(1) Lauren is a sole proprietor. She owns, leases, and manages apartment buildings. During 2014, Lauren incurred the following costs. Which of these costs are deductible? If so, are they for AGI or from AGI deductions?
(a) Attorney’s fees of $350 for title searches on new property Lauren acquired.
(b) Legal fees of $600 to collect unpaid rent.
(c) CPA fees of $450 to prepare Lauren’s 2013 federal income tax return, $350 of which involved preparation of her Schedule C.
(d) Legal fees Lauren paid for an attorney to prepare her will.
(e) Legal fees Lauren paid for an unsuccessful challenge a county rezoning ordinance that adversely affected her business.
2) Lamont uses the accrual method of accounting for his calendar-year computer sales and repair business. For tax purposes, (a) how should Lamont account for the following transactions; and (b) would your answers change if Lamont were a cash basis taxpayer?
(i) During 2014, Lamont hired a contractor to remodel his store. The remodeling was completed on November 28. On December 13, Lamont received a $20,000 bill from the contractor. He immediately contacted the contractor to contest the $7,000 labor charge included in the bill, which Lamont claims should only be $5,000. Lamont did not pay any amount to the contractor.
(ii) Lamont provides a one-year warranty on all of its computers. For computer sales during 2014, he paid $12,500 to service warranties during 2014, and he expects to pay $14,000 to fulfill the remaining 2014 warranty obligations in 2015.
3) Joe Smith, a cash-basis taxpayer, earned an annual salary of $80,000 at Resolute Corp. in 2014, but he elected to take only $50,000. Resolute, which was financially able to pay Smith's full salary, credited the unpaid balance of $30,000 to Smith’s account on the corporate books in 2014, and actually paid this $30,000 to Smith on January 30, 2015. How much of the salary is taxable to Smith in 2014? Explain.
(4) During 2014, Chloe incurred the following costs associated with her beachfront condominium in Ocean City:
Insurance $ 500
Repairs & maintenance 700
Mortgage interest 3,000
Property taxes 1,000
Chloe could also have deducted a total of $8,000 in depreciation if the property had been acquired and used only for investment purposes. However, during the year, Chloe used the condominium 20 days for a much needed vacation. She rented it out for 60 days during the year, which resulted in total gross income of $9,000.
(a) What total deduction amount (i) for AGI and (ii) from AGI may Chloe claim for the above condominium costs during 2014? (b) What is the effect of the above costs on Chloe’s basis in her condominium?
5) Assume all of the same facts as in Question (4) above, except that Chloe rents her condominium a total of 14 days in 2014. How would she report her income and deductions from the property?
6) During 2014, Lucinda, suffered serious injuries in a snow-boarding accident. She incurred the following costs as a result:
Doctor bills $11,700
Hospital bills 9,400
Legal fees to sue the ski resort 3,000
Lucinda is single with no dependents. Her 2014 salary was $58,000. She paid $600 in medical and dental insurance premiums, which were withheld from her salary on an after-tax basis, $2,750 in mortgage interest on her personal residence, and $1,200 in interest on her car loan. She was reimbursed for $10,000 in medical expenses by her health insurer. Calculate her 2014 taxable income.
7) During 2014, Megan purchased a beachfront condominium for $600,000. She paid $150,000 down and took out a $450,000 mortgage, secured by the condominium. At the time of the purchase, the outstanding mortgage on Megan’s principal residence was $700,000, which was secured by her residence. The fair market value of Megan’s principal residence, which she purchased in 1998, is $1.4 million. What is Megan’s qualified mortgage indebtedness interest that she may deduct on her 2014 federal income tax return?
8) Jeremiah, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Jeremiah donated land to a church and made no other contributions. Jeremiah purchased the land 15 years ago as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Jeremiah may deduct as an itemized deduction for the land donation for the current year?
9) During the current year, Walter's residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Walter received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Walter's current year adjusted gross income was $60,000 and he did not have any casualty gains. What total amount can Walter deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations? Explain.
10) Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor?
a. Employee's unreimbursed business car expense.
b. Self-employed health insurance.
c. Employee's unreimbursed moving expense.
d. One-half of the self-employment tax.
