...Week 4 Assignments AC553 Federal Taxes and Management Decisions Question 14-4: Code Sec. 351 allows investors to avoid recognizing gains on transfers of assets to a corporation in return of property. The purpose is to avoid discouraging investors from contributing to corporations. Corporations are considered significant stimulants of the economy. Question 14-20: Corporations may elect a calendar year, or a fiscal year, regardless of the tax years of its owners. Partnerships need to have the same tax year as the principal partners. S corporations are required to adopt the calendar year for tax purposes. The difference as illustrated is that corporations have more flexibility is choosing their tax year. Both, personal service corporations and S corporations may elect a fiscal year if they can establish a business purpose for it. Question 14-22: Corporations are allowed to net long-term capital gains or losses against short-term gains and losses to arrive at a net gain or loss. If the both long-term and short-term balances where the same trend, i.e. both gains and both losses, they must be reported separately. Net capital gains are taxed as ordinary income. However, net capital losses may not be deducted in the year incurred. They may only be deducted against net capital gains carried 3 years backwards with the remaining balance carried 5 years forward. Problem 14-55: a) There are no tax consequences to Susan at transfer. However, her basis in previously...
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...John Smith Tax Issues: John Smith was not considered the injured party in the lawsuit, he was the acting attorney representing a client whom was injured in an incident. John Smith was providing a service at the time and the $300,000 is considered payment for the service of representation in a legal matter. According to section 61 of the Internal Revenue Code any gross income is taxable for federal income tax regardless of the source or matter in which it was obtained. In particular compensation for services in the form of “fees” is specifically mention in this section. During the practice of representing his client John Smith incurred expenses that amount to $25,000 total. These expenses were necessary in order to reasonably provide complete and accurate service to his client. According to section 162(a) of the Internal Revenue Code an expense is considered for business purposes when it is ordinary and necessary to carry out the service, an expense that was actually paid during the course of providing the service and it has to be incurred while carrying out the course of the service. These types of expenses are applicable per publication 535 for 2010. By pursuing and using the maximum amount of deductions available to him John Smith can expect lower his amount of taxable income to a more favorable amount. In addition to finding all of the business expenses that he has incurred while providing his service, he also has two other options he may want to pursue to minimize his tax...
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...Chapter 3. Solution to 3-15 Joshua & White Technologies: December 31 Balance Sheets (Thousands of Dollars) Assets 2010 2009 Cash and cash equivalents $21,000 $20,000 Short-term investments 3,759 3,240 Accounts Receivable 52,500 48,000 Inventories 84,000 56,000 Total current assets $161,259 $127,240 Net fixed assets 218,400 200,000 Total assets $379,659 $327,240 Liabilities and equity Accounts payable $33,600 $32,000 Accruals 12,600 12,000 Notes payable 19,929 6,480 Total current liabilities $66,129 $50,480 Long-term debt 67,662 58,320 Total liabilities $133,791 $108,800 Common stock 183,793 178,440 Retained Earnings 62,075 40,000 Total common equity $245,868 $218,440 Total liabilities and equity $379,659 $327,240 Joshua & White Technologies December 31 Income Statements (Thousands of Dollars) 2010 2009 Sales $420,000 $400,000 Expenses excluding depr. and amort. 327,600 320,000 EBITDA $92,400 $80,000 Depreciation and Amortization 19,660 18,000 EBIT $72,740 $62,000 Interest Expense 5,740 4,460 EBT $67,000 $57,540 Taxes (40%) 26,800 23,016 Net Income $40,200 $34,524 Common dividends $18,125 $17,262 Addition to retained earnings $22,075 $17,262 Other Data 2010 2009 Year-end Stock Price $90.00 $96...
