INDIVIDUAL INCOME TAXATION
Take Home Quiz 2
Winter 2015
PROBLEM
1
Part 1:
Green Corp., a cash basis and calendar year taxpayer, was
formed and began operations on August 22, 2014.
Green incurred the following expenses during its first year
of operations
(August 22 – Dec. 31):
Expenses of temporary directors and organizational meetings
$24,000
Fee paid to state of incorporation 7,000
Expenses in printing & sale of stock certificates 7,200
Legal services for drafting corporate charter & bylaws
18,800
Total
57,000
With an election under section 248 to amortize qualifying
organizational expenses, how much may the corporation deduct
for tax year 2014?
Part
2:
Rich and Tim are both involved in operating
illegal businesses. Rich operates a
gambling business and Tim operates a drug production
business. Both
businesses have GROSS REVENUES OF $500,000. The businesses
incur the following expenses. Calculate the net income for each of
these
activities.
Rich
Tim
Employee salaries
$150,000
$150,000
Bribes to police
20,000
20,000
Rent and utilities
40,000
40,000
Cost of goods sold
-0-
230,000
PROBLEM
2
1.
Red Company purchased an apartment
building on November 1, 2014, for $7,000,000.
Determine the cost recovery deduction for 2014.
2.
Pink Corporation purchased a
business asset (seven-year property) on October 18, 2014, at
a cost of
$30,000. This is the only asset it
purchased during the year. Pink did not
elect to expense any of the asset under § 179, nor did it
elect to take
additional or bonus depreciation or use straight-line cost
recovery. Determine the cost recovery deduction for 2014.
3.
Purple
Company acquires a new machine (seven-year property) on
December 9, 2014, at a
cost of $204,000. Purple makes the election to expense the
maximum amount under
§ 179. No election is made to use the straight-line method.
Determine the total
deductions in calculating taxable income related to the
machine for 2014
assuming Purple has taxable income of $400,000.
4.
On June 4, 2013, Sam purchased
an automobile (5 year property) that cost $30,000. The car is
used 70% for business and 30% for
personal use. Determine the cost recovery for 2014 and 2013
assuming the business
use remains the same.
5.
On May 12, 2013, Kate purchased
an automobile (5 year property) that cost $40,000.She used
the automobile 40%
for business and 60% for personal use during 2013. Determine
the cost recovery for 2014 and 2013
assuming the business use percentage remains the same.
PROBLEM
3
Joan, age 17, is claimed as a dependent on
her parents’ tax return. Her income for
2014 consisted of $6,000 of wages, $4,000 of interest, and
$5,000 of qualified
dividends. Her parents’ ordinary income
marginal tax rate is 35%. Joan did not
provide more than half her own support.
What is Joan’s tax liability for the year?
Would your answer change if she had
received $5,000 of ordinary, not qualified dividends? If so,
how?
PROBLEM
4
Part 1: Mark sold his farm during the current taxable year. At
the
date of the sale, the farm had an adjusted basis of $215,000
and was encumbered
by a mortgage of $200,000. The buyer agreed to take the title
subject to the
$200,000 mortgage, paid him $150,000 in cash, and agreed to
pay him $300,000 with
interest at 5 percent one year from the date of sale. How
much is Mark’s
realized and recognized gain on the sale?
Part 2: Margaret
gives a parcel of land to her son, Max. She had purchased the
land in 1996 for
$185,000 and its fair market value on the date of the gift is
$168,000. No gift
tax is paid. Max subsequently sells the land for $172,000.
Determine the realized and recognized gain or
loss for both Margaret and Max.
PROBLEM
5
Part
1: An individual taxpayer has the gains and losses shown
below. The taxpayer also has $2,000 of §1231 lookback losses.
What is the
amount and character of the taxpayers net gain or loss for
the year?
