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Chapter 7 Deductions And Losses: Certain Business Expenses And Losses
41. LO.6 In 2016, Rose, Inc., has QPAI of $4 million and taxable income of $3 million.
Rose pays independent contractors $500,000. Rose’s W–2 wages are $600,000, but only $400,000 of the wages are paid to employees engaged in qualified domestic production activities.
a. Calculate the DPAD for Rose, Inc., for 2016.
b. What suggestions could you make to enable Rose to increase its DPAD?
42. LO.1, 3 Nell, single and age 38, had the following income and expense items in 2016:
Nonbusiness bad debt $ 6,000
Business bad debt 2,000
Nonbusiness long-term capital gain 4,000
Nonbusiness short-term capital loss 3,000
Salary 50,000
Interest income 3,000
Determine Nell’s AGI for 2016.
43. LO.1, 4 Assume that in addition to the information in Problem 42, Nell had the following items in 2016:
Personal casualty gain on an asset held for four months $10,000
Personal casualty loss on an asset held for two years 1,000
Determine Nell’s AGI for 2016.
Cumulative Problems
44. Jane Smith, age 40, is single and has no dependents. She is employed as a legal secretary by Legal Services, Inc. She owns and operates Typing Services located near the campus of Florida Atlantic University at 1986 Campus Drive. Jane is a material participant in the business. She is a cash basis taxpayer. Jane lives at 2020 Oakcrest
Road, Boca Raton, FL 33431. Jane’s Social Security number is 123-45-6789. Jane indicates that she wants to designate $3 to the Presidential Election Campaign Fund.
Jane had health insurance for all months of 2015. During 2015, Jane had the following income and expense items:
a. $100,000 salary from Legal Services, Inc.
b. $20,000 gross receipts from her typing services business.
c. $700 interest income from Acme National Bank.
d. $1,000 Christmas bonus from Legal Services, Inc.
e. $60,000 life insurance proceeds on the death of her sister.
f. $5,000 check given to her by her wealthy aunt.
g. $100 won in a bingo game.
Tax Return Problem
h. Expenses connected with the typing service:
Office rent $7,000
Supplies 4,400
Utilities and telephone 4,680
Wages to part-time typists 5,000
Payroll taxes 500
Equipment rentals 3,000
i. $9,500 interest expense on a home mortgage (paid to San Jose Savings and
Loan).
j. $15,000 fair market value of silverware stolen from her home by a burglar on
October 12, 2015. Jane had paid $14,000 for the silverware on July 1, 2006. She was reimbursed $1,500 by her insurance company.
k. Jane had loaned $2,100 to a friend, Joan Jensen, on June 3, 2012. Joan declared bankruptcy on August 14, 2015, and was unable to repay the loan. Assume that the loan is a bona fide debt.
l. Legal Services, Inc., withheld Federal income tax of $16,000 and the appropriate amount of FICA tax from her wages.
m. Alimony of $10,000 received from her former husband, Ted Smith.
n. Interest income of $800 on City of Boca Raton bonds. o. Jane made estimated Federal tax payments of $1,000. p. Sales taxes from the sales tax table of $946. q. Property taxes on her residence of $1,100. r. Charitable contributions of $2,500. s. In November 2015, Jane was involved in an automobile accident. At the time of the accident, Jane’s automobile had an FMV of $45,000. After the accident, the automobile’s FMV was $38,000. Jane’s basis in the car was $52,000. Jane’s car was covered by insurance, but because the policy had a $5,000 deduction clause, Jane decided not to file a claim for the damage.
Part 1—Tax Computation
Compute Jane Smith’s 2015 Federal income tax payable (or refund due). If you use tax forms for your computations, you will need Forms 1040 and 4684 and Schedules
A, C, and D. Suggested software: H&R BLOCK Tax Software.
Part 2—Tax Planning
In 2016, Jane plans to continue her job with Legal Services, Inc. Therefore, items a, d, and l will recur in 2016. Jane plans to continue her typing services business (refer to item b) and expects gross receipts of $26,000. She projects that all business expenses (refer to item h) will increase by 10%, except for office rent, which, under the terms of her lease, will remain the same as in 2015. Items e, f, g, j, k, and s will not recur in 2016. Items c, i, m, n, p, q, and r will be approximately the same as in
2015.
Jane would like you to compute the minimum amount of estimated tax she will have to pay for 2016 so that she will not have to pay any additional tax upon filing her 2016 Federal income tax return. Write a letter to Jane that contains your advice, and prepare a memo for the tax files.
45. Mason Phillips, age 45, and his wife, Ruth, live at 230 Wood Lane, Salt Lake City, UT
84101. Mason’s Social Security number is 111-11-1111. Ruth’s Social Security number is 123-45-6789. Mason and Ruth are cash basis taxpayers and had the following items for 2016:
• Salary of $140,000.
• Bad debt of $30,000 from uncollected rent.
Tax Computation Problem
• Collection of unpaid rent from a prior year of $6,000.
• Sale of § 1244 stock resulting in a loss of $105,000. The stock was acquired eight months ago.
• Rental income of $60,000.
• Rental expenses of $33,000.
• Casualty loss on rental property of $10,000.
• Personal casualty loss (from one event) of $20,000.
• Theft loss of $5,000 on a computer used 100% associated with their jobs.
• Theft loss of $8,000 on a painting held for investment.
• Other itemized deductions of $18,000.
• Federal income tax withheld of $3,000.
Compute Mason and Ruth’s 2016 Federal income tax payable (or refund due).