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...AC553 Homework Week 1 3.31 Tom & Linda married filing Jointly Itemized deduction $11,950.00 4 Exemptions @ 3700 $14,800.00 AGI $40,000.00 AGI $40,000.00 (Standard/Itemized deduction) $(11,950.00) (Personal Exemption) $(14,800.00) Taxable Income $13,250.00 3.32 Marie Single 2 dependent Children AGI $70,000.00 Itemized deduction $9,000.00 AGI $70,000.00 (Standard/Itemized deduction) $(9,000.00) (Personal Exemption) 3@3700 $(11,100.00) Taxable Income $49,900.00 3.36 Stanley age 16, dependent Wages $1,000.00 Interest from bonds $2,000.00 Gross Income $3,000.00 Gross Income $3,000.00 Standard deduction (1000+300) $(1,300.00) Taxable Income $1,700.00 13.55 Mr. Z (Non dealer) Installation Plan Year Installation Sales Gross Profit Collections Profit/Sales Collection*% 2009 $200,000.00 $50,000.00 $25,000.00 0.25 $6,250.00 2010 $300,000.00 $81,000.00 $80,000.00 0.27 $21,600.00 2011 $400,000.00 $96,000.00 $125,000.00 0.24 $30,000.00 $57,850.00 13.69 Bill is cash basis, calendar year taxpayer December Items-Gross income or deductions Gross A) Check...
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...Problem 14-10 A. 1. 2011 Dividends = (1.10)(2010 Dividends) = (1.10)($3,600,000) = $3,960,000 2. 2010 Payout = $3,600,000/$10,800,000 = 0.33 = 33% 2011 Dividends = (0.33)(2011 Net income) = (0.33)($14,400,000) = $4,800,000 (Note: If the payout ratio is rounded off to 33%, 2011 dividends are then calculated as $4,752,000.) 3. Equity financing = $8,400,000(0.60) = $5,040,000 2011 Dividends = Net income - Equity financing = $14,400,000 - $5,040,000 = $9,360,000 All of the equity financing is done with retained earnings as long as they are available. 4. The regular dividends would be 10% above the 2010 dividends: Regular dividends = (1.10)($3,600,000) = $3,960,000. The residual policy calls for dividends of $9,360,000. Therefore, the extra dividend, which would be stated as such, would be: Extra dividend = $9,360,000 - $3,960,000 = $5,400,000. An even better use of the surplus funds might be a stock repurchase. B. Policy 4, based on the regular dividend with an extra, seems most logical. Implemented properly, it would lead to the correct capital budget and the correct financing of that budget, and it would give correct signals to investors. C. No. As a regular dividend it should be lower than $9 Million. Problem 19-6 | | | | | | A | | | alternative 1 | alternative 2 | alternative 3 | | Total current liabilities | 150,000 | 150,000 | 150,000 | | Long-term debt | | 162,500 | 150,000 | 500,000 | | warrents | |...
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...©2011 CCH. All Rights Reserved. Chapter 5 59 Chapter 5 Gross Income—Exclusions SUMMARY OF CHAPTER Having just completed the study of gross income in the preceding chapter and thus gained a comprehension of what income is and when it is taxable, the student should now be ready to proceed to the concepts underlying exclusions from gross income, which are discussed in the present chapter. Since gross income includes income from all sources, to be excluded from gross income the items must be expressly exempted by law. Sections 101–139 list those items. Common Exclusions from Gross Income ¶5001 Gifts and Inheritances A gift, bequest, or inheritance is excluded from gross income. Thus, the donor does not receive a tax deduction for the property transmitted. If property received by gift or inheritance later produces income, the income is taxable. ¶5015 Life Insurance Proceeds Generally, life insurance proceeds received by the benefi ciary are not included in gross income if such amounts are paid by reason of death of the insured. It is immaterial who the benefi ciary is or whether the policy was part of a group life insurance plan or was individually purchased. However, if payment is delayed and the total amount when received includes interest, the interest is taxable. ¶5025 Sale of Residence Sales of principal residences on May 7, 1997, and thereafter are eligible for a $500,000 exclusion from gross income ($250,000 for single individuals). A two-year ownership...
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...AC553: FINAL EXAM STUDY GUIDELINES The Final Exam will be administered during Week 8. It consists of 16 multiple-choice questions (five points each) totaling 80 points and 10 essay questions (17 points each) totaling 170 points for a grand total of 250 points. It is a 3.5-hour exam. There are some basic calculations involved, so a simple calculator may be useful. Showing your work will count towards your overall points, so make sure that your answer consists of more than just numbers. The Final Exam is cumulative. It covers all of the readings, lectures, threaded discussions, and homework assignments from Weeks 1-7. However, most of your preparation should focus on the following: 1. The assigned problems for Weeks 1-7 2. The threaded discussions from Weeks 1-7 3. Quizzes 1 and 2 4. The concepts that you learned in the You Decide Projects 1 and 2 Also, make sure that you review the following concepts and examples: TCO A: Demonstrate familiarity with the basic fundamentals and forms of taxation and the underlying policy considerations that drive the imposition of income and other taxes. 1. Schedule A tax deductions 2. U.S. Tax Court 3. U.S. District Court 4. Tax evasion TCO B: Illustrate the impact of taxation as a transaction cost, understand the importance and methods of research and planning to minimize tax liability, and describe the framework for tax compliance. 1. Taxation of corporations--Review Problem 14-5. 2. Schedule A charitable contributions...
