taxation final

Flashcard maker : Lily Taylor
property that is classified as personalty is subject to cost recovery true or false
if a taxpayer does not claim any cost recovery for an asset during a particular year, what will be the impact on the basis of the asset?
the basis of the asset must be reduced by the amount of cost recovery that should have been deducted
does the acquisition of real property enter into the 40% test to determine whether the midquarter convention must be used?
no. real property does not enter into the 40% test to determine whether the midquarter convention must be used.
which is true about the computation of cost recovery in the year of sale of an asset when the mid-quarter convetion is being used.
if the midquarter convention applies, the property is treated as though it were disposed of at the midpoint of the quarter
orange corporation acquired new office furniture on aug 15, 2011 for $130,000. orandge did not elect immediate expensing under #179. orange elects not to take additional first year depreciation.

what class of property is the office furniture for MACRS?

orange’s cost recovery deduction for 2011 is _______

seven year

cost recovery deduction
macrs cost recovery {$130000 x 14.29 (table 8.1)}= $18577

weston acuires a used office machine (seven year class asset) on november 2, 2011. for $75,000. this is the only asset acuired by Weston during the year. he does not elect immediate expensing under #179. on sept 15, 2012, weston sells the machine
what macrs convention applies to the machine?
* mid quarter
*half year
*mid month

westone’s cost recovery for 2011 is _____ and for 2012 is _____.

answer – midquarter
2011 cost recovery is (macrs cost recovery [75000 x 0.0357 (table 8.2)]
macrs cost recovery [$75,000 x (.2755 x (2.5/4))]
which of the following assets would be subject to cost recovery
a. An antique vase in a doctor’s waiting room.

b. A painting by Picasso hanging on a doctor’s office wall.

c. Stock in the doctor’s LLC.

d. a., b., and c.

e. None of the above.

e none of the above
Tan Company acquires a new machine (ten-year property) on January 15, 2011, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2011, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election. Tan elects not to take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2011.
a. $25,716.
Alice purchased office furniture on September 20, 2011, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. She elects not to take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2011.

macrs cost recovery
office (100000 x 14.29)=14290
computer (80000 x .25)=

chapter 10
which of the following expenses can roberta include as medical expenses when she computes her medical expense deduction? check all that apply
health club dues, contact lenses, travel expenses to obtain treatment at the mayo clinic in minnesota, fees for an alcohol rehab program, funeral expenses, medical insurance premiums, nonprescription calcium supplements to prevent osteoporosis, life insurance premiums
contact lenses, travel expenses to obtain treatment at the mayo clinic, fees for an alcohol rehabilitation program, medical insurance premiums.

code defines medical expenses as expenditures for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”

david, the sole proprietor of a bookstore, pays $7500 premium for medical insurance for himself and his family. joan, an employee of a small firm that doesn’t provide her with medical insurance, pays medical insurance premiums of $8000 for herself.
how does the tax treatment differ for david and joan?
david deducts 100% of the premium for agi, whereas joan includes the premiums in computing her itemized medical expense deduction.
Julia owns a principal residence in California, a condo in nyc, and a houseboat in florida. all of the properties have mortgages on which julia pays interest.

a) for which residence can julia deduct mortgage interest?
b. what strategy should julia consider to maximize her mortgage interest deduction?

a. her principal residence plus one of the other residences

b. consolidating the three mortgages into two mortgages

to dissuade his pastor from resigning and taking a position with a larger church, michael, an ardent leader of the congregation, gives the pastor a new car.
is the cost of the car deductible by Michael as a charitable contribution?
paula contributed orange corporation common stock to united way, a qualified charitable organizaiton. in addition, she contributed tables and chairs from her proprietorship’s inventory to the high school in her city. should paula’s chartiable contributin deduction be determined by the basis or the fair market value of the contributed items?

a). the orange corporation stock is __________. Paula’s deduction for the stock contribution witll be determined by _______ if she has held the stock for the long term holding period.

b) the tables and chairs are _________, so paula’s deduction will be determined by ________ the tables and chairs.

