Problems
33. LO.1 Amos is a self-employed tax
attorney. He and Monica, his employee, attend a conference in Dallas sponsored
by the American Institute of CPAs. The following expenses are incurred during
the trip:
Amos Monica
Conference registration $ 900 $900
Airfare 1,200 700
Taxi fares 100 –0–
Lodging in Dallas 750 300
a. Amos pays for all of these expenses.
Calculate the effect of these expenses on
Amos’s AGI.
b. Would your answer to part (a) change if
the American Bar Association had sponsored the conference? Explain.
34. LO.1 Daniel, age 38, is single and has
the following income and expenses in 2016.
Salary income $60,000
Net rent income 6,000
Dividend income 3,500
Payment of alimony 12,000
Mortgage interest on residence 4,900
Property tax on residence 1,200
Contribution to traditional IRA 5,000
Contribution to United Church 2,100
Loss on the sale of real estate (held for
investment) 2,000
Medical expenses 3,250
State income tax 300
Federal income tax 7,000
a. Calculate Daniel’s AGI.
b. Should Daniel itemize his deductions
from AGI or take the standard deduction?
Explain.
35. LO.1 Janice, age 22, is a student who
earns $10,000 working part-time at the college ice cream shop in 2016. She has
no other income. Her medical expenses for the year total $3,000. During the
year, she suffers a casualty loss of $3,500 when her apartment catches on fire.
Janice contributes $2,500 to her church. On the advice of her parents, Janice is
trying to decide whether to contribute $1,000 to the traditional IRA her
parents set up for her. What effect would the
IRA contribution have on Janice’s itemized
deductions?
36. LO.1 A list of the items that Peggy
sold and the losses she incurred during the current tax year is as follows:
Yellow, Inc. stock $ 1,600
Peggy’s personal use SUV 8,000
Peggy’s personal residence 10,000
City of Newburyport bonds 900
She also had a theft loss of $1,500 on her
uninsured business use car. Calculate
Peggy’s deductible losses.
37. LO.2 Duck, an accrual basis
corporation, sponsored a rock concert on December
29, 2016. Gross receipts were $300,000. The
following expenses were incurred and paid as indicated:
Expense Payment Date
Rental of coliseum $ 25,000 December 21, 2016
Cost of goods sold:
Food 30,000 December 30, 2016
Souvenirs 60,000 December 30, 2016
Performers 100,000 January 5, 2017
Cleaning of coliseum 10,000 February 1,
2017
Because the coliseum was not scheduled to
be used again until January 15, the company with which Duck had contracted did
not perform the cleanup until January 8–10, 2017.
Calculate Duck’s net income from the
concert for tax purposes for 2016.
38. LO.3 Doug incurred and paid the
following expenses during the year:
• $50 for a ticket for running a red light while he was commuting to
work.
• $100 for a ticket for parking in a handicapped parking space.
• $200 to an attorney to represent him in traffic court as to the two
tickets.
• $500 to an attorney to draft an agreement with a tenant for a
one-year lease on an apartment that Doug owns.
• $1,000 to an attorney to negotiate a reduction in his child support
payments.
• $2,500 to an attorney to negotiate a reduction in his qualified alimony
payments to a former spouse.
Calculate the amount of Doug’s deductible
expenses.
39. LO.3 Trevor, a friend of yours from
high school, works as a server at the ST Caf_e.
He asks you to help him prepare his Federal
income tax return. When you inquire about why his bank deposits substantially
exceed his tip income, he confides to you that he is a bookie on the side.
Trevor then provides you with the following documented income and expenses for
the year:
Tip income $16,000
Gambling income 52,000
Gambling expenses
Payouts to winners 29,000
Employee compensation 8,000
Bribe to police officer who is aware of
Trevor’s bookie activity 7,500
a. How will these items affect Trevor’s AGI
(ignore the impact of self-employment taxes)?
b. His taxable income (ignore the impact of
self-employment taxes)?
