ACC 421 - Federal Income Taxation

Chapter 8
31. On November 4, 2011, Blue Company acquired an asset (27.5-year residential real property) for $200,000 for use in its business. In 2011 and 2012, respectively, Blue took $642 and $5,128 of cost recovery. These amounts were incorrect because Blue applied the wrong percentages (i.e., those for 39-year rather than 27.5-year). Blue should have taken $910 and $7,272 cost recovery in 2011 and 2012 respectively. On January 1, 2013, the asset was sold for $180,000. Calculate the gain or loss on the sale of the asset in 2013.

45. Lori, who is single, purchased five-year class property for $200,000 and seven-year class property for $400,000 on May 20, 2013. Lori expects the taxable income derived from her business (without regard to the amount expensed under §179) to be about $800,000. Lori wants to elect immediate §179 expensing, but she doesn't know which asset she should expense under §179. She elects not to take additional first-year depreciation.

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

b. Determine Lori's total deduction if the §179 expense is first taken with respect to the seven-year class asset.

c. What is your advice to Lori?

50. On June 5, 2013, Leo purchased and placed in service a new car that cost $20,000. The business use percentage for the car is always 100%. He does take additional first-year depreciation. Compute Leo's cost recovery deduction in 2013 and 2014.

51. On March 15, 2013, Helen purchased and placed in service and new Escalade. The purchase price was $62,000, and the vehicle had a rating of 6,5000 GVW. The vehicle was used 100% for business.

a. Calculate the maximum total deduction Helen may take with respect to the vehicle in 2013.

b. How would your answer above change if Helen elected not to take first-year depreciation?

58. Oleander Corporation, a calendar year entity, begins business March 1, 2013. The corporation has startup expenditures of $63,000. If Oleander elects §195 treatment, determine the total amount of startup expenditures that it may deduct in 2013.

61. Chris purchased an oil interest for $2 million. Recoverable barrels were estimated to be 500,000. During the year, 120,000 barrels were sold for $3.84 million, regular expenses (including cost recovery) were $1.24 million, and IDC were $1 million. Calculate Chris's taxable income under the expensing and capitalization methods of handling IDC.

Chapter 9
9. Since Emma does not have records of the operating expenses, the automatic mileage method is her best option. She is able to prove the miles driven and the percentage of its business use.

20. In each of the following situations, indicate whether there is a cutback adjustment:
a. Each year, the employer awards its top salesperson an all-expense-paid trip to Jamaica.
b. The employer has a cafeteria for its employees where meals are furnished at cost.
c. The employer sponsors an annual Labor Day picnic for its employees.
d. Every Christmas, the employer gives each employee a fruitcake.
e. The taxpayer, an airline pilot, pays for meals and lodging during a layover between flights.
f. The taxpayer pays a cover charge to take key clients to a nightclub.
g. The taxpayer gives business gifts to her clients at Christmas.
h. The taxpayer purchases tickets to take clients to an athletic event.

Chapter 9

38. Caden, a financial planner, decides to quit his job with an investment bank in Charleston, South Carolina, and establish a private practice in Santa Fe, New Mexico. In connection with the move, he incurs the following expenses:
Moving van charge $4,500
Lodging during move 540
Meals during move 410
Loss on sale of residence in Charleston 9,000
Mileage for personal autos 3,500 miles

How much of these expenses, if any, can Caden deduct?

41. Elijah is employed as a full-time high school teacher. The school district where he works recently instituted a policy requiring all of its teachers to start working on a master's degree. Pursuant to this new rule, Elijah spent most of the summer of 2013 taking graduate courses at an out-of-town university. His expenses are as follows:
Tuition $6,600
Books and course materials 1,500
Lodging 1,700
Meals 2,200
Laundry and dry cleaning 200
Campus parking 300

In addition, Elijah drove his personal automobile 2,200 miles in connection with the education. He uses the automatic mileage method.

a. How much, if any, of these expenses might qualify as deductions for AGI?

b. How much, if any, of these expenses might qualify as deductions from AGI?

49. During the year, Brenda has the following expense related to her employment:
Airfare $8,500
Meals 4,000
Lodging 4,900
Transportation while in travel status 940
Entertainment of clients 8,000

Although Brenda renders an adequate accounting to her employer, she is reimbursed for only $12,000 of the above expenses. What are Brenda's tax consequences based on the following assumptions?

a. The $12,000 reimbursement does not designate which expenses are covered.

b. The reimbursement specifically recovers only the meals and entertainment expenses.

c. The reimbursement covers any of the expenses other than meals and entertainment.

d. If Brenda has a choice of reimbursement procedures [parts (a), (b), or (c) above], which should she select? Why?

Chapter 10
7. David, a sole proprietor of a bookstore, pays a $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that doesn't provide her with medical insurance, pays medical insurance premiums of $8,000 for herself. How does the tax treatment differ for David and Joan?

23. Megan would need to calculate the face value of the items. Since the items are used, Megan would also need to figure the amount of depreciation. The amount she calculates will need to be subject to the limitations of AGI, which can be up to 50%.

24. Emma Doyle, age 55, is employed as a corporate attorney. For calendar year 2013, she had AGI of $100,000 and paid the following medical expenses:
Medical insurance premiums $3,700
Doctor and dentist bills for Emma's parents 6,800
Doctor and dentist bills for Emma 5,200
Prescription medicines for Emma 400
Nonprescription insulin for Emma 350

Emma's parents would qualify as Emma's dependents except that they file a joint return. Emma's medical insurance policy does not cover them. Emma filed a claim for reimbursement of $2,800 of her own expenses with her insurance company in December 2013 and received reimbursement in January 2014. What is Emma's maximum allowable medical expense deduction for 2013?