A) a capital asset, the fiar market value
B) ordinary income property, her basis in
doug and karen are married and together have AG
I of $80000 in 2011. They have two dependents and file a joint return. They pay $3000 for a high deductible health insurance policy and contribute $2400 to a qualified health savings account (HSA). during the year, they paid $75000 in doctor and dentist bill s, and $1700 for presctiption drugs. in nov 2011, they received an insurance reiumbursement of $2100 for hospitalization. They expect to receive an additional reiumbursement of $1000 in January 2012.
a. what amount if any is deductible for AGI?

b. the maximum deduction from AGI as an itemized deduction for medical expenses in 2011 is _______

a. $2400 ( the $2400 contributed to a qualifed health savings account)
b. $4100

Physician bills, dentist bills, and hospital expenses 7500
less reiumbursement (2100)
equals unreiumbursed expenses $5400
health insurance premiums $3000
prescription medicine and drugs 1700
equal toal medical expenses = 10,100
less: 7.5% of (80000 AGI) 6000
equal deductible medical expenses =$4100

Dylan is a self employed, calender year taxpayer. he reports on a cash basis. dylan made the following estimated state income tax payments.
jan 18, 2011 $1800 (4th payment for 2010)
apr 15, 2011 $2250 (1st payment for 2011)
june 15, 2011 $2250 (2nd payment for 2011)
sept 15, 2011 $2250 (3rd payment for 2011)
jan 17, 2011 $2250 (4th payment for 2011)

Dylan had a tax overpayment of $1200 on his 2010 state income tax return and had the overpayment applied to his 2011 state income taxes.

a) indicate which payments are included in Dylan’s state income tax itemized deduction for his 2011 federal income tax return.

b)the amount of dylan’s state income tax itemized deduction for his 2011 federal income tax return is $9750

a. included overpayment, jan 2011, april 2011, june 15, 2011, sept 15 2011, sept 2011.
not included Jan 2012.

b. 1800+2250+2250+2250+1200 = $9750

in 2002, Roland, who is single, purchased a personal residence for $340000 and took out a mortgage of $200000 on the property. In May of the current year, when the residence had a fmv of $440000 and roland owed $140000 on the mortgage, he took a home equity loan for $220000. He used the funds to purchase a recreational vehicle, which he uses 100% for personal use.
A.) can roland deduct all of his interest related to the original mortgage which is currently $140000
B) can roland deduct all of the interest related to the home equity loan of $220000?
c) for the current year, the maxiumum amount of debt on which roland can deduct interest is ______
a) yes
b.) no
c) $240,000?
Kelsey, who is a head of household with one dependent, had AGI of $315,000 for 2011. Heincurred the following expenses and losses during the year:
medical expenses before 7.5% of agi limitation $25,000
state and local income taxes $4300
state sales tax 1205
real estate taxes 3705
home mortgage interest 4400
credit card interest 820
charitable contribution 3800
casulaty loss before 10% limitation (after $100 floor) 38000
unreiumbursed employee expenses subject to the 2% of AGI limitation $7100