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...AC553 You Decide Week 4 John and Jane Smith Tax issues and recommendation 1. John Smith Tax Issues: 1(a) How is the $300,000 treated for purposes of Federal Income Tax? Since the $300,000 was derived from a business activity the amount should be included in the Gross Income reported for the John Smith LLC (IRS Regulation 1.61-3(a)). The assumption is being made that none of the income has been reported previously and that the LLC using a cash basis accounting method (IRS Publication 334). Because the income is reported in the LLC the income will also be reduced by all appropriate Cost of Goods Sold relevant to the business activity. The deductions from income will follow the guidelines relating to IRS Code Sections 62, 162 and 212 which focus on clarifying that the expenses are reasonable and that they are necessary for the performance of the business activity. Once the applicable deductions and credits (including any Net Operating Loss carry forward amounts) have been realized from a tax perspective at the business level the Net Income from the business will flow through to the personal income level where it will be taxed at the marginal tax rate of the individual. Summary: The $300,000 will be reported as gross income for the business LLC (IRS Regulation 1.61-3(a)), which will then be reduced by the appropriate Cost of Goods Sold and any applicable Tax Credits (IRS Code Sections 62, 162 and 212). At that point the Net Income from the business will flow...
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...1. Three Types of Income (on Final) a. Active (earned) income b. Passive income - income derived from a passive activity such as working interest in oil and gas, often associated with limited partnerships i. Can only deduct passive losses to the extent you have passive income c. Portfolio income (interest, dividend, annuities, sales of stocks and bonds, royalties not derived from an ordinary course of a trader business) 2. In –class quiz d. Owned a apartment complex ii. What is gross rental income 1. Tenant improvements in lieu of rent 2. Tenant improvement are not in lieu of rent iii. Two troublesome tenants, one comes and tell the landlord that they can’t pay the rent. Gives an interest bearing 90 day note in lieu of the rent. This note is treated as property and should be valued at FMV (fair market value) iv. Tenant hasn’t been in the apartment the entire month of December and has not paid rent. Paid late, landlord received in January 3. Include the rent in previous year’s taxable income v. Own a ten-flat in the city. Landlord lives in one of the ten, rent the other nine out. What is the net rental income? What about the deductions 4. What fractions of the building can you depreciate? 90% vi. Had inside information down in Springfield that a third airport was going to be built in the Chicagoland area. With this inside the...
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...You Decide-Week 4 ACCT553 John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? Mr. Smith, in regards to your $300,000 earnings for the successful litigation of your clients case, this will be treated as current year earnings. The payment fits all three doctrines of income starting with the economic doctrine which states “all income from whatever source derived” IRC Code Sec. 61 (a). The constructive receipt doctrine, outlining constructive receipt of payments, allows us to treat the payment for this current year only even though it was income from a case that lasted two years. “Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.” Reg. §1.451-2. Since these earnings were under the restriction of a successful verdict for your client, the payment could not be considered as earned any sooner than now. Since you operate your legal practice through an LLC, the assignment of income falls to the Limited Liability Corporation of which you are the primary member. Although the income is assigned to the LLC, there is only one layer of income tax, yours, since the LLC is treated as a conduit entity. All income will pass through to you as ordinary income, after business exclusions and deductions of course. The LLC is a disregarded entity and for federal tax purposes the activities of the business will be treated as if you were a sole proprietor (IRC Code Sec.752)...
