Tax Regulation and Strategies (BUSN 7131X)
Answer all questions. Points above 30 will be credited to extra credit. You must show all calculations. No points will be awarded if calculations are not shown.
- Loss deduction. Pylon, Inc. a calendar year S corporation, is partly owned by Doris, who has a beginning stock basis of $10,000. Doris’ share of long-term capital gain (LTCG) is $2,000 and her share her share of an ordinary loss is $9,000. If Doris receives a $6,000 distribution, what is her deductible loss?
Solution
Long-term Capital Gain $2,000
Ordinary loss ($9,000)
Loss 7,000
($6000 -$3000)
Deductible loss is $3,000 while she is left with $3,000. The 4,000 loss is carried forward to the next year.
Doris 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.
Related: Emu Electronics & Hubbard Computer ltd
- Alimony recapture. Dave and Sue’s divorce became final on January 2 of the current year. Dave is an executive for a Fortune 500 company and Sue is starting her own business this year. In the current year (year 1 of the divorce agreement), Dave expects his marginal income tax rate to be 35% and Sue’s marginal income tax rate will be 25% because of some start-up expenses of her business. Two years from now (year 3 of the divorce agreement), Dave will retire and will be in the 15% tax bracket, and Sue’s business, a sole proprietorship, will cause her to be in the 35% tax bracket. Dave intentionally front-loaded his alimony payments to Sue ($60,000 in year 1, $40,000 in year 2, and $20,000 in year 3). What is Dave’s alimony recapture in year 3? Formula: R3 = P1 + P2 -2P3 – $37,500
Solution
R3 = P1 + P2 -2P3 – $37,500
P1 = alimony payments for year 1
P2 = alimony payments for year 2
P3 = alimony payments for year 3
60,000+40,000-(2×20, 000) -37,500
=100,000 – 77,500
R3=22,500
- Education expenses. Dawn, who holds a bachelor’s degree in art history, is a middle school teacher in New York. She wants to further her education in art history, believing this will allow her to become a better teacher. Dawn spent her summer break attending the University in Hawaii taking art history courses. Her expenses are as follows:
Books and tuition $2,000
Meals 1,000
Lodging 700
Laundry while in travel status 200
Transportation 700
Total $4,600
What is Dawn’s education expense deduction?
Solution
Books and Tuition $2,000
Meals (50%) x 1,000 $500
Lodging $700
Transportation $700
Education Expense Deduction $3,900
- Asset basis after Section 179 expense election. In 2017, Berry Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,040,000. (a) What portion of the cost may Berry elect to treat as an expense rather than as a capital expenditure, assuming net taxable income of $4million? (b) What is the adjusted basis of the machine (ignore any depreciation allowable).
Solution
- Deduction limit for 2017 is $510,000. This is the portion of the cost that Berry may elect to treat as an expense rather than as a capital expenditure.
- $2,040,000 – $510,000 = $1,530,000
- Reporting partnership income. Blue Jay Partners is a partnership with fiscal year ending on September 30. Bethany, a 20% partner in the partnership, is a calendar year individual taxpayer. For the taxable year ending September 30, 2017, Blue Jay had operating income of $100,000. Blue Jay also had operating income of $30,000 for the period of October 1, 2017, through December 31, 2017. How much income must Bethany report on her 2017 tax return?
Solution
Jan 1, 2017 – Sept 30, 2017 9/12×100, 000 75,000
Oct 1, 2017 – Dec 31, 2017 3/12×30, 000 7,500
82,500
Income on tax return for Bethany is 20% x82500 = 16,500
- Wash sale rule. Tiffany purchased 100 shares of ACE Corporation stock for $28,000 on January 1 of last year. In the current tax year, she sold 30 shares of these 100 shares for $8,000. Twenty-nine days earlier, she had purchased 30 shares for $7,500.
Solution
- What is her recognized loss/gain based on these transactions?
Value of the shares on purchase = $28,000/100
1 share is $280
Sold at 30 shares at $8000
Cost of share = $8000/30 = 267
Loss per share = $280-267 = 13
Total loss = 30 x 13 = $390
- What is Tiffany’s basis in the new shares?
$28,000 + 8,000 + 7,500 = 43,500
New cost basis per share is 43,500/100 = $435
- Gross profit percentage: Mike sold a 40-acre tract of land for $500,000 on January 1. The land had an adjusted basis of $300,000. The agreement specified a down payment of $100,000, with the remaining $400,000 sales price to be paid over a five-year-note term at 10% interest.
Solution
- What is the gross profit percentage from the sale?
Gross Profit/Sales x 100 =
$ (500,000 – 300,000)/ $ 300,000x 100
200, 000/ 300, 000 x 100
= 66.7%
- What is the capital gain on the down payment?
300,000 – 100,000
= 200,000
- What is the return of capital on the down payment?
200,000 – 100,000 = 100,000
- If Mike received a note payment of $120,000 in the first year, of which $40,000 represented accrued interest, how much of the $120,000 is ordinary income, capital gain and nontaxable return of capital.
Ordinary Income = 80,000
Capital Gains = 40,000
Nontaxable Return of capital = 8,000
- Social Security Income: George and Jody Taylor, who are married and file a joint return, are both 65 years old and retired. They anticipate income this year to include $16,000 from a company pension, 6,000 in interest income, and $9,000 from part-time jobs. Their Social Security benefits will be $12,000. How much of their Social Security is included in gross income? (2 points)
Solution
Company pension $16,000
Interest income $6,000
Part-time jobs $9,000
Gross Income $31,000
The income is less than $32,000 and no adding 50% to the adjusted gross income.
- Casualty loss: In 2017, Larry had art worth $10,000 (basis of $15,000), stolen from his apartment. During the year, he had a salary of $30,000 and no other deductions. What is Larry’s itemized deduction from the theft? (2 points).
Solution
Itemized deduction from theft ($15,000 – $10,000) = $5,000
- Section 1250 Recapture: Mark sold a building on June 15 for $100,000. Mark’s income tax rate is 28%. He had acquired the building more than five years earlier for $75,000. Straight-line depreciation taken was $30,000. Calculate the Section 1250 gain and the long-term capital gain. At what rate is each gain taxed. (9 points)
Solution
Purchase price $75,000
Depreciation $25,000
Basis for the property $50,000
Overall gain after selling the property @ 100,000-50,000 $50,000
Un-recaptured section 1250 gains $25,000
Tax higher capital gain 25/100 x 25,000 = $6,250
Tax at long-term capital gain 15/100 x 25,000 $3,750
Capita gain is taxed at 25% while long-term capital gain is taxed at 15%
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