Kelsey’s total itemized deductions are _______

medical expenses [25000 – (7.5% x 315000)] 1375
state and local income taxes 4300
real estate taxes 3705
home mortgage interest 4400
charitable contributions 3800
casualty loss [38000 – (10% x 315000)] 800
equals total itemized deductions = $24880
chapter 14
chapter 14
I. Rationale for Separate Reporting of Capital Gains & Losses
• Capital v. Ordinary
II. Capital Gains and Losses
•Short term – held one year or less: taxed as ordinary gain
•Long term – held > one year: taxed at 5/15%
•Must net s/t items together and l/t items together.
• If s/t and l/t gain, tax as indicated above
• If s/t gain and l/t loss, net together. If net result = s/t gain, taxed as ordinary income. If net result = l/t loss, max. = $3,000 and c/f balance.
• If s/t loss and l/t gain, net together. If net result = l/t gain, tax at 5/15%. If net result = s/t loss, max. = $3,000 and c/f balance.
• If s/t loss and l/t loss, net together. Max. loss = $3,000 and c/f balance.
• EXCEPTION: No loss allowed on sale of personal use asset (but, still must recognize gain)
III. Capital Assets – Examples: personal use assets and investments (car, home, stock)
• DEFINITION: none in code – go to 1221(a) which defines what is NOT a capital asset
• Inventory or property held primarily for sale to customers in the ordinary course of business
• A/R and Notes Receivable
• Depreciable property or real estate used in a business
IV. Holding Period
• Acquired asset as a gift – carryover basis – tack on holding period of original owner
• Acquired asset via inheritance – basis = FMV at date of death – holding period = long term
• Asset in like-kind exchange – tack on holding period of original asset
V. Qualified Dividend Income
• Taxed as l/t capital gains: 5/15%
VII. Section 1231 & Recapture Rules
final review
final review
during 2011, green corp purchased 179 equipment costing $200,000 and qualifying leashold improvement property costing $350000. Green has no other asset purchases during 2011 and is not subject to the taxable income limitation. the maxium 179 deduction green can claim for 2011 is
$450000 [200000 with respect to the equipment and $250000 with respect to the qualifying leasehold improvements]
amortization deduction
the tax deduction for the cost or other basis of an intangible asset over the asset’s estimated useful life.
examples of amortable intangibles include patents, coprights, and leasehold interests. the intangible goodwill can be amortized for income tax purposes over a 15 year period.
the process by which the cost or other basis of a natural resource is recovered upon extraction and sale of the resource.
The two ways to determine the depletion allowance are the cost and percentage methods. under cost depletion, each unit of production sold is assigned a portion of the cost or other basis of the interest. this is determined by dividng the cost or other basis by the total units expected to be recovered. under percentage depletion, the tax law provides a special percentage factor for different types of minerals and other natural resources. this percentage is multiplied by the gross income from the interest to arrive at the depletion allowance.
chapter 9
chapter 9
Employee vs. Self-Employed
Business expenses for self-employed persons are deductible for AGI
Unreimbursed business expenses for employees are generally deductible from AGI subject to 2% of AGI floor

Person is classified as an employee if:
Subject to will and control of another with respect to what shall be done and how it shall be done
Another furnishes tools or the place of work
Income based on time spent rather than task performed

