You have just met with Scott Myers (603 Pittsfield Drive, Champaign, IL 61821), a successful full-time real estate developer and investor. During your meeting, you discussed his tax situation because you are starting to prepare his current Federal income tax return. During your meeting, Scott mentioned that he and his wife, Susan, went to great lengths to maximize their participation in an apartment complex that they own and manage. In particular, Scott included the following activities in the 540 hours of participation for the current year • Time spent thinking about the rentals. • Time spent by Susan on weekdays visiting the apartment complex to oversee operations of the buildings (i.e., in a management role). • Time spent by both Scott and Susan on weekends visiting the apartment complex to assess operations. Scott and Susan always visited the complex together on week- ends, and both counted their hours (i.e., one hour at the complex was two hours of participation). • Time spent on weekends driving around the community looking for other potential rental properties to purchase. Again, both Scott’s hours and Susan’s hours were counted, even when they drove together. After reviewing Scott’s records, you note that the apartment complex generated a significant loss this year. Prepare a letter to Scott describing your position on the deductibility of the loss.
> What are closing costs? List and briefly describe the different closing costs you might incur when applying for a mortgage.
> How do lenders protect their interest in a home? Describe two governmentbacked home loan programs.
> What is term insurance? What factors determine the premium for term insurance? What is decreasing-term insurance?
> Why does the value of a home depend on the demand for homes? What factors influence the demand for homes?
> Once you have reduced your list of three or four homes down to one home, what is your next step? Should you offer the price the seller is asking? Describe how you would conduct a market analysis of the home.
> What is the main factor in determining a home’s resale value? How can you predict a home’s resale value? Who pays commissions when a home is sold?
> Why do insurance costs and taxes vary among homes?
> How do price, convenience of the location, and maintenance affect your home buying decisions?
> What should you consider when determining an affordable down payment and monthly mortgage payments?
> What is your first task when considering buying a home? Why is this step important? How can a real estate broker help you?
> Dave and Sharon Sampson are assessing the amount of health insurance and disability income insurance they have. The Sampsons’ health insurance is provided by a health maintenance organization (HMO). Recently, Dave and Sharon have heard about preferred p
> Dave and Sharon Sampson are assessing the amount of health insurance and disability income insurance they have. The Sampsons’ health insurance is provided by a health maintenance organization (HMO). Recently, Dave and Sharon have heard about preferred p
> Dave and Sharon Sampson are assessing the amount of health insurance and disability income insurance they have. The Sampsons’ health insurance is provided by a health maintenance organization (HMO). Recently, Dave and Sharon have heard about preferred p
> The Sampsons have one remaining insurance need: life insurance. They have decided to purchase term life insurance. They want a life insurance policy that will provide for the family in the event of Dave’s death because he is the major b
> What is the purpose of disability income insurance? Why might younger individuals consider purchasing disability insurance?
> What is Medigap insurance?
> What is a high deductible health plan? How is this type of plan related to an HSA?
> Vera is an 85yearold widow and retiree from a large corporation. Her former employer recently changed the health care coverage for retirees to an HMO. Vera is having difficulty with her knees and has requested a referral to an orthopedist. After orderi
> Morris will start investing $1,500 a year in stocks. He feels he can average a 12% return. If he follows this plan, how much will he accumulate in 5 years? In 10 years? In 20 years?
> Floyd wants to invest the $15,000 he received from his grandfather’s estate. He wants to use the money to finance his education when he pursues his doctorate in five years. What amount will he have in five years if he earns a 9% return? If he receives a
> Dawn decides to invest $2,000 each year in stock at the end of each of the next five years. She believes she can earn a 9% return over that time period. How much will Dawn’s investment be worth at the end of five years?
> Tammy has $3,500 that she wants to invest in stock. She believes she can earn a 12% annual return. What would be the value of Tammy’s investment in 10 years if she is able to achieve her goal?
> Emma bought a stock a year ago for $53 per share. She received no dividends on the stock and sold the stock today for $38 per share. What is Emma’s return on the stock?
> Joel (from Problem 1) is in the 25% tax bracket. What amount of taxes will he pay on his capital gain if he held the stock for less than a year? Data from Problem 1: Joel purchased 100 shares of stock for $20 per share. During the year, he received di
> Recall that the Sampsons have a goal of saving about $300 per month ($3,600 per year) for their children’s college education. They want to estimate how this money would grow over time if they invest it in stock. Dave and Sharon have nev
> List the information provided in corporate bond quotations.