. Melinda and Bill are married and file a joint return. Melinda owns an unincorporated dental practice. Bill works part-time as a substitute high school computer science teacher. He spends the rest of his time caring for their daughter. During 2014, they reported the following items of income and expense on their federal income tax return:
Bill’s salary $ 18,000
Interest earned on a savings account 1,200
Interest paid on their personal residence 7,100
Itemized deductions for state and local taxes 3,400
Items relating to Melinda’s dental practice
Payroll and salary expense 49,000
(a) What is Melinda’s and Bill’s taxable income or loss for the year? (b) What is Melinda’s Net Operating Loss for the year?
11) Monica, a law firm employee, maintains an office at the principal location of the law firm. She frequently travels directly from her home to client locations within and outside of the metropolitan area. Monica is not reimbursed for her transportation costs, and she has incurred the following transportation costs during 2014.
Transportation expenses for trips to clients within the metropolitan area $2,000
Transportation expenses for trips to clients located outside the metropolitan area 3,000
(a) What is the amount of Monica’s deduction for transportation expenses? (b) How is the deduction reported on Monica’s 2014 tax return? (c) What is the amount of Monica’s deduction for transportation expenses and its classification if she is self-employed and operates her office from her home? Assume that the requirements of IRC Sec. 280A are satisfied.
12) Oscar is a self-employed CPA, who uses 15% of his home exclusively as an office. Oscar operates completely out of his home office and makes all of his appointments from the office as well as maintaining his books and records in the office. Oscar’s gross income from his accounting practice was $60,000 in 2014. He incurred expenses of $6,000 that directly relate to his business, such as computer and office supplies. Below are additional expenses Oscar incurred in 2014 that related to his residence:
Real estate taxes $ 4,000
Mortgage interest 8,000
Repairs & utilities 1,000
(a) Which of the above costs, if any, are deductible by Oscar on his 2014 federal income tax return? Are they for AGI or from AGI deductions?
(b) How would your answer change if Oscar were an employee of an accounting firm and maintained an office at home in order to take work home with him so he did not have to spend so many hours at the firm’s offices?
13) Steeple Corp. granted an incentive stock option (“ISO”) to Regina, an employee, on January 1, 2010, when the option price and FMV of the Steeple stock was $80. The option entitled Regina to buy 10 shares of Steeple stock. Regina exercised the option and acquired the Steeple stock on April 1, 2012, when the stock’s FMV was $100. Regina, while still employed by the Steeple Corp., sold the stock on May 1, 2014, for $120 per share.
(a) What are the tax consequences to Regina and Steeple Corp. on the following dates: January 1, 2010; April 1, 2012; and May 1, 2014? (Assume all ISO qualifications are satisfied.)
(b) How would your answer to part (a) change if Regina instead sold the Steeple stock for $130 per share on May 1, 2012?
14) Eloise owns 100 shares of Ajax Corp., a publicly traded company, which Eloise purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Ajax declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Ajax stock was $62 per share. On February 1, Year 3, Eloise had her broker specifically sell the 100 shares of Ajax stock received in the split when the FMV of the stock was $65 per share. What amount should Eloise recognize as long-term capital gain income on her Form 1040, U.S. Individual Income Tax Return, for Year 3?
15) An individual had the following capital gains and losses for the year:
Short-term capital loss $ 70,000
Long-term gain (unrecaptured Section 1250 at 25%) 56,000
Collectibles gain (28% rate) 10,000
Long-term gain (15% rate) 20,000
What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?
16) In the current year, Owens sold land with a basis of $80,000 to Yancey for $100,000. Yancey paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Owens include in gross income for the year of sale?
17) Maureen and Justin, married taxpayers filing jointly, had the following transactions during Year 9:
Gain on sale of stock purchased in Year 1 and sold in June, Year 9 $ 3,000
Ordinary income from employers 80,000
Loss on sale of stock purchased in January, Year 9 and sold in March, Year 9 20,000
What is the amount of the capital loss carryover to Year 10?
18) Upon her grandfather's death, Jayden inherited 10 shares of Axiom Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather's death, Jordan sold all her shares of Axiom for $7,500. What was Jayden's recognized gain in the year of sale?
19) Johnson began operating a hardware store in the current year after constructing a building at a total cost of $100,000 on land previously acquired for $50,000. In the current year, the land had a fair market value of $60,000. Johnson paid real estate taxes of $5,000 in the current year. What is the total depreciable basis of Johnson's business property?
20) Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under IRC Sec. 179, the cost of new or used tangible depreciable personal property?
I. The property must be purchased for use in the taxpayer's active trade or business.
II. The property must be purchased from an unrelated party
(a) I only.
(b) Both I and II.
(c) Neither I nor II.
(d) II only.