AFM202 Lecture 7: Lecture Notes for Class 7

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coffeecoyote854

8 Dec 2015

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM202

Professor

Alan Mc Naughton

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Document Summary

Lecture notes for class 7: computing business income for a corporation. Rules in the income tax act regarding business income. The rules for inclusions and deductions for business income are almost the same for corporations as for individuals. One common rule is that expenses are only deductible up to the reasonable amount. Another common rule is that meals and entertainment are only 50% deductible. A third rule is that book depreciation is not deductible; cca is. Finally, book gains or losses from the sale of property are not recognized for tax purposes; instead the taxpayer reports taxable capital gains and allowable capital losses. Here are some rules for deductions for business income which we have not yet covered in the course, or we have not covered in sufficient detail. The references to paragraphs of the income tax act. One set of rules is about things which cannot be deducted. These are in section 18 of the income.

Related Questions

1.Which of the following statements about conversion of income is correct?

converting ordinary income into capital gain is a beneficial tax planning strategy

converting capital gain income into ordinary income is a beneficial tax planning strategy

converting qualifying dividends into interest income is a beneficial tax planning strategy

holding assets that will generate a capital gain inside a retirement plan is a beneficial tax planning strategy

2. Which of the following statements is NOT a true statement regarding long-term capital assets?

capital assets that are held for more than one year are treated as long-term

no distinction is made between capital losses and ordinary losses

with few exceptions, the maximum capital gains tax rate is 15%

the benefit of holding a capital asset long enough to garner long-term capital gain treatment must be weighed against the financial risk associated with a possible decline in value during the holding period

3. Which of the following statements about the taxation of dividends is correct?

all dividends are taxed at the same rate as applicable to capital gains

dividends paid by credit unions and mutual insurance companies qualify for the lower tax rate

qualifying dividends are taxed at a maximum 15% rate

d. there is no tax benefit to changing some of an individual's funds from a lower-yielding fixed income investment into a dividend-paying stock

4. Which of the following is an advantage of making an IRC Section 83(b) election with respect to restricted stock?

an 83(b) election can be made any time within the tax year of the transfer of shares from the company to the employee

if the stock is forfeited, the compensation recognized and the taxes paid are deductible as losses

any future appreciation would be taxed as capital gain instead of taxable compensation

d. the employee does not receive any cash at the time of the stock award to pay the tax on the compensation recognized under the election

5.The maximum alternative minimum tax rate for individuals is:

less than the maximum regular federal income tax rate for individuals

equal to the maximum regular federal income tax rate for individuals

greater than the maximum regular federal income tax rate for individuals

d. going to decrease each year by 1% until it reaches 20% in 2010

6. How is alternative minimum taxable income (AMTI) for individuals computed?

AMTI = taxable income + adjustments + preferences - exemptions

AMTI = taxable income - adjustments + preferences - exemptions

AMTI = taxable income +/- adjustments + preferences - exemption

d. AMTI = taxable income +/- adjustments - preferences - exemptions

7. Which of the following statements regarding the calculation of alternative minimum taxable income (AMTI) for corporations versus the calculation of AMTI for individuals is accurate?

	a.	AMTI is calculated the same for both corporations and individuals
	b.	an additional step is required for corporations based on their adjusted current earnings
	c.	the exemption amount for corporations is not subject to phaseout to phaseout while the exemption amounts for individuals are
	d.	thethere is no adjustments to taxable income for corporations, only preferences

1. Jeremy earned $260,000 in salary and $9,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $20,500 in itemized deductions. Neither of his dependents qualifies for the child tax credit. (use the tax rate schedules.). (Do not round intermediate calculations. Round "Income tax liability" to 2 decimal places.)

a. Use the 2017 tax rate schedules to determine Jeremyâs taxes due.

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability	?

2. b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $12,500. What is Jeremyâs tax liability including the tax on the capital gain?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability	?

3. c. Assume the original facts except that Jeremy had only $3,000 in itemized deductions. What is Jeremyâs total income tax liability?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability ?

4. Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the coupleâs joint year 2 tax return and each spouseâs separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewellaâs separate year 3 tax return understated Crewellaâs self-employment income, causing the joint return year 2 tax liability to be understated by $13,300 and Crewellaâs year 3 separate return tax liability to be understated by $6,700. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.)

a. What amount of tax can the IRS require Jasper to pay for the Dahvillâs year 2 joint return?