> Wes acquired a mineral interest during the year for $10 million. A geological survey estimated that 250,000 tons of the mineral remained in the deposit. During the year, 80,000 tons were mined, and 45,000 tons were sold for $12 million. Other related exp
> Ella has $105,000 of losses from a real estate rental activity in which she actively participates. She has other rent income of $25,000 and other passive income of $32,000. Her AGI before considering these items of income and loss is $95,000. How much r
> On June 5, 2014, Dan purchased and placed in service a 7-year class asset costing $550,000. Determine the maximum deductions that Dan can claim with respect to this asset in 2014 and 2015.
> Mable and Jack file a joint return. For the current year, they had the following items: Salaries………………………………………………………………………………….$120,000 Loss on sale of § 1244 stock acquired two years ago…………………….105,000 Gain on sale of § 1244 stock acquired six months
> Constanza, who is single, sells her current personal residence (adjusted basis of $165,000) for $450,000. She has owned and lived in the house for 30 years. Her selling expenses are $22,500. What is Constanza’s realized and recognized gain?
> Lucy sells her partnership interest, a passive activity, with an adjusted basis of $305,000 for $330,000. In addition, she has current and suspended losses of $28,000 associated with the partnership and has no other passive activities. Calculate Lucy’s t
> In the current year, Ed invests $30,000 in an oil partnership. He has taxable income for the current year of $2,000 from the oil partnership and withdraws $10,000. What is Ed’s at-risk amount at the end of the year?
> Arianna’s personal residence has an adjusted basis of $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna’s gain basis? What is her loss basis?
> Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000. a. What is Lisa’s realized and recognized gain or loss? b. What is Alfred’s recognized gain or loss if he subsequently sells the pr
> Sebastian purchases two pieces of equipment for $100,000. Appraisals of the equipment indicate that the fair market value of the first piece of equipment is $72,000 and that of the second piece of equipment is $108,000. What is Sebastian’s basis in these
> A business building on which straight-line depreciation of $13,000 was taken is sold on the installment basis for $100,000 with $20,000 down and four yearly installments of $20,000 plus interest. The adjusted basis for the building is $35,000
> Rose dies with passive activity property having an adjusted basis of $65,000, suspended losses of $13,000, and a fair market value at the date of her death of $90,000. Of the $13,000 suspended loss existing at the time of Rose’s death, how much is deduct
> Noah, who has $62,000 of AGI before considering rental activities, has $70,000 of losses from a real estate rental activity in which he actively participates. He also actively participates in another real estate rental activity from which he h
> Rhonda has an adjusted basis and an at-risk amount of $7,500 in a passive activity at the beginning of the year. She also has a suspended passive loss of $1,500 carried over from the prior year. During the current year, she has a loss of $12,000 from the
> Determine the treatment of a loss on rental property under the following facts: Basis ……………………………………….$650,000 FMV before the loss……………………800,000 FMV after the loss……………………..200,000
> Mary’s diamond ring was stolen in 2014. She originally paid $8,000 for the ring, but it was worth considerably more at the time of the theft. Mary filed an insurance claim for the stolen ring, but the claim was denied. Because the insurance claim was den
> On May 9, 2013, Calvin acquired 250 shares of stock in Aero Corporation, a new startup company, for $68,750. Calvin acquired the stock directly from Aero, and it is classified as § 1244 stock (at the time Calvin acquired his stock, the corporation had $9
> Your client is a new partnership, ARP Associates, which is an engineering consulting firm. Generally, ARP bills clients for services at the end of each month. Client billings are about $50,000 each month. On average, it takes 45 days to collect the recei
> Bob owns a collection agency. He purchases uncollected accounts receivable from other businesses at 60% of their face value and then attempts to collect these accounts. During the current year, Bob collected $60,000 on an account with a face value of $80
> In the current year, Abe gives an interest in a passive activity to his daughter, Andrea. The value of the interest at the date of the gift is $25,000, and its adjusted basis to Abe is $13,000. During the time that Abe owned the investment, losses of $3,
> Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities. I da has a marginal tax rate of 28%. She has $12,000 of losses from Activity A, $18,000 of losses from Activity B, and income of
> During the current year, Gene, a CPA, performs services as follows: 1,800 hours in his tax practice and 50 hours in an apartment leasing operation in which he has a 15% interest. Because of his oversight duties, Gene is considered to be an active partic
> Bonnie and Jake (ages 35 and 36, respectively) are married with no dependents and live in Montana (not a community property state). Because Jake has large medical expenses, they seek your advice about filing separately to save taxes. Their income and exp
> Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2014, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Year
> Jonathan, a physician, earns $200,000 from his practice. He also receives $18,000 in dividends and interest from various portfolio investments. During the year, he pays $45,000 to acquire a 20% interest in a partnership that produces a $300,000 loss. Com
> Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income
> A number of years ago, Lee acquired a 20% interest in the BlueSky Partner- ship for $60,000. The partnership was profitable through 2014, and Lee’s amount at risk in the partnership interest was $120,000 at the beginning of 2015. BlueSky incurred a loss
> Dr. Randolph, a cash basis taxpayer, knows that he will be in a lower marginal tax bracket next year. To take advantage of the expected decrease in his tax rate, Dr. Randolph instructs his office manager to delay filing the medical insurance claims for s
> The end of the year is approaching, and Maxine has begun to focus on ways of minimizing her income tax liability. Several years ago, she purchased an nvestment in Teal Limited Partnership, which is subject to the at-risk and the pas- sive activity loss r
> Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road Excursions in which she has an at-risk basis of $0, suspended losses under t
> Rene retired from public accounting after a long and successful career of 45 years. As part of her retirement package, she continues to share in the profits and losses of the firm, albeit at a lower rate than when she was working full- time. Because Rene
> John, an engineer, operates a separate business that he acquired eight years ago. If he participates 85 hours in the business and it incurs a loss of $34,000, under what circumstances can John claim an active loss?
