BUSN 7131X Research Assignment
Case 1
A Taxpayer explains to you that he sold his fully depreciated, 100% business-use vehicle for $10,500 and then purchase another vehicle for $10,000. The vehicle he purchased is used 100% personally. Does this qualify as a like-kind exchange and thus any gain is deferred?
Solution
No. The taxpayer does not qualify for like-kind exchange. The reason why it doesn’t qualify for like-kind exchange is because the property relinquished and that acquired must be held for business or investment purpose (Brownlee, 2016). He has sold a business-use vehicle and purchased a personal vehicle. Therefore, no gain that can be differed in this case.
Case 2
Jackson graduated from Marquette University in May 2015. Prior to graduation, he was a full-time student from January 3 through May 22. After graduation, he started working as a marketing assistant and was eligible to participate in his employer’s 401(k) plan. During the year, he made 401(k) contributions of $2,000 and had adjusted gross income of $18,750. Since this is the first time has participated in a retirement plan, he does not have any distributions from other plans. Can Jackson claim a credit on Form 8880, Credit for Qualified Retirement Savings Contributions, for his contributions to the 401(k) plan?
Solution
Yes. Jackson can get up to 20% of his contribution as his income is between $18,251 and $19,750. Thus, he qualifies to claim a credit on form 8880, for his contribution to the 401 (k) plan. Also, he had already finished school and graduated from university removing him from the bracket of full time students.
Case 3
Jerry and Elaine have a child who is two years old. The couple incurs $11,800 in child care expenses while they work. Jerry earned $55,000 and Elaine earned $16,750 during the year. Jerry’s employer has a dependent cadre FSA. Under the plan, Jerry had $3,500 set aside tax-free, for reimbursement of child care expenses, which shows in his W-2 box 10. Will Jerry and Elaine receive the dependent care credit on their tax return?
Solution
Yes. Jerry and Elaine should receive the dependent care credit on their tax return. Their income is more than $43,000 and this makes the couple to qualify for the 20% break. Thus, they will get a tax break of only $700 ($3,500×20%).In this case, a tax payer can set aside up to $5,000 in pretax money in his FSA, and claim the dependent-care credit of up-to $1,000 in extra expenses.
Case 4
Pat owns an unimproved lot adjacent to a local church that is currently worth $110,000. Pat inherited the lot from his father. At that time, the FMV was $95,000. The church offers Pat $88,000 for the lot and he accepts. Pat is under the impression that he will have a $7,000 ($88,000 – $95,000) capital loss that he can use to offset capital gains that he generated in current year. Is Pat correct? Show computations to support your answer.
Solution
Yes. The capital loss is $7,000. This can be calculated by lessening total sale price – cost of acquisition ($88,000-$95,000= $7,000). Pat can only deduct $3,000 0f final net short or long-term losses against any other types of income in a given year. The other losses can be carried forward to next year (Scholes, 2015).
Case 5
An accrual basis C corporation gave Hannah a bonus on February 15, 2016, based on services performed during 2015. Hannah is a cash basis shareholder/employee who owns 40% of the C Corporation’s stock, while her father owns the remaining 60%. Can this bonus be deducted on the C Corporation’s 2015 Form 1120, U.S. Corporation Income Tax Return?
Solution
No. C Corporation allows only shareholders who have a 50% or higher shares or ownership in a company at the time the bonus is paid can have their bonus deducted.
Reference
Brownlee, W. E. (2016). Federal Taxation in America. Cambridge University Press.
Scholes, M. S. (2015). Taxes and business strategy. Prentice Hall.
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