Amount of tax: ?

5. Trudy and Ben file a joint return. Trudyâs reported income creates $200 of income tax and Benâs reported income creates $180 of income tax. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for?

a. $50

b. $180

c. $380

d. $430

6. James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of Jamesâs gross income?

a. $0

b. $1,900

c. $25,000

d. $26,900

7. Which of the following is a from AGI deduction?

a. moving expenses

b. rental and royalty expenses

c. business expenses for a self employed taxpayer

d. charitable contributions

8.Which of the following is not an itemized deduction?

a. personal casualty losses

b. medical expenses

c. personal property taxes for a personal use automobile

d. charitable contributions

e. none of the choices are correct

9. In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the coupleâs only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Julietteâs most favorable filing status for year 1?

a. head of household

b. single

c. married filing separately

d. qualifying widow

10. Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is the Carolineâs most favorable filing status for the year?

a. head of household

b. married filing separately

c. surviving spouse single

maroonleopard66

1. Taxpayerwants to make a donation to qualified public charity today. Thedonation would consist of real estate held by Taxpayer forinvestment for five years which real estate has a fair market valueof $30,000. Taxpayer's adjusted basis in the real estate is$20,000. Taxpayer wants to know how much gain Taxpayer wouldrecognize as a result of this transaction and if Taxpayer may takean income tax charitable deduction for this contribution? What isthe correct answer to Taxpayerâs questions?

a. Taxpayer would recognize a gain of $10,000, and Taxpayer may takecharitable deduction based on the fair market value of the realestate subject to the Taxpayerâs 50% of adjusted gross incomelimitation for charitable contributions of capital assets toqualified public charities, provided Taxpayer itemizesdeductions.

b. Taxpayer does not recognize any gain, but Taxpayerâs charitablededuction would be based on Taxpayerâs adjusted basis in theproperty contributed.

c. Taxpayerâs allowable charitable deduction would be $10,000.

d. None of the above is correct.

2. Assume that in 2018 Taxpayer makes a donation to qualifiedpublic charity of real estate held by Taxpayer for investment forfive years and having a fair market value of $20,000 on the date ofthe contribution. Taxpayer's basis in the property is $30,000. Howmuch loss or deduction would be allowable to or recognized bytaxpayer as a result of this transaction?

a. Taxpayer would recognize a capital loss of $10,000 that may be usedto offset Taxpayerâs capital gains.

b. There would be no deductible loss allowable with respect to theinherent loss in the property, but taxpayer may take a charitablededuction of $20,000 subject to the adjusted gross incomepercentage limitation, and provided Taxpayer itemizesdeductions.

c. Taxpayer may carry over the loss until Taxpayer makes a bargainsale of other real estate to a public charity.

d. Taxpayerâs allowable charitable income tax deduction would be$30,000.

3. Tom, Dick,and Larry purchase real estate from Jane. The grantee portion ofthe deed Jane gives them reads âto Tom, Dick, and Larry.â Tom,Dick, and Larry own the real estate as:

a. joint tenants with right of survivorship

b. tenants by the entireties

c. tenants in common

d. trustees

4. Common stockof ABC Corporation, a publicly traded corporation, and cash wascontributed by Taxpayer to a qualified public charity on June 10,2018. Taxpayerâs adjusted basis in the stock was $1,000 and thefair market value of the stock on June 10 was $1,500. $2,000 ofcash was also contributed to qualified public charity on June 10,2018. The stock was held long-term and was held for investment.What is the correct income tax treatment as a result of thedonations?

a. Taxpayerâs initial income tax charitable deduction amount would be$1,000 for the stock with no gain recognized with respect to thestock and $2,000 for the cash, both subject to the same adjustedgross income limitation, assuming that Taxpayer itemizesdeductions.

b. The amount of the charitable deduction may be limited based uponthe overall phase-out of itemized deductions.

c. Taxpayerâs initial income tax charitable deduction amount would be$1,500 for the stock with $500 gain recognized and $2,000 for thecash, both subject to the same adjusted gross income limitation,assuming that Taxpayer itemizesdeductions.

d. b and c are both correct.

e. None of the above statements is a correct statement.

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AFM202 Lecture 7: Lecture Notes for Class 7

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