> In the current year, White, Inc., earns $400,000 from operations and receives $36,000 in dividends and interest from various portfolio investments. White also pays $150,000 to acquire a 20% interest in a passive activity that produces a $200,000 loss. a
> Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts: a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to t
> Sarah has investments in four passive activity partnerships purchased several years ago. Last year, the income and losses were as follows: Activity Income (Loss) A ……………………………………………………..$ 30,000 B …
> Jorge owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive gain to Jorge of $115,0
> A number of years ago, Kay acquired an interest in a partnership in which she is not a material participant. Kay’s basis in her partnership interest at the beginning of 2014 is $40,000. Kay’s share of the partnership loss is $35,000 in 2014, while her sh
> In the current year, Bill Parker (54 Oak Drive, St. Paul, MN 55164) is considering making an investment of $60,000 in Best Choice Partnership. The prospectus provided by Bill’s broker indicates that the partnership investment is not a passive activity an
> Drake Appliance Company, an accrual basis taxpayer, sells home appliances and service contracts. Determine the effects of each of the following transactions on the company’s 2015 gross income assuming that the company uses any available options to defer
> In 2014, Fred invested $50,000 in a general partnership. Fred’s interest is not considered to be a passive activity. If his share of the partnership losses is $35,000 in 2014 and $25,000 in 2015, how much can he deduct in each year?
> Mary, a single taxpayer with two dependent children, has the following items of income and expense during 2015: Gross receipts from business………………………….$144,000 Business expenses………………………………………….180,000 Alimony received …………………………………………..22,000 Interest
> In 2012, John opened an investment account with Randy Hansen, who held himself out to the public as an investment adviser and securities broker. John contributed $200,000 to the account in 2012. John provided Randy with a power of attorney to use the $20
> Olaf lives in the state of Minnesota. A tornado hit the area and damaged his home and automobile. Applicable information is as follows: Because of the extensive damage caused by the tornado, the President designated the area a disaster area. Olaf and h
> Mary, a single taxpayer, purchased 10,000 shares of § 1244 stock several years ago at a cost of $20 per share. In November of the current year, Mary receives an offer to sell the stock for $12 per share. She has the option of either selling all of the st
> Jake and Mary Snow are residents of the state of New York. They are cash basis taxpayers and file a joint return for the calendar year. Jake is a licensed master plumber. Two years ago, Jake entered into a contract with New York City to perform plumbing
> Sam Jones owns a granite stone quarry. When he acquired the land, Sam allocated $800,000 of the purchase price to the quarry’s recoverable mineral reserves, which were estimated at 10 million tons of granite stone. Based on these estimates, the cost depl
> Mike Saxon is negotiating the purchase of a business. The final purchase price has been agreed upon, but the allocation of the purchase price to the assets is still being discussed. Appraisals on a warehouse range from $1,200,000 to $1,500,000
> Jamie purchased $100,000 of new office furniture for her business in June of the current year. Jamie understands that if she elects to use ADS to compute her regular income tax, there will be no difference between the cost recovery for computing the regu
> In 2015, 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
> Accounting students understand that the accrual method of accounting is superior to the cash method for measuring the income and expenses from an ongoing business for financial reporting purposes. Thus, CPAs advise their clients to use the accrual method
> On May 28, 2015, Mary purchased and placed in service a new $20,000 car. The car was used 60% for business, 20% for production of income, and 20% for personal use in 2015. In 2016, the usage changed to 40% for business, 30% for production of income, and
> On June 5, 2014, Leo purchased and placed in service a new car that cost $20,000. The business-use percentage for the car is always 100%. Leo claims any available additional first-year depreciation. Compute Leo’s cost recovery deduction for 2014 and 2015
> On October 15, 2015, Jon purchased and placed in service a used car. The purchase price was $25,000. This was the only business-use asset Jon acquired in 2015. He used the car 80% of the time for business and 20% for personal use. Jon used the MACRS stat
> Jabari Johnson is considering acquiring an automobile at the beginning of 2015 that he will use 100% of the time as a taxi. The purchase price of the automobile is $35,000. Johnson has heard of cost recovery limits on automobiles and wants to know the ma
> Olga is the proprietor of a small business. In 2015, the business’s income, before consideration of any cost recovery or § 179 deduction, is $250,000. Olga spends $600,000 on new 7-year class assets and elects to take the § 179 deduction on them. She doe
> Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $400,000 on May 20, 2015. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000.
> During March 2015, Sam constructed new agricultural fences on his farm. The cost of the fencing was $80,000. Sam does not elect immediate expensing under § 179 and he does not claim any available additional first-year depreciation. However, an election n
> Janice acquired an apartment building on June 4, 2015, for $1.6 million. The value of the land is $300,000. Janice sold the apartment building on November 29, 2021. a. Determine Janice’s cost recovery deduction for 2015. b. Determine Janice’s cost reco
> On May 5, 2015, Christy purchased and placed in service a hotel. The hotel cost $10.8 million. Calculate Christy’s cost recovery deductions for 2015 and for 2025.
> Debra acquired the following new assets during 2015. Determine Debra’s cost recovery deductions for the current year. Debra does not elect immediate expensing under § 179. She does not claim any available additional first-ye
> Each Saturday morning, Ted makes the rounds of the local yard sales. He has developed a keen eye for bargains, but he cannot use all of the items he thinks are “real bargains.” Ted has found a way to share the benefits of his talent with others. If Ted s
> Juan, a sole proprietor, acquires a new 5-year class asset on March 14, 2015, for $200,000. This is the only asset Juan acquired during the year. He does not elect immediate expensing under § 179. Juan does not claim any available additional first-year d
> On November 4, 2013, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2013 and 2014, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect; Blue applied the wro
> In 2015, Rose, Inc., has QPAI of $4 million and taxable income of $3 million. Rose pays independent contractors $500,000. Rose’s W–2 wages are $600,000, but only $400,000 of the wages are paid to employees engaged in qualified domestic production activit
> Sarah Ham, operating as a sole proprietor, manufactures printers in the United States. For 2015, the proprietorship has QPAI of $400,000. Sarah’s modified AGI was $350,000. The W–2 wages paid by the proprietorship to employees engaged
> Blue Corporation, a manufacturing company, decided to develop a new line of merchandise. The project began in 2015. Blue had the following expenses in connection with the project. The new product will be introduced for sale beginning in July 2017. Deter
> Dan Simms is the president and sole shareholder of Simms Corporation, 1121 Madison Street, Seattle, WA 98121. Dan plans for the corporation to make a charitable contribution to the University of Washington, a qualified public charity. He will have the co
> In 2015, Gray Corporation, a calendar year C corporation, holds a $75,000 charitable contribution carryover from a gift made in 2010. Gray is contemplating a gift of land to a qualified charity in either 2015 or 2016. Gray purchased the land as an invest
> For each of the following independent transactions, calculate the recognized gain or loss to the seller and the adjusted basis to the buyer. a. Bonnie sells Parchment, Inc. stock (adjusted basis $17,000) to Phillip, her brother, for its fair market val
> Brittany Callihan sold stock (basis of $184,000) to her son, Ridge, for $160,000, the fair market value. a. What are the tax consequences to Brittany? b. What are the tax consequences to Ridge if he later sells the stock for $190,000? For $152,000?
> Nancy, the owner of a very successful hotel chain in the Southeast, is exploring the possibility of expanding the chain into a city in the Northeast. She incurs $35,000 of expenses associated with this investigation. Based on the regulatory environment f
> Trip Garage, Inc. (459 Ellis Avenue, Harrisburg, PA 17111), is an accrual basis taxpayer that repairs automobiles. In late December 2015, the company repaired Samuel Mosley’s car and charged him $1,000. Samuel did not think the problem had been fixed, s
> Jarret owns City of Charleston bonds with an adjusted basis of $190,000. During the year, he receives interest payments of $3,800. Jarret partially financed the purchase of the bonds by borrowing $100,000 at 5% interest. Jarret’s interest payments on the
> Ella owns 60% of the stock of Peach, Inc. The stock has declined in value since she purchased it five years ago. She is going to sell 5% of the stock to a relative. Ella is also going to make a gift of 10% of the stock to another relative. Identify the r
