ACCT 301 Lecture Notes - Lecture 6: Internal Revenue Code, Jumpstart Our Business Startups Act, Accrual

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14 Apr 2020

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The irc sets out a general framework on what can be deducted. 4 separate categories of deductions: deduction incurred in the operation of a trade or business, deduction that is in connection with the production of income, losses (business or personal, personal expenditures (itemized or standard) Some deductions are for agi and some deductions are from agi: the ones from agi are standard or itemized deductions. Internal revenue code (section 152) governs trade and business deductions. May deduct all ordinary and necessary expenses that were paid or incurred during the year while carrying on trade or business activities. In connection with the determination, collection, or refund of any tax. Must be: profit motive, expenditure must be incurred in order to create a profit in trade or business, hobby: activity engaged in not for profit not a profit motive, ordinary in nature.

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Amber & Bryan (both age 45), are married and file a joing tax return. 2017 income includes:

1. Salary of $200,000

2. Amber was in a car accident and received compensatory damages of $25,000 for broken nose.

3. Amber also received punitive damages of $15,000; the person who hit her car was intoxicated

4. interest income from Disney bonds in the amount of $1,000

5. refund of 2016 NJ IncomeTaxes of $2,000 (the couple itemized their deductions in 2016; itemized deductions exceeded the standard deduction by $5,000)

Amber and Bryan also incurred and paid the following expenses during the year:

6. Medical expenses: $7,000

7. Parking tickets $300

8. Alimony (Bryan was previously married and pays Alimony to his ex-wife): $12,000

9. Legal fees associated with divorce proceedings- not tax related: $4,000

10. Charitable contributions- paid on 12/30/17: $2,000

11. Casualty loss (after $100 floor, but before any further limitations) $1,000

12. Mortgage payment on principal residence: principal only: $10,000

13. Mortgage payment on principal residence: interest expense: $14,500

14. Property taxes (real estate taxes) on personal residence: $4,200

15. Nephew, Gerardo, owns a home and could not make his property tax payment as he is unemployed. Amber paid Gerardo's property taxes (real estate taxes): $3,000

16. Federal income tax withheld: $18,000

17. Qualified Moving expenses in conjuction with a new job: $2,000

18. Contribution to a traditional IRA: $4,000

19. Cost of new roof on personal residence: $14,000

20. NJ income tax withheld: $1,300

A. Identify items 1-5 as taxable or not taxable. Identify items 6-20 as a deduction for AGI, deduction from AGI, or not deductible. Give a sentence or two explaining limitations, rules, etc for the following items: 5, 6, 10, 11, 15,19

B. Use the tax formula to provide a detailed calculation of the couple's 2017 taxable income. Be sure to compare the standard deduction amount to total itemized deductions.

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Amber & Bryan (both age 45), are married and file a joing tax return. 2017 income includes:

1. Salary of $200,000

2. Amber was in a car accident and received compensatory damages of $25,000 for broken nose.

3. Amber also received punitive damages of $15,000; the person who hit her car was intoxicated

4. interest income from Disney bonds in the amount of $1,000

5. refund of 2016 NJ IncomeTaxes of $2,000 (the couple itemized their deductions in 2016; itemized deductions exceeded the standard deduction by $5,000)

Amber and Bryan also incurred and paid the following expenses during the year:

6. Medical expenses: $7,000

7. Parking tickets $300

8. Alimony (Bryan was previously married and pays Alimony to his ex-wife): $12,000

9. Legal fees associated with divorce proceedings- not tax related: $4,000

10. Charitable contributions- paid on 12/30/17: $2,000

11. Casualty loss (after $100 floor, but before any further limitations) $1,000

12. Mortgage payment on principal residence: principal only: $10,000

13. Mortgage payment on principal residence: interest expense: $14,500

14. Property taxes (real estate taxes) on personal residence: $4,200

15. Nephew, Gerardo, owns a home and could not make his property tax payment as he is unemployed. Amber paid Gerardo's property taxes (real estate taxes): $3,000

16. Federal income tax withheld: $18,000

17. Qualified Moving expenses in conjuction with a new job: $2,000

18. Contribution to a traditional IRA: $4,000

19. Cost of new roof on personal residence: $14,000

20. NJ income tax withheld: $1,300

B. Use the tax formula to provide a detailed calculation of the couple's 2017 taxable income. Be sure to compare the standard deduction amount to total itemized deductions.

yelloweel732

Architect, a cash basis TP, has been conducting a business as a sole proprietorship for several years. Architect decides to incorporate, and on July 1 of the current year he forms Design, Inc., to which he transfers the following assets:

Assets AB FMV

Accounts Receivable $0 $60,000

Supplies 0 20,000

Unimproved Land 60,000 120,000

Total $60,000 $200,000

The land was subject to contingent environmental liabilities that Architect had not taken into account (i.e., had not deducted or capitalized) for tax purposes at the time of the incorporation. The supplies were acquired nine months ago and their cost was immediately deducted by Architect as an ordinary and necessary business expense.

In exchange, Architect receives 100 shares of Design common stock with a FMV of $100,000. In addition, Design assumes $70,000 of accounts payable to trade creditors of Architect's sole proprietorship and a $30,000 bank loan incurred by Architect two years ago for valid business reasons, and it assumed the environmental liabilities associated with the land.

Design elects to become a cash method, calendar year TaxPayer. During the remainder of the current year, it pays $30,000 of the accounts payable and collects $40,000 of the accounts receivable transferred by Architect. In the following taxable year, Design paid $20,000 in environmental remediation expenses that qualified for a current deduction when paid or accrued under Section 162.

(a)What are the tax consequences (gain or loss recognized, basis and holding period) of the incorporation to Architect and Design, Inc.?

(b) Who will be taxable upon collection of the accounts receivable: Architect, Design or both?

(c) When Design pays the accounts payable assumed from Architect and incurs the environmental remediation costs, may it properly deduct these expenses?

(d)Assume that Architect is in the highest marginal individual tax bracket and Design, Inc. anticipates no significant TI for the current year:

â¢What result, if Architect decides to pay (and deduct) personally all the accounts payable. and transfers the accounts receivable to the C?

(e) Would your answers be any different if Architect had been an accrual method Taxpayer?

(f) Is Design, Inc. limited in its choice of accounting method (i.e., cash or accrual) or taxable year? See Â§Â§ 441; 448

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ACCT 301 Lecture Notes - Lecture 6: Internal Revenue Code, Jumpstart Our Business Startups Act, Accrual

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