summer as a fire watcher for the Oregon forest service. As such he spends 3 weeks in the woods in a forest service watchtower and then gets a week off. Because of the remoteness of the location, groceries are flown in by helicopte
> Tia is married and is employed by Carrera Auto Parts. In 2017, Carrera established high-deductible health insurance for all its employees. The plan has a $2,600 deductible for married taxpayers. Carrera also contributes 5% of each employee's salary to
> Hamid’s employer provides a high-deductible health plan ($1,300 deductible) and contributes $500 to each employee’s Health Savings Account. Hamid makes the maximum allowable contribution to his HSA. During the year, he spends $300 on qualified medical e
> Faldo, Inc., provides medical coverage to employees through a self-insured plan. Nick, the president of Faldo, receives $3,400 in medical expense reimbursements from the plan during the current year. Discuss the tax consequences to Nick under the follow
> Abe is an employee of Haddock, Inc. Haddock provides basic health and accident insurance to all its employees through a contract with Minor Accident Insurance Company. Because the Minor policy does not cover 100% of medical costs, Haddock provides all
> Horace is an employee of Ace Electric Co. Ace provides all employees with group term life insurance equal to twice their annual salary. How much gross income does Horace have under each of the following assumptions? a. Horace is 26 and earns $16,000 pe
> Bear Company provides all its employees with a $10,000 group term life insurance policy. Elk Company does not provide any life insurance but pays $10,000 to survivors of employees who die. Jackie, an employee of Bear Company, and her sister-in-law, Rose
> Under what circumstances can the following taxpayers defer recognition of prepaid income beyond the year of receipt? a. A cash basis taxpayer b. An accrual basis taxpayer
> Erwin works for Close Corporation for 24 years. Close has a qualified, noncontributory pension plan that pays employees with more than 5 years of service $100 per month per year of service when they reach age 65. Erwin turns 65 in February of this year
> Zoie has worked for Humple Manufacturing for 16 years. Humple has a pension plan that matches employee contributions by up to 4% of an employee’s salary. Zoie, age 60, is ready to retire. She has contributed $20,000 to the plan. Under Humple’s pensio
> Boris is an unmarried systems specialist with a public accounting firm. During all of 2017, he is on temporary assignment in London. He pays $21,000 in British income tax on his $100,000 salary. Boris knows little about taxes and seeks your advice on
> What does the 90-day letter represent, and what are the choices the taxpayer has after receiving one?
> Joan is a single individual who works for Big Petroleum, Inc. During all of 2017, she is stationed in West Africa. She pays West African taxes of $20,000 on her Big Petroleum salary of $92,000. Her taxable income without considering her salary from Big i
> Lucinda, a welder for Big Auto Inc. dies in an automobile accident on March 14 of this year. Big Auto has a company policy of paying $5,000 to the spouse of any employee who dies. In addition to the $5,000 payment, Big Auto pays Harvey, Lucinda's husba
> Armando, a manager for Petros Pizza Pies (PPP), dies in an accident on July 12. PPP pays his wife, Penelope, $600 in salary that had accrued before Armando died. Armando was covered by a $90,000 group term life insurance policy, which is also paid to P
> Determine whether the taxpayers in each of the following situations have realized taxable income: a. Alexander inherited a tract of land from his uncle who died during the current year. A friend of Alexander's who is a petroleum engineer told him he tho
> Fawn receives a $2,500 scholarship to State University. Discuss the taxability of the scholarship under each of the following assumptions: a. The scholarship is paid from a general scholarship fund and is awarded to students with high academic potential
> Earl is a student at Aggie Tech. He receives a $5,000 general scholarship for his outstanding grades in previous years. Earl is also a residence hall assistant, for which he receives a $1,000 tuition reduction and free room and board worth $6,000 per y
> How does the wherewithal-to-pay concept affect the tax treatment of prepaid income?
> Biko owns a snowmobile manufacturing business, and Miles owns a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. Biko and Miles have decided to consolidate
> Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequenc
