federal taxation homework 3,4

Chapter 6

13. LO.2 Aubry, a cash basis and calendar year taxpayer, decides to reduce his taxable income for 2014 by buying $65,000 worth of supplies for his business on December 27, 2014. The supplies will be used up in 2015.

a. Can Aubry deduct the expenditure for 2014?

b. Would your answer in part (a) change if Aubry bought the supplies because the seller was going out of business and offered a large discount on the price? Explain.

23. LO.3 Paul operates a restaurant in Cleveland. He travels to Columbus to investigate acquiring a business. He incurs expenses as follows: $1500 for travel, $2000 for legal advice, and $3500 for a market analysis. Based on the different tax consequences listed below, describe the circumstances that were involved in Paul’s investigation of the business.

a. Paul deducts the $7000 of expenses.

b. Paul cannot deduct any of the $7000 of expenses.

c. Paul deducts $5000 of the expenses and amortizes the $2000 balance over a period of 180 months.

41. LO.3 Vermillion, Inc., a publicly held corporation, pays the following salaries to its executives:

	Salary	Bonus	Retirement Plan Contribution
CEO	$2,000,000	$100,000	$80,000
CFO	1,800,000	90,000	72,000
Treasurer	1,600,000	0	64,000
Marketing Vice President	1,500,000	75,000	60,000
Operations Vice President	1,400,000	70,000	56,000
Distribution vice president	1,200,000	60,000	48,000
Research vice president	1,100,000	0	44,000
Controller	800,000	0	32,000

Vermillion normally does not pay bonuses, but after reviewing the results of operation for the year, the board of directors decided to pay a 5% bonus to selected executives. What is the amount of these payments that Vermillion may deduct?

52. LO.1, 3, 4 Elisa and Clyde operate a retail sports memorabilia shop. For the current year, sales revenue is $55,000 and expenses are as follows:

Cost of goods sold $21,000

Advertising 1,000

Utilities 2,000

Rent 4,500

Insurance 1,500

Wages to Boyd 8,000

Elisa and Clyde pay $8,000 in wages to Boyd, a part-time employee. Because this amount is $1000 below the minimum wage, Boyd threatens to file a complaint with the appropriate Federal agency. Although Elisa and Clyde pay no attention to Boyd’s threat, Chelsie (Elisa’s mother) gives Boyd a check for $1000 for the disputed wages. Both Elisa and Clyde ridicule Chelsie for wasting money when they learn what she has done. The retail shop is the only source of income for Elisa and Clyde.

a. Calculate Elisa and Clyde’s AGI.

b. Can Chelsie deduct the $1000 payment on her tax return? Explain.

c. How could the tax position of the parties be improved?

57. LO.1, 3, 4 During the current year, Robert pays the following amounts associated with his own residence:

Property taxes 3,000

Mortgage interest 8,000

Repairs 1,200

Utilities 2,700

Replacement of roof 4,000

In addition, Robert paid $1,500 of property taxes on the home that is owned and used by Anne, his daughter.

a. Which of these expenses can Robert deduct?

b. Can Anne deduct the $1,500 of property taxes?

c. Are the deductions for AGI or from AGI (itemized)?

d. How could the tax consequences be improved?

Chapter 7

13. LO.4 Mary’s diamond ring was stolen in 2013. She originally paid $8,000 for the ring, but it was worth considerably ore 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 denied, Mary took a casualty loss for the stolen ring on her 2013 tax return. In 2013, Mary had AGI of $40,000. In 2014, the insurance company had a “change of heart” and sent Mary a check for $5,000 for the stolen ring. Discuss the proper tax treatment of the $5,000 Mary received from the insurance company in 2014.

33. LO.4 During 2014, someone broke into Jacob’s personal residence and took the following items:

Asset	Adjusted Basis	FMV before	FMV after	Insurance Recovery
Business computer	12,000	10,000	0	7,000
Bearer bonds	30,000	25,000	0	0
Silverware	7,000	20,000	0	18,000
Cash	8,000	8,000	0	0

Jacob is an employee and used the computer 100% of the time in his employment. Although his homeowner’s insurance policy paid Jacob $7,000 for the stolen computer, Jacob’s employer did not reimburse Jacob for any of the remainder of his loss. Jacob’s AGI for the year, before considering any of the above items, is $50,000. Determine the total deduction for the stolen items on Jacob’s 2014 tax return.

34. LO.3, 4, 8 Olaf lives in the state of Minnesota. A tornado hit the area and damaged his home and automobile. Applicable information is as follows:

Item	Adjusted Basis	FMV before	FMV after	Insurance Proceeds
Home	350,000	500,000	100,000	280,000
Auto	60,000	40,000	10,000	20,000

Because of the extensive damage caused by the tornado, the President designated the area a disaster area.

Olaf and his wife, Anna, always file a joint return. Their return for last year shows AGI of $180,000 and taxable income of $140,000. For the current year, their return shows AGI of $300,000 and taxable income (exclusive of the casualty loss deduction) of $215,000,

Determine the amount of Olaf and Anna’s loss and the year in which they should take the loss.

41. LO.6 Green Corporation manufactures skirts and blouses in the United States. The DPGR derived from the manufacture of one skirt is $12, and the DPGR from one blouse is $10. The cost of goods sold is $5 for one skirt and $6 for one blouse. Other allocated costs are $1 for one skirt and $5 for one blouse. What amount of QPAI is available to Green for calculating the DPAD?

43. LO.1, 3 Nell, single and age 38, had the following income and expense items in 2014:

Nonbusiness bad debt 6,000

Business bad debt 2,000

Nonbusiness long-term capital gain 4,000

Nonbusiness short-term capital loss 3,000

Salary 50,000

Interest income 3,000

Determine Nell’s AGI for 2014.

Chapter 8

23. LO. 3, 4 Discuss the implications of an automobile that is used in a trade of business and has a gross vehicle weight (GVW) exceeding 6,000 pounds.

32. LO.1, 2 Jose purchased a house for $300,000 in 2011. He used the house as his personal residence. In March 2014, when the fair market value of the house was $400,000, he converted the house to rental property. What is Jose’s cost recovery for 2014?

45. LO. 2, 3, 9 Lori, who is single, purchased 5-year class property for $31,000 and 7-year class property for $42,000 on May 20, 2014. Lori expects the taxable income derived from her business (without regard to the amount expensed under §179) to be about $100,000. Lori wants to elect immediate § 179 expensing, but she doesn’t know which asset she should expense under § 179. She does not claim any available additional first-year depreciation.

a. Determine Lori’s total deduction if the § 179 expense is first taken with respect to the 5-year class asset.

b. Determine Lori’s total decoction if the § 179 expense is first taken with respect to the 7-year class asset.

c. What is your advice to Lori?

55. LO. 2, 5 In 2014, Muhammad purchased a new copter 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 MACRS statutory percentage method, determine his cost recovery deduction for 2014 for computing taxable income and for computing his alternative minimum tax.

59. LO. 7 Martha was considering starting a new business. During her preliminary investigations related to the new venture, she incurred the following expenditures.

Salaries $22,000

Travel 18,000

Interest on short-term note 4,000

Professional fees 13,000

Martha begins the business on July 1 of the current year. If Martha elects § 195 treatment, determine her startup expenditure deduction for the current year.