Employee Expenses Transportation Expenses
Fall into one of the following categories:
Transportation expense defined
Very limited, only from job site to job site and commuting to/from temporary work place
Commuting from home to work and back is nondeductible
Additional costs incurred to transport heavy tools
Employees with more than one job
Travel Expenses
Travel expense defined
Expenses while “away from tax home” overnight on business
Includes transportation, lodging, 50% meals, and miscellaneous expenses
Travel expense defined
Restrictions on Travel Expenses
Convention travel expenses
No deduction for travel unless directly related to taxpayer’s trade or business
Example: Doctor attending out-of-town seminar on estate planning would not have deductible travel expenses
Restrictions apply to the deductibility of travel expenses of the taxpayer’s spouse or dependent
Generally, accompaniment by the spouse or dependent must serve a bona fide business purpose, and
The expenses must be otherwise deductible
Education travel expenses
Travel as a form of education is not deductible
Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses
Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses
Moving Expenses
Deductible for moves in connection with the commencement of work at a new principal place of work
Two tests must be met for moving expenses to be deductible
Distance test
Time test
Distance from old home to new job must be at least 50 miles farther than from old home to old job
New home location not relevant for decision
Example of Distance Test
Gail lived 20 miles from her old job
Gail’s new job is 75 miles from her old home
Gail meets the distance test
Moving Expenses – Time Test
Taxpayer must be full-time employee for 39 weeks in the 12-month period following the move, or
Self-employed must work in new location for 78 weeks during the next two years following the move
39 of the weeks must be in the first 12 months
Test waived if die, disabled, discharged, or transferred
If time test not met during taxable year, two alternatives:
Take the deduction in year moved. If test is not met in following year, either:
Include the amount deducted in gross income in the following year, or
File amended return for year of move
Alternatively, wait until time test is met and then file amended return for year of move
Deductible Moving Expenses
”Qualified” moving expenses include reasonable expenses of:
Moving household goods and personal effects to new locationUnreimbursed moving expenses are deductible for AGI
Reimbursement or payment by employer:
For qualified moving expenses, amount is excluded from gross income, but no deduction for related expenses
For nonqualified moving expenses, amount is included in gross income and no deduction is allowed
Expenses of travel for taxpayer and family to new location
Actual auto costs (not depreciation) or mileage rate of $.19 per mile for each car in 2011
Meals are not deductible as moving expense
The Big Picture – Example 28 Moving Expenses
Even though this is her first job, Morgan will be entitled to a moving expense deduction.
This presumes that she is not reimbursed by Kite Corporation for these expenses. Education expenses of an employee are deductible if they are incurred:
To maintain or improve existing skills, or
To meet express requirements of the employer or requirements imposed by law to retain employment status
The mileage on her car (at the rate of 19 cents per mile) also is allowed.
Her deduction is for AGI and can be claimed even if she chooses the standard deduction option.
Education Expenses
Education expenses include:
Travel (including lodging and 50% meals)
A deduction is allowed for AGI for qualified tuition and related expenses involving higher education (i.e., postsecondary)
Deduction For Qualified Tuition and Related Expenses
Qualified tuition and related expenses include whatever is required for enrollment
Usually, student activity fees, books, room and board are not included
Expenses need not be work related
Deduction is not available for married persons filing separately
After starting her new job, Morgan enrolls in the night program of a local law school.
Although Morgan does not plan to practice law, she feels that a law degree would advance her career.
Except for the tuition she pays (see the discussion of § 222), none of her expenses relating to the education will be deductible
Entertainment Expenses
Deductions are very restricted due to abuse possibilities
Deductible amount allowed:
50% of meals and entertainment costs including related taxes, tips, cover charges, parking fees, and room rental fees….100% of transportation costs
Amounts cannot be lavish or extravagant
Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees
The 50% cutback rule has a number of exceptions, such as:
Situations where full value of meals or entertainment is included in income
Meals and entertainment are provided in a subsidized eating facility or where the de minimis fringe benefit rule is met
Employer-paid recreational activities for employees
e.g., the annual Christmas party or spring picnic
Entertainment expenses are classified as either:
Directly related to business
Actual business meeting or discussion occurs during meal or entertainment
Associated with business
Meal or entertainment that directly precedes or follows business meeting or discussion
Restrictions on Entertainment Expenses
Club dues
Generally not deductible
Exception: Clubs formed for public service and community volunteerism (e.g., Kiwanis, Rotary)Business gifts
Business gifts of tangible personalty with a value of $25 or less per person per year are deductible
Incidental costs (e.g., gift-wrapping) are not included in the cost of the gift in applying the limit
If the value is $4 or less (e.g., pen with company name) then not subject to $25 limit
Gifts to employers or superiors are not deductible
Business entertainment expenses incurred at club are still deductible (50%)
Ticket purchases for entertainment
Amounts paid in excess of face value of ticket are not deductible
Limitation on deductibility of luxury skybox expenditures
Unreimbursed Employee Expenses
Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation
If employee could have received, but did not seek, reimbursement for whatever reason, none of the employment-related expenses are deductible
Miscellaneous Itemized Deductions
Miscellaneous itemized deductions subject to the 2% of AGI limitation
Certain miscellaneous expenses must be added together and the amount in excess of 2% of taxpayer’s AGI is deductible from AGI (i.e., itemized deduction reported on Sch. A)
Examples of Miscellaneous Itemized Deductions Subject to 2% Floor
Most reimbursed expenses under a nonaccountable plan
Unreimbursed employee expenses
Section 212 expenses not related to rents and royalties
Tax return preparation fee
Hobby expenses
Investment expenses (except interest and taxes)
Impairment-related work expenses of handicapped individuals
Gambling losses to the extent of winnings
Certain terminated annuity payments
Chapter 8 Depreciation
Dr. Cliff Payne purchases and places in service in his dental practice the following fixed assets during the current year:In addition, during the current year, Dr. Payne purchased another personal residence for $300,000
He converts his original residence to rental property.
He also purchased a condo for $170,000 near his office that he is going to rent.
Has Dr. Payne correctly calculated the depreciation expense for his dental practice?
Will he be able to deduct any depreciation expense for his rental properties?

