Exam 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals

Chance Corporation began operating a new retail business in the current year and had $500,000 of sales, $70,000 of which had not been collected by year- end. Total purchases were $350,000 on which $30,000 is still owed. Ending inventory is $60,000; operating expenses are $170,000, $50,000 of which is still owed at year- end. a. Compute net income from the business under the accrual method. b. Compute net income from the business under the cash method. c. Would paying the $50,000 she owes for operating expenses before year- end change her net income under th accrual method? Under the cash method?

2020 Enterprises, owned by Xio who also manages the businesses, has generated more than $25 million of sales f of the past five years. This year it is reporting the following income and deduction amounts: Xio just received a statement from the bank reporting interest expense of $1,800,000 on a loan to 2020 Enterprises fund operations and equipment purchases. How much of the interest expense can 2020 Enterprises deduct in co this year's taxable income?

The following taxes are deductible as itemized deductions with the exception of

Jillian has just accepted an offer from accounting firm for a full- time position after completion of her master's degree. In addition to paying a high salary and premiums on the basic health insurance policy, the firm will pay the benefits listed below. Which of the following benefits can be excluded (assume the benefits are provided on a non- discriminatory basis to all employees)?

Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she purchased ten ago for $435,000. a. What is the amount of Nicki's recognized gain on the sale? b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki's recognized gain on sale? c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in the ho they sell the home for $485,000, what is the amount of their recognized gain on the sale?

An individual taxpayer who is self- employed and an active investor has qualified for foreign tax credits, nonrefundable personal tax credits and general business credits. Because he knows there are differing limitations on the application of these credits, with resulting interrelated aspects, he wants to know the appropriate order for their application. The appropriate order of the application of these three classes of tax credits is as follow:

Terrell and Michelle are married and living in New York, which is a not a community property state. They jointly own property with an adjusted basis of $240,000. On December 2 of this year, Michelle died when the property had a fair market value of $260,000. Terrell's basis in the property after Michelle's death is

Rui, the sole proprietor of a CPA firm, is responsible for a large client base. She often drives to meetings at two different clients' offices in a single day. Rui can deduct the transportation costs of driving to the various client meetings.

Discuss why a taxpayer would want to avoid like- kind exchange provisions.

Taj operates a sole proprietorship, maintaining the business records under the cash- basis method of accounting. Taj performs services for a client and sends the client a bill for $12,000. Six months later, before payment is received by Taj, the client files bankruptcy, with no assets available for unsecured creditors such as Taj. Taj will deduct

Wes owned a business which was destroyed by fire in May 2018. Details of his losses follow: His AGI without consideration of the casualty is $45,000. What is Wes's net casualty loss deduction for 2018?

In 2018, Richard's Department Store changes its inventory method from FIFO to LIFO. Richard's uses the simplified LIFO method. Richard's year- end inventory under FIFO is as follows: 2017 - $300,000; 2018 - $350,000. The 2017 price index is 110% and the 2018 index is 120%. The 2018 layer is

The Current Model most closely describes a pass- through entity while a variation of the Deferred Model describes a C corporation.

Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000 plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the new parcel. Due to the exchange, Landry will recognize

Because of the locked- in effect, high capital gains tax rates may discourage taxpayer's from selling appreciated capital assets.

In list form, outline the steps to follow when using a tax service.

Sela sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The total gross profit for installment sale recognition purposes is

Lance transferred land having a $180,000 FMV and a $105,000 adjusted basis, which is subject to a $150,000 mortgage in exchange for a one- third interest in the Trois Partnership. Lance acquired the land in 2010. The partnership owes no other liabilities. Lance, Rhonda, and Zach share profits and losses equally and each has a one- third interest in partnership capital. The tax effect to Lance is

Assessments or fees imposed by the government for specific privileges or services are not deductible as taxes.

In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.