Chapter 12
22. LO.2 Charles generated a tentative general business credit of $42,000 for the current year. His net regular tax liability before the general business credit is $107,000, and his tentative minimum tax is $88,000. Compute Charles’s allowable general business credit for the year.
23. LO.2 Oak Corporation holds the following general business credit carryovers.
2012 $ 5,000
2013 15,000
2014 6,000
2015 19,000
Total carryovers $45,000
If Oak’s general business credit generated by 2016 activities equals $36,000 and the total credit allowed during the current year is $60,000 (based on tax liability), what amounts of the current general business credit and carryovers are utilized against the 2016 income tax liability? What is the amount of unused credit carried forward to 2017?
24. LO.3, 7 Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 or $380,000 on rehabilitation expenditures. Write a letter to Paul and a memo for the tax research files explaining the following for the two alternative expenditures.
a. The computation that determines the rehabilitation expenditures tax credit available.
b. The effect of the credit on Paul’s adjusted basis in the property.
c. The cash-flow differences as a result of the tax consequences related to his expenditure choice.
25. LO.3 Green Corporation hires six individuals on January 4, 2016, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2016, and each individual works more than 400 hours during the year. The other three individuals each work 300 hours and receive wages of $5,000 during the year.
a. Calculate the amount of Green’s work opportunity credit.
b. If Green pays total wages of $140,000 to its employees during the year, how much of this amount can Green deduct, assuming that the work opportunity credit is taken?
26. LO.3 In March 2016, Sparrow Corporation hired three individuals—Austin, Adam, and Angela—all of whom are certified as long-term family assistance recipients.
Each of these individuals earned $11,000 during 2016. Only Adam continued to work for Sparrow in 2017, and he earned $13,500 then.
In March 2017, Sparrow hired Sam, who also is certified as a long-term family assistance recipient. During 2017, Sam earned $12,000.
a. Compute Sparrow’s work opportunity credit for 2016 and 2017.
b. If Sparrow pays total wages to its employees of $325,000 in 2016 and $342,000 in 2017, what is the entity’s wage deduction for those years?
27. LO.3, 7 Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom’s research-credit base amount for the year is $32,800.
a. Determine Tom’s incremental research activities credit for the year.
b. Tom is in the 25% tax bracket. Determine which approach to the research expenditures and the research activities credit (other than capitalization and subsequent amortization) would provide the greater tax benefit.
28. LO.3 Ahmed Zinna (16 Southside Drive, Charlotte, NC 28204), one of your clients, owns two retail establishments in downtown Charlotte and has come to you seeking advice concerning the tax consequences of complying with the Americans with Disabilities Act. He understands that he needs to install various features at his stores (e.g., ramps, doorways, and restrooms that are handicap accessible) to make them more accessible to disabled individuals. He asks whether any tax credits are available to help offset the cost of the necessary changes. He estimates the cost of the planned changes to his facilities as follows.
Location Projected Cost
Calvin Street $22,000
Stowe Avenue 8,500
Ahmed reminds you that the Calvin Street store was constructed in 2004 and that the Stowe Avenue store is in a building that was constructed in 1947. Ahmed operates his business as a sole proprietorship and has approximately eight employees at each location. Write a letter to Ahmed in which you summarize your conclusions concerning the tax consequences of his proposed capital improvements.
29. LO.3 Jimmy Limited added elevators, access ramps, and several technological improvements to the 1923 building in which it operates a consulting business.
Jimmy is an LLC with five full-time employees and about $3 million in gross receipts.
The improvements were made to improve access to the building. Expenditures for the accessibility project totaled $7,500. Compute Jimmy’s disabled access credit for the tax year.
30. LO.3 Employees at the Hobby Hut requested that the company provide assistance in locating professional-quality child care services during business hours. The
Hut, a C corporation, contracts with the local Kiddie Kare agency to provide Hut employees with information about child care providers’ location, pricing, customer ratings, and operating hours. This year, the Hut paid $15,000 under this contract, which includes a flat fee for a guaranteed number of employee contacts and a perservice charge after that. Compute the Hobby Hut’s credit for employer-provided child care for the tax year.
31. LO.4 Which of the following individuals qualify for the earned income credit?
a. Thomas is single, 21 years old, with no qualifying children. His income consists of $9,000 in wages.
b. Shannon, who is 27 years old, maintains a household for a dependent 11-yearold son and is eligible for head-of-household tax rates. Her income consists of $16,050 of salary and $50 of taxable interest (Shannon’s AGI is $16,100).
c. Keith and Susan, both age 30, are married and file a joint return. Keith and
Susan have no dependents. Their combined income consists of $28,500 of salary and $100 of taxable interest (i.e., their AGI is $28,600).
d. Colin is a 26-year-old, self-supporting, single taxpayer. He has no qualifying children and generates earnings of $9,000.