Office furniture and fixtures $ 70,000
Computers and peripheral equipment 67,085
Dental equipment 475,000

Using his financial reporting system, he concludes that the depreciation expense on Schedule C of Form 1040 is $91,298.

Office furniture and fixtures ($70,000 X 14.29%) $10,003
Computers and peripheral equipment ($67,085 X 20%) 13,417
Dental equipment ($475,000 X 14.29%) 67,878

Cost Recovery
Recovery of the cost of business or income-producing assets is through:
Cost recovery or depreciation: tangible assets
Amortization: intangible assets
Depletion: natural resources
Basis in an asset is reduced by the amount of cost recovery that is allowed and by not less than the allowable amount
Allowed cost recovery is cost recovery actually taken
Allowable cost recovery is amount that could have been taken under the applicable cost recovery method
If no cost recovery is claimed on property
The basis of the property must still be reduced by the amount that should have been deducted
i.e., The allowable cost recovery

If personal use assets are converted to business or income-producing use
Basis for cost recovery and for loss is lower of
Adjusted basis or
Fair market value at time property was converted
Losses that occurred prior to conversion can not be recognized for tax purposes through cost recovery

MACRS characteristics:
MACRS Personalty .
Statutory lives: 3, 5, 7, 10 yrs 15, 20 yrs
Method: 200% DB 150% DB
Convention: Half Yr or Mid-Quarter

DB = declining balance with switch to straight-line
Straight-line depreciation may be elected

Half-Year Convention
General rule for personalty
Assets treated as if placed in service (or disposed of) in the middle of taxable year regardless of when actually placed in service (or disposed of)
Example Purchased and placed an asset in service on March 15 (Tax year end is December 31)
Treated as placed in service June 30
Six months cost recovery in year 1 (and year disposed of, if within recovery period)
Additional First-Year Depreciation
50% additional first-year depreciation has been allowed for several years
The Small Business Jobs Act of 2010 extended additional first-year depreciation for one more year
Effective for qualified property acquired and placed in service before January 1, 2011
Most recently, the Tax Relief Act of 2010 extended additional first-year depreciation for 2011
Increases the percentage from 50% to 100%
Effective for qualified property placed in service after Sept. 8, 2010 and before Jan. 1, 2012
The Act also extends additional first-year depreciation for 2012, but at the 50% rate
Effective for qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013
Additional first-year depreciation allows an additional percentage (50% or 100%) of cost recovery in year asset is placed in service
Qualified property includes most types of new property other than buildings
Property that is used but new to the taxpayer does not qualify
Mid-Quarter Convention
Applies when more than 40% of personalty is placed in service during last quarter of year
Assets treated as if placed into service (or disposed of) in the middle of the quarter in which they were actually placed in service (or disposed of)
Business with 12/31 year end purchased and placed in service the following used 5-year class assets:
Asset 1: on 3/28 for $50,000, and
Asset 2: on 12/28 for $100,000
More than 40% placed in service in last quarter; therefore, mid-quarter convention used:
Asset 1: $50,000 × (.20 × 200% × 10.5/12) = $17,500, or
$50,000 × 35% (Table 8.2) = $17,500
Asset 2: $100,000 × (.20 × 200% × 1.5/12) = $5,000, or
$100,000 × .05 (Table 8.2) = $5,000
MACRS characteristics:
MACRS Realty
Residential Rental Nonresid. Realty
Statutory lives: 27.5 yrs 31.5 yrs or 39 yrs
Method: Straight-line
Convention: Mid-month