Holding
Period/Property
Character of
Gain or Loss
Amount
5 years/vacant land
§ 1231 gain
$8,000
3 years/business
equipment
§ 1245 gain
4,200
2 years/publicly
traded stock
Long-term capital
gain
1,490
7 months/publicly
traded stock
Short-term
capital loss
(2,850)
Part 2 : The
chart below describes the § 1231 assets sold by the Blue
Company (a sole
proprietorship) this year. Compute the gain or loss from each
asset disposition
and determine the nature of the gain or loss for each
individual transaction
and the net gain or loss for the Company for the year and the
nature of that
gain or loss. Assume there is a §1231 lookback loss of
$3,000.
Asset
Acquired
Sold
Cost
Acc. Depr.
Sale Price
Stamping machine
3/23/09
8/18/2014
$40,000
$29,736
$32,000
Factory building
2/19/06
7/13/2014
80,000
18,838
90,000
Tractor
5/1/09
11/11/2014
52,000
52,000
30,000
Overhead crane
11/2/01
2/28/2014
74,000
74,000
18,000
INDIVIDUAL INCOME TAXATION
Take Home Quiz 2
Winter 2015
PROBLEM
1
Part 1:
Green Corp., a cash basis and calendar year taxpayer, was
formed and began operations on August 22, 2014.
Green incurred the following expenses during its first year
of operations
(August 22 – Dec. 31):
Expenses of temporary directors and organizational meetings
$24,000
Fee paid to state of incorporation 7,000
Expenses in printing & sale of stock certificates 7,200
Legal services for drafting corporate charter & bylaws
18,800
Total
57,000
With an election under section 248 to amortize qualifying
organizational expenses, how much may the corporation deduct
for tax year 2014?
Part
2:
Rich and Tim are both involved in operating
illegal businesses. Rich operates a
gambling business and Tim operates a drug production
business. Both
businesses have GROSS REVENUES OF $500,000. The businesses
incur the following expenses. Calculate the net income for each of
these
activities.
Rich
Tim
Employee salaries
$150,000
$150,000
Bribes to police
20,000
20,000
Rent and utilities
40,000
40,000
Cost of goods sold
-0-
230,000
PROBLEM
2
1.
Red Company purchased an apartment
building on November 1, 2014, for $7,000,000.
Determine the cost recovery deduction for 2014.
2.
Pink Corporation purchased a
business asset (seven-year property) on October 18, 2014, at
a cost of
$30,000. This is the only asset it
purchased during the year. Pink did not
elect to expense any of the asset under § 179, nor did it
elect to take
additional or bonus depreciation or use straight-line cost
recovery. Determine the cost recovery deduction for 2014.
3.
Purple
Company acquires a new machine (seven-year property) on
December 9, 2014, at a
cost of $204,000. Purple makes the election to expense the
maximum amount under
§ 179. No election is made to use the straight-line method.
Determine the total
deductions in calculating taxable income related to the
machine for 2014
assuming Purple has taxable income of $400,000.
4.
On June 4, 2013, Sam purchased
an automobile (5 year property) that cost $30,000. The car is
used 70% for business and 30% for
personal use. Determine the cost recovery for 2014 and 2013
assuming the business
use remains the same.
5.
On May 12, 2013, Kate purchased
an automobile (5 year property) that cost $40,000.She used
the automobile 40%
for business and 60% for personal use during 2013. Determine
the cost recovery for 2014 and 2013
assuming the business use percentage remains the same.
PROBLEM
3
Joan, age 17, is claimed as a dependent on
her parents’ tax return. Her income for
2014 consisted of $6,000 of wages, $4,000 of interest, and
$5,000 of qualified
dividends. Her parents’ ordinary income
marginal tax rate is 35%. Joan did not
provide more than half her own support.
What is Joan’s tax liability for the year?
Would your answer change if she had
received $5,000 of ordinary, not qualified dividends? If so,
how?