40. LO.3, 4 Amber, a publicly held
corporation, currently pays its president an annual salary of $900,000. In
addition, it contributes $20,000 annually to a defined contribution pension
plan for him. As a means of increasing company profitability, the board of
directors decides to increase the president’s compensation. Two proposals are
being considered. Under the first proposal, the salary and pension contribution
for the president would be increased by 30%. Under the second proposal,
Amber would implement a performance-based
compensation program that is projected to provide about the same amount of
additional compensation and pension contribution for the president.
a. Evaluate the alternatives from the
perspective of Amber.
b. Prepare a letter to Amber’s board of
directors that contains your recommendations.
Address the letter to the board
chairperson, Agnes Riddle, whose address is 100 James Tower, Cleveland, OH
44106.
41. LO.3 Nancy, the owner of a very
successful hotel chain in the Southeast, is exploring the possibility of
expanding the chain into a city in the Northeast. She incurs $35,000 of
expenses associated with this investigation. Based on the regulatory
environment for hotels in the city, she decides not to expand. During the year,
she also investigates opening a restaurant that will be part of a national
restaurant chain. Her expenses for this are $53,000. The restaurant begins
operations on
September 1. Determine the amount that
Nancy can deduct in the current year for investigating these two businesses.
42. LO.3 Terry traveled to a neighboring
state to investigate the purchase of two hardware stores. His expenses included
travel, legal, accounting, and miscellaneous expenses. The total was $52,000.
He incurred the expenses in June and July
2016. Under the following circumstances,
what can Terry deduct in 2016?
a. Terry was in the hardware store business
and did not acquire the two hardware stores.
b. Terry was in the hardware store business
and acquired the two hardware stores and began operating them on October 1,
2016.
c. Terry did not acquire the two hardware
stores and was not in the hardware store business.
d. Terry acquired the two hardware stores
but was not in the hardware store business when he acquired them. Operations
began on October 1, 2016.
43. LO.3 Harold conducts a business with
the following results for the year:
Revenue $20,000
Depreciation on car 3,960
Operating expenses of car 3,100
Rent 6,000
Wages 8,200
Amortization of intangibles 680
Harold estimates that due to a depressed
real estate market, the value of land owned by the business declined by $5,200.
a. Calculate the effect of Harold’s
business on his AGI.
b. How would your answer in part (a) change
if the activity was a hobby?
44. LO.3 Alex, who is single, conducts an
activity in 2016 that is appropriately classified as a hobby. The activity
produces the following revenues and expenses:
Revenue $18,000
Property taxes 3,000
Materials and supplies 4,500
Utilities 2,000
Advertising 5,000
Insurance 750
Depreciation 4,000
Without regard to this activity, Alex’s AGI
is $42,000. Determine the amount of income Alex must report, the amount of the
expenses he is permitted to deduct, and his taxable income.
45. LO.3 Samantha, an executive, has AGI of
$100,000 before considering income or loss from her miniature horse business.
Her outside income comes from prizes for winning horse shows, stud fees, and
sales of yearlings. Samantha’s home is on 20 acres, half of which she uses for
the horse activity (i.e., stables, paddocks, fences, tack houses, and other
related improvements).
Samantha’s office in her home is 10% of the
square footage of the house. She uses the office exclusively for maintaining
files and records on the horse activities.
Her books show the following income and
expenses for the current year:
Income from fees, prizes, and sales $22,000
Expenses
Entry fees 1,000
Feed and veterinary bills 4,000
Supplies 900
Publications and dues 500
Travel to horse shows (no meals) 2,300
Salaries and wages of employees 8,000
Depreciation
Horse equipment $3,000
Horse farm improvements 7,000
On 10% of personal residence 1,000 11,000
Total home mortgage interest 24,000
Total property taxes on home 2,200
Total property taxes on horse farm
improvements 800
The mortgage interest is only on her home
because the horse farm improvements are not mortgaged.
a. What are Samantha’s tax consequences if
the miniature horse activity is a hobby?
b. If it is a business?