Residential rental real estate
Includes property where 80% or more of gross rental revenues are from nontransient dwelling units
e.g., Apartment building

Straight-line Election
May elect straight-line rather than accelerated depreciation on personalty placed in service during year
Use the class life of the asset for the recovery period
Use half-year or mid-quarter convention as applicable
Election is made annually by class of property
Unreimbursed Employee Expenses
Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation
If employee could have received, but did not seek, reimbursement for whatever reason, none of the employment-related expenses are deductible
Examples of Miscellaneous Itemized Deductions Subject to 2% Floor
Most reimbursed expenses under a nonaccountable plan
Unreimbursed employee expenses
Section 212 expenses not related to rents and royalties
Tax return preparation fee
Hobby expenses
Investment expenses (except interest and taxes)
1.Joey, who is single, is not covered by another qualified plan earns $109,000 (AGI is also $109,000) in 2011. In 2011, he can contribute _____ to traditional IRA or _____ to Roth IRA.
Answer: Contribution ceiling is the smaller of $5000 (or $10,000 for spousal IRA) or 100% of compensation. However if the tax paper is an active participant in qualified plan, the traditional IRA deduction limitation is phase out proportionately between certain AGI ranges.
Roth IRA are subject to income limits The maximum annual contribution of $5,000 is phased out beginning at AGI of $107,000 for single taxpayer, the phase-out range is $15,000 for single taxpayers
Joey exceed $109,000 his contribution to the Roth IRA will be reduced. The $667 reduction is computed as follow: $109,000 – $107,000 = $4,000. $2,000 / $15,000 * $5,000 = $667. His contribution to the Roth IRA is $4,333 ($5,000 – $667)
Deductible as Itemized.
Gambling loss and Uniform dry cleaning
Expense incurred in applying for the CFO position of a grocery chain. Taxpayer, an auditor with a CPA firm, did not get the job
Cost of Visual Aid prepared by a college professor for use in a graduate seminar
Deductible for AGI
Cost of safety shoes Taxpayer is self -employed
Expense incurred by the taxpayer, a member of the Vermont National Guard, two day training
Not Deductible
Club Dues for the Coronado Club Taxpayer a Lawyer uses the luncheon club exclusively for business, Cost noncredit for CPA review program taxpayer is Graduate from the business school.
Home to first job is 20 miles -First job to Second job is 18 miles -Home to second job 29miles
Judith works 48 weeks during the year. The deductible mileage is _____. Explanation: the Expense of getting from one job to another is deductible
48 week x 5 days = 240 days x 18 miles = 4,320.
4. Moving expense Qualified and nonqualified
Upon losing his job as a plant manager, Anthony incurs $6,200 in job search expense. Having no success in finding new employment in the same type of work, Anthony moves to Clearwater and begins a charter boat business. His expenses in connection with the move are summarized below:
Breaking Lease: $2,800 Forfeiture membership: $2,200 Packing & Moving: $7,100
Lodging: $380 Meals: $360 Mileage: $ 2,400
Anthony can Deduct $6,200 all related expense to the job search from AGI (subject to a 2% AGI Limitation, and the Moving Expense $7,936 as deduction a FOR AGI
Packing and moving $7,100 + $380(Lodging) + $456 (Mileage 2400 miles * 0.19) = $7,936
5. Qualified tuitions and related expense under Section 222
Sophia is single and is employed as an architect. During 2011, she spends $3,900 in tuition to attend law school at night. Her MAGI is $64,000. Her Qualified tuition under section 222 is $3,900. If not allowed under section is 0.
John is single and is employed as pharmacist. During 2011, he spends $2,300 ($2,100 for tuition and $200 for books) to take a course in herbal supplement at a local university. His MAGI is $70,000. Under section 222 qualifies a deduction is $2,000. Not allowed under section 222 is $300. The Maximum amount of the deduction is reduced MAGI exceed the $65,000 but less than $80,000, so his deduction is limited to $2,000. The $100 not allowed for tuition under Section 222 plus the $200 for book would be allowed as a deduction from AGI
Hailey spends $5,200 for tuition and $900 for books and supplies to pursuit an accounting degree. Her MAGI is $40,000 files separate tax returns. A Deduction for AGI under section 222 is o and no Section 222 is zero. Because no deduction is allowed under Section 222 apply married filing separate.
6. Business Entertainment
Snipe associates paid $70,000 for a 20 seat skybox. Regular seats to these games cost $200 each. At one game, an employee of Snipes entertained 18 clients Snipes furnished food and beverage for the event at a cost of $1,000. The game was preceded by a bona fide business discussion, and all expense are adequately substantiated
Snipe can deduct $2,500::::: Explanation: cost of seats ($200 x 20) $4,000 + food beverage $1,000 = $5,000 total entertainment Less: 50% ($2,500) = Total Deduction is $2,500