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...AC553 Week 3 Home Work Reading Chapter 7: Deductions: Business/Investment Losses and Passive Activity Losses Chapter 8: Deductions: Itemized Deduction Homework Questions: 7-7 and 7-13 Problems (Show your work.): 7-46, 8-34, and 8-40 Chp.7. 7. Differentiate between the following: active income, passive income, and portfolio income. Sol. 1.Active Income Income an individual earns through participating in some activity with the goal of earning income. Also referred to as earned income. 2.Passive Income Income earned through a trade or investment in which the individual does through little or no effort. Ex:Rental property income managed by management company. 3.Portfolio Income Income is derived directly from investments such as stock earnings, mutual fund investments, or interest income. 13. Briefly, what is "material participation"? Why is the determination of whether a taxpayer materially participates important? Sol. Material participation is the point at which an individual becomes Actively or Continuously involved in a project . Earned revenue from the project is no longer considered passive income. This is important as this determines whether income is active or passive inconsideration of how loses are deducted and how this income is taxed. 46. Mary Beth is a CPA, devoting 3,000 hours per year to her practice. She also owns an office building in which she rents out space to tenants. She devotes none of her time to the management of the office...
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...AC553: FINAL EXAM STUDY GUIDELINES The Final Exam will be administered during Week 8. It consists of 16 multiple-choice questions (five points each), totaling 80 points; and 10 essay questions (17 points each) totaling 170 points, for a grand total of 250 points. It is a 3.5-hour exam. There are some basic calculations involved, so a simple calculator may be useful. Showing your work will count towards your overall points, so make sure that your answer consists of more than just numbers. The Final Exam is cumulative. It covers all of the readings, lectures, threaded discussions, and homework assignments from Weeks 1 – 7. However, most of your preparation should focus on the following: 1. The assigned problems for Weeks 1 – 7; 2. The threaded discussions from Weeks 1 – 7; 3. Quizzes 1 and 2; and 4. The concepts that you learned in the You Decide Projects 1 and 2. Also, make sure that you review the following concepts and examples. TCO A: Demonstrate familiarity with the basic fundamentals and forms of taxation and the underlying policy considerations that drive the imposition of income and other taxes. 1. Schedule A Tax Deductions 2. U.S. Tax Court 3. U.S. District Court 4. Tax Evasion TCO B: Illustrate the impact of taxation as a transaction cost, understand the importance and methods of research and planning to minimize tax liability, and describe the framework for tax compliance. 1. Taxation of Corporations--review Problems...
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...PAPER WORK WEEK SEVEN (AC553) Solution: (A) ADJUSTED GROSS INCOME: This is a measure of income and it used to establish eligibility for financial benefits. It is calculated as gross income from taxable sources minus allowable deductions. Adjusted gross income is important to individual income taxation because it controls individual qualification for numerous deductions and credits. Besides, it can affect individual eligibility for retirement plans. (B) How does ADJUSTED GROSS INCOME AFFECT: (1) Medical Deduction on Form 1040, Schedule A Only the part of medical expenses that exceed 7.5% of the amount on Form 1040, line 38 is deductible. To the extent you were not reimbursed, you can deduct the amount you paid for: Prescription medicines or insulin, Medical examination, diagnostic test etc. (2) Miscellaneous Itemized Deduction on Form 1040, Schedule A This is subject to expense that is more than 2 % of your adjusted gross income. This 2% limit can only be applied after you apply any other deduction limit. For example, unreimbursed employee expenses, Tax preparation fee, and all other expenses that will appear on line 11 of Form 1040. (3) The Deduction for Charity on Form 1040, Schedule A Donations to charity are tax deductible expenses but subject to limitation.1) you must make an assessment of the fair market value of the property you contribute. 2) You must attach IRS Form 8283 if your total non-cash contribution exceeds $500. 3) If you contribute a car...
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...AC553 – You Decide 1. John Tax Issues: a. How is the $300,000 treated for purposes of Federal tax income? The $300,000 is included in John’s Gross Income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items. Therefore the $300,000 is classified as compensation John received for legal services rendered. b. How is the $25,000 treated for purposes of Federal tax income? The $25,000 should also be included in gross income, as they are also included in the fees for the legal services) provided. c. What is your determination regarding reducing the taxable amount of income for both a and b In order for John to reduce the taxable amount of his income of $300,000, he must maximize his deductions as business expenses. Business expenses are the cost of carrying on a trade or business. Expenses are usually deductible if the business is operated to make a profit. The tax code Section 162- Trade or business expenses indicates for a business expenses to be deductible, it must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the business, while a necessary expense is one that is helpful and appropriate for the business. The other requirements for an expense to be deductible as a business expense include, it being reasonable in amount and practice; an expense is allowable...
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