32. LO.4, 7 Cooper National is incorporated in Alabama. It generated a $5 million profit on its overseas operations this year. Cooper paid the following to various other countries.
• $1 million in income taxes.
• $1.5 million in value added taxes.
What are Cooper’s alternatives as to the treatment of these tax payments on its U.S.
Federal income tax returns?
33. LO.4 Jimenez Enterprises is incorporated in Arkansas. It generated a $5 million profit on its overseas operations this year. Jimenez paid $1 million in income taxes to various countries on these profits. Jimenez’s marginal Federal income tax rate is 35%. Compute the Jimenez foreign tax credit and carryovers for the year.
34. LO.4 Same as Problem 33, except that Jimenez paid $2 million in income taxes to other countries.
35. LO.4 Ann and Bill were on the list of a local adoption agency for several years seeking to adopt a child. Finally, in 2015, good news comes their way and an adoption seems imminent. They pay qualified adoption expenses of $5,000 in 2015 and $11,000 in 2016. The adoption becomes final in 2016. Ann and Bill always file a joint income tax return.
a. Determine the amount of the adoption expenses credit available to Ann and Bill if their combined annual income is $120,000. What year(s) will they benefit from the credit?
b. If Ann and Bill’s modified AGI in 2015 and 2016 is $220,000, calculate the amount of the adoption expenses credit.
36. LO.4 Durell and Earline are married, file a joint return, and claim dependency exemptions for their two children, ages 5 years and 6 months. They also claim
Earline’s 18-year-old son from a previous marriage as a dependent. Durell and
Earline’s combined AGI is $68,000.
a. Compute Durell and Earline’s child tax credit.
b. Assume the same facts, except that Durell and Earline’s combined AGI is $122,000. Compute their child tax credit.
37. LO.4 Paul and Karen are married, and both are employed (Paul earned $44,000 and Karen earned $9,000 this year). Paul and Karen have two dependent children, both under the age of 13. Paul and Karen pay $3,800 to various unrelated parties to care for their children while they are working. Assuming that Paul and
Karen file a joint return, what, if any, is their tax credit for child and dependent care expenses?
38. LO.4 Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are gainfully employed and earn salaries as follows: $16,000 (Jim) and $5,200 (Mary Jean).
To care for their children while they work, Jim and Mary Jean pay Eleanor (Jim’s mother) $5,600. Eleanor does not qualify as a dependent of Jim and Mary Jean. Jim and Mary Jean file a joint Federal income tax return. Compute their credit for child and dependent care expenses.
39. LO.4, 7 Bernadette Rosen, a longtime client of yours, is an architect and the president of the local Rotary chapter. To keep up to date with the latest developments in her profession, she attends continuing education seminars offered by the architecture school at State University. This year, Bernadette spends $2,000 on course tuition to attend such seminars. She spends another $400 on architecture books during the year.
Bernadette’s dependent son Colin is a senior majoring in engineering at the University of the Midwest. During the calendar year, Colin incurs the following expenses: $8,200 for tuition ($4,100 per semester) and $750 for books and course materials. Colin lives at home while attending school full-time.
Bernadette is married, files a joint return, and reports a combined AGI with her husband Morrie of $113,000.
a. Calculate Bernadette’s education tax credits for these items.
b. In her capacity as president of the local Rotary chapter, Bernadette has asked you to present a 20- to 30-minute speech outlining the different ways the tax law helps defray (1) the cost of higher education and (2) the cost of continuing education once someone is in the workforce. Prepare an outline of possible topics for presentation. A tentative title for your presentation is “How Can the
Tax Law Help Pay for College and Continuing Professional Education?”
40. LO.4 Kathleen and Glenn decide that this is the year to begin getting serious about saving for their retirement by participating in their employers’ § 401(k) plans.
As a result, they each have $3,000 of their salary set aside in their qualified plans.
a. Calculate the credit for certain retirement plan contributions available to
Kathleen and Glenn if the AGI on their joint return is $35,000.
b. Kathleen and Glenn persuade their dependent 15-year-old son, Joel, to put $500 of his part-time earnings into a Roth IRA during the year. What is the credit for certain retirement plan contributions available to Joel? His AGI is $7,000.