If there was no bona fide business discussion either proceeding or after the event, there is NO entertainment option. Therefore, the business GIFT IS the only available deduction

7. Partially reimbursed expenses- Effect on AGI and itemized deductions
Audrey, age 38 and single, earns a salary of $59,000. She has interest income of $1600 and has a $2000 long-term capital loss from the sale of a stock investment. Audrey incurs the following employment-related expenses during the year:
Transportation 5500
Meals 2800
Lodging 4200
Entertaining clients 2200
Professional dues and subscription 300
Total 15000
Under an accountable plan, Audrey receives reimbursements of 45000 from her employer, calculate her AGI and itemized employee business expenses.

Audrey’s AGI- 59000(salary)+1600(interest income)- 2000(long-term capital loss)= 58600

Deductions for AGI Other than meals and entertainment (Lodging 4200, Transportation 5500, Professional dues and subscriptions 300= Total expenses 10000- less: reimbursement 3000=Unreimbursed portion 7000- Unreimbursed deductions from AGI 7000)

Deductions for AGI Meals and entertainment (2800+2200=5000 Less: Reimbursement (treated as a deduction for AGI 1500= Reimbursed option 3500 less: cutback adjustment 1750= 1750

Total reimbursed employee expenses (7000+1750= 8750 Less 2% of 58600(AGI) = 1172- total employee deductions allowed= 7578

carol and dave earch purchased 100 shares of stock of burgundy, inc. a publicly owned corporation, in July, and they each pay $10000. carol sells her stock on dec 31 for $8000. Sincy burgundy’s stock is listed on a national exchange, dave is able to ascertain that his shares are worth $8000 on dec 31. Does the tax law treat the decline in value of the stock differently for Carol and Dave?
Yes. They are treated differently because the loss in value of Carol’s stock is the result of a sale which qualifies as a disposition, but the loss in value of Dave’s stock is simply a decline in value.
Robin inherits 1000 shares of Wal-mart stock from her aunt in 2011. According to the info received from the executor of her aunt’s estate, Rboin’s adjusted basis for the stock is $55000. Albert, Robin’s fiance, receives 1000 shares of Wal-mart stock from his uncle as a gift in 2011. His uncle tells albert that his adjusted basis for Walmart stock is $7000.
What could cause the substantial difference in the adjusted basis for Robin’s and Albert’s respective 1000 shares of Walmart stock?
For property received by gift, the basis is the ______ basis while for inherited property, the basis is the ________ basis.
A. carryover
B. Fair market value

for property received by gift, there is a carryover basis. if no gift tax is paid, then albert’s adjusted basis is the $7000.
For inherited property, the basis is a new basis. (fmv on the date of the decedent’s death, unless the executor of the estate elects the alternate valuation date and amount). the 55000 adjusted basis for Robin’s Walmart shares appears to be the fmv of the stock at the date of her aunt’s death.