PROBLEM
4
Part 1: Mark sold his farm during the current taxable year. At
the
date of the sale, the farm had an adjusted basis of $215,000
and was encumbered
by a mortgage of $200,000. The buyer agreed to take the title
subject to the
$200,000 mortgage, paid him $150,000 in cash, and agreed to
pay him $300,000 with
interest at 5 percent one year from the date of sale. How
much is Mark’s
realized and recognized gain on the sale?
Part 2: Margaret
gives a parcel of land to her son, Max. She had purchased the
land in 1996 for
$185,000 and its fair market value on the date of the gift is
$168,000. No gift
tax is paid. Max subsequently sells the land for $172,000.
Determine the realized and recognized gain or
loss for both Margaret and Max.
PROBLEM
5
Part
1: An individual taxpayer has the gains and losses shown
below. The taxpayer also has $2,000 of §1231 lookback losses.
What is the
amount and character of the taxpayers net gain or loss for
the year?
Holding
Period/Property
Character of
Gain or Loss
Amount
5 years/vacant land
§ 1231 gain
$8,000
3 years/business
equipment
§ 1245 gain
4,200
2 years/publicly
traded stock
Long-term capital
gain
1,490
7 months/publicly
traded stock
Short-term
capital loss
(2,850)
Part 2 : The
chart below describes the § 1231 assets sold by the Blue
Company (a sole
proprietorship) this year. Compute the gain or loss from each
asset disposition
and determine the nature of the gain or loss for each
individual transaction
and the net gain or loss for the Company for the year and the
nature of that
gain or loss. Assume there is a §1231 lookback loss of
$3,000.
Asset
Acquired
Sold
Cost
Acc. Depr.
Sale Price
Stamping machine
3/23/09
8/18/2014
$40,000
$29,736
$32,000
Factory building
2/19/06
7/13/2014
80,000
18,838
90,000
Tractor
5/1/09
11/11/2014
52,000
52,000
30,000
Overhead crane
11/2/01
2/28/2014
74,000
74,000
18,000
INDIVIDUAL INCOME TAXATION
Take Home Quiz 2
Winter 2015
PROBLEM
1
Part 1:
Green Corp., a cash basis and calendar year taxpayer, was
formed and began operations on August 22, 2014.
Green incurred the following expenses during its first year
of operations
(August 22 – Dec. 31):
Expenses of temporary directors and organizational meetings
$24,000
Fee paid to state of incorporation 7,000
Expenses in printing & sale of stock certificates 7,200
Legal services for drafting corporate charter & bylaws
18,800
Total
57,000
With an election under section 248 to amortize qualifying
organizational expenses, how much may the corporation deduct
for tax year 2014?
Part
2:
Rich and Tim are both involved in operating
illegal businesses. Rich operates a
gambling business and Tim operates a drug production
business. Both
businesses have GROSS REVENUES OF $500,000. The businesses
incur the following expenses. Calculate the net income for each of
these
activities.
Rich
Tim
Employee salaries
$150,000
$150,000
Bribes to police
20,000
20,000
Rent and utilities
40,000
40,000
Cost of goods sold
-0-
230,000
PROBLEM
2
1.
Red Company purchased an apartment
building on November 1, 2014, for $7,000,000.
Determine the cost recovery deduction for 2014.
2.
Pink Corporation purchased a
business asset (seven-year property) on October 18, 2014, at
a cost of
$30,000. This is the only asset it
purchased during the year. Pink did not
elect to expense any of the asset under § 179, nor did it
elect to take
additional or bonus depreciation or use straight-line cost
recovery. Determine the cost recovery deduction for 2014.
3.
Purple
Company acquires a new machine (seven-year property) on
December 9, 2014, at a
cost of $204,000. Purple makes the election to expense the
maximum amount under
§ 179. No election is made to use the straight-line method.
Determine the total
deductions in calculating taxable income related to the
machine for 2014
assuming Purple has taxable income of $400,000.
4.
On June 4, 2013, Sam purchased
an automobile (5 year property) that cost $30,000. The car is
used 70% for business and 30% for
personal use. Determine the cost recovery for 2014 and 2013
assuming the business
use remains the same.
5.
On May 12, 2013, Kate purchased
an automobile (5 year property) that cost $40,000.She used
the automobile 40%
for business and 60% for personal use during 2013. Determine
the cost recovery for 2014 and 2013
assuming the business use percentage remains the same.
PROBLEM
3
Joan, age 17, is claimed as a dependent on
her parents’ tax return. Her income for
2014 consisted of $6,000 of wages, $4,000 of interest, and
$5,000 of qualified
dividends. Her parents’ ordinary income
marginal tax rate is 35%. Joan did not
provide more than half her own support.
What is Joan’s tax liability for the year?
Would your answer change if she had
received $5,000 of ordinary, not qualified dividends? If so,
how?
PROBLEM
4
Part 1: Mark sold his farm during the current taxable year. At
the
date of the sale, the farm had an adjusted basis of $215,000
and was encumbered
by a mortgage of $200,000. The buyer agreed to take the title
subject to the
$200,000 mortgage, paid him $150,000 in cash, and agreed to
pay him $300,000 with
interest at 5 percent one year from the date of sale. How
much is Mark’s
realized and recognized gain on the sale?
Part 2: Margaret
gives a parcel of land to her son, Max. She had purchased the
land in 1996 for
$185,000 and its fair market value on the date of the gift is
$168,000. No gift
tax is paid. Max subsequently sells the land for $172,000.
Determine the realized and recognized gain or
loss for both Margaret and Max.
PROBLEM
5
Part
1: An individual taxpayer has the gains and losses shown
below. The taxpayer also has $2,000 of §1231 lookback losses.
What is the
amount and character of the taxpayers net gain or loss for
the year?
Holding
Period/Property
Character of
Gain or Loss
Amount
5 years/vacant land
§ 1231 gain
$8,000
3 years/business
equipment
§ 1245 gain
4,200
2 years/publicly
traded stock
Long-term capital
gain
1,490
7 months/publicly
traded stock
Short-term
capital loss
(2,850)
Part 2 : The
chart below describes the § 1231 assets sold by the Blue
Company (a sole
proprietorship) this year. Compute the gain or loss from each
asset disposition
and determine the nature of the gain or loss for each
individual transaction
and the net gain or loss for the Company for the year and the
nature of that
gain or loss. Assume there is a §1231 lookback loss of
$3,000.
Asset
Acquired
Sold
Cost
Acc. Depr.
Sale Price
Stamping machine
3/23/09
8/18/2014
$40,000
$29,736
$32,000
Factory building
2/19/06
7/13/2014
80,000
18,838
90,000
Tractor
5/1/09
11/11/2014
52,000
52,000
30,000
Overhead crane
11/2/01
2/28/2014
74,000
74,000
18,000
INDIVIDUAL INCOME TAXATION
Take Home Quiz 2
Winter 2015
PROBLEM
1
Part 1:
Green Corp., a cash basis and calendar year taxpayer, was
formed and began operations on August 22, 2014.
Green incurred the following expenses during its first year
of operations
(August 22 – Dec. 31):
Expenses of temporary directors and organizational meetings
$24,000
Fee paid to state of incorporation 7,000
Expenses in printing & sale of stock certificates 7,200
Legal services for drafting corporate charter & bylaws
18,800
Total
57,000
With an election under section 248 to amortize qualifying
organizational expenses, how much may the corporation deduct
for tax year 2014?
Part
2:
Rich and Tim are both involved in operating
illegal businesses. Rich operates a
gambling business and Tim operates a drug production
business. Both
businesses have GROSS REVENUES OF $500,000. The businesses
incur the following expenses. Calculate the net income for each of
these
activities.
Rich
Tim
Employee salaries
$150,000
$150,000
Bribes to police
20,000
20,000
Rent and utilities
40,000
40,000
Cost of goods sold
-0-
230,000
PROBLEM
2
1.
Red Company purchased an apartment
building on November 1, 2014, for $7,000,000.
Determine the cost recovery deduction for 2014.
2.
Pink Corporation purchased a
business asset (seven-year property) on October 18, 2014, at
a cost of
$30,000. This is the only asset it
purchased during the year. Pink did not
elect to expense any of the asset under § 179, nor did it
elect to take
additional or bonus depreciation or use straight-line cost
recovery. Determine the cost recovery deduction for 2014.
3.
Purple
Company acquires a new machine (seven-year property) on
December 9, 2014, at a
cost of $204,000. Purple makes the election to expense the
maximum amount under
§ 179. No election is made to use the straight-line method.
Determine the total
deductions in calculating taxable income related to the
machine for 2014
assuming Purple has taxable income of $400,000.
4.
On June 4, 2013, Sam purchased
an automobile (5 year property) that cost $30,000. The car is
used 70% for business and 30% for
personal use. Determine the cost recovery for 2014 and 2013
assuming the business
use remains the same.
5.
On May 12, 2013, Kate purchased
an automobile (5 year property) that cost $40,000.She used
the automobile 40%
for business and 60% for personal use during 2013. Determine
the cost recovery for 2014 and 2013
assuming the business use percentage remains the same.
PROBLEM
3
Joan, age 17, is claimed as a dependent on
her parents’ tax return. Her income for
2014 consisted of $6,000 of wages, $4,000 of interest, and
$5,000 of qualified
dividends. Her parents’ ordinary income
marginal tax rate is 35%. Joan did not
provide more than half her own support.
What is Joan’s tax liability for the year?
Would your answer change if she had
received $5,000 of ordinary, not qualified dividends? If so,
how?
PROBLEM
4
Part 1: Mark sold his farm during the current taxable year. At
the
date of the sale, the farm had an adjusted basis of $215,000
and was encumbered
by a mortgage of $200,000. The buyer agreed to take the title
subject to the
$200,000 mortgage, paid him $150,000 in cash, and agreed to
pay him $300,000 with
interest at 5 percent one year from the date of sale. How
much is Mark’s
realized and recognized gain on the sale?
Part 2: Margaret
gives a parcel of land to her son, Max. She had purchased the
land in 1996 for
$185,000 and its fair market value on the date of the gift is
$168,000. No gift
tax is paid. Max subsequently sells the land for $172,000.
Determine the realized and recognized gain or
loss for both Margaret and Max.
PROBLEM
5
Part
1: An individual taxpayer has the gains and losses shown
below. The taxpayer also has $2,000 of §1231 lookback losses.
What is the
amount and character of the taxpayers net gain or loss for
the year?
Holding
Period/Property
Character of
Gain or Loss
Amount
5 years/vacant land
§ 1231 gain
$8,000
3 years/business
equipment
§ 1245 gain
4,200
2 years/publicly
traded stock
Long-term capital
gain
1,490
7 months/publicly
traded stock
Short-term
capital loss
(2,850)
Part 2 : The
chart below describes the § 1231 assets sold by the Blue
Company (a sole
proprietorship) this year. Compute the gain or loss from each
asset disposition
and determine the nature of the gain or loss for each
individual transaction
and the net gain or loss for the Company for the year and the
nature of that
gain or loss. Assume there is a §1231 lookback loss of
$3,000.
Asset
Acquired
Sold
Cost
Acc. Depr.
Sale Price
Stamping machine
3/23/09
8/18/2014
$40,000
$29,736
$32,000
Factory building
2/19/06
7/13/2014
80,000
18,838
90,000
Tractor
5/1/09
11/11/2014
52,000
52,000
30,000
Overhead crane
11/2/01
2/28/2014
74,000
74,000
18,000