Samantha wants to retire, sell the house that she has occupied as her residence for 20 years, and travel. she would have a $120000 realized loss on the sale of the residence. She intends to use the net proceeds to fund her travels.
a)Can Samantha recognize the loss?
b)Would the answer above be different if the realized loss, was instead, a $120000 realized gain?
As Samantha _____ the 121 requirements, she ____ be able to exclude the $120000 realized gain.
A. No.
a taxpayers personal residence is a personal use asset, therefore a realized lss from the sale of a personal residence is not recognized. , since its a personal use asset, the realized loss on the sale is disallowed and cant be recognized.
B. satisfies, would.
A realized gain from the sale of a personal residence is subject ot taxation. however a favorable relife from recognition of gain is provided in the form of the 121 exclusion. under this provision, a taxpayer can exclude up to $125000 of realized gain on the sale.
to qualify for exclusion, the residence must have been owned, and used by the taxpayer as the principal residence for at least 2 years during the five year period ending on the date of the sale.
As samantha satisfies the 121 requirements, she would be able to exclude the $120000 realized gain.
an individual taxpayer sells some used assets at a rummage sale. these assets are ____ asets. Losses on these assets ____ deductible and the proceeds of the sale are a return of capital, thus the transactions are not taxable.
Personal; are not
is an account receivable that arose in the ordinary course of a cash basis dentist’s business a capital asset?
internal revenue code provisions play an important role in the definition of capital assets, because the code list categories of what ______ capital assets.
after netting all her short term and long term capital gains and losses, minerva has a net short term capital gain and a net long term capital gain.
Can she net these against each other?

She cannot net them against each other because they are both gains.

Nick inhertited 130 shares of BEIGE stock when his mother, cherie died. cherie had acuired the stock for a total of $300,000 on november 15, 2010. she died on august 10, 2011, and the shares were worth a total of $225,000 at thta time. Nick sold the shares for $236,000 on december 22, 2011.
nicks recognized gain of ____ is a ____.
answers: $11000; long term capital gain.

his gain of $11000 (236000-$225000) is a long term capital gain.

elaine case (single, no dependents) has the following transaction in 2011.
AGI (exclusive of capital gains and losses) 240000
long term capital gain 22000
long term capital loss (8000)
short term capital gain 19000
short term capital loss (23000)

Elaine has a net long term capital ____ of ____ and a netshort term capital ___ of ____. As a result, she has a net capital ___ of _____.

elaine has a net long term capital gain of $14000 and a net short term capital loss of $4000. As a result, she has a net capital gain of $10000.
net long-term capital gain (22000 long term capital gain – 8000 long term loss) = 14000
net short term capital loss ($19000 short term gain – $23000 short term loss) =($4000)
equals net capital gain = 10000
dear ms case. the purpose of this letter is to discuss the result of your stock transactions for 2011. You had ____ of _____ capital gains and ____ of ____ capital losses. subtracting the ___ of losses from the ___ of ____ results in a ___ net ____ capital gain.
the ___ net ____ capital gain and the details of your stock transaction ___ be reported on the schedule d attached to your form 1040. the ____ net capital ___ ____ for alternative tax and will be taxed at a ___ % rate rather than at your marginal tax rate of ___%.
dear ms case. the purpose of this letter is to discuss the result of your stock transactions for 2011. You had $14000 of longterm capital gains and $4000 of short term capital losses. subtracting the $4000 of losses from the $14000 of gains results in a $10000 net long term capital gain.
the $10000 net long term capital gain and the details of your stock transaction will be reported on the schedule d attached to your form 1040. the $10000 net capital gain qualifies for alternative tax and will be taxed at a 15% rate rather than at your marginal tax rate of 35%.
tax deprecation and cost recovery chapter 8
Step 1 – Determine Classification of Property
• Classified by Recovery Period
• Personalty – 3, 5, 7, 10, 15, 20 years – See Exhibit 8.1
• Realty
Residential: 27.5 years
Non-residential (commercial): 31.5 or 39 years (depends when the property was placed in service)

Step 2 – MACRS Depreciation
• Personalty- 3, 5, 7, 10 year property =200% Declining Balance*
• Personalty- 15, 20 year property =150% Declining Balance*
• Realty = Straight Line

* Taxpayer may elect Straight Line method for Personalty.

Step 3 – Determine Convention
• Personalty – General Rule: half-year convention
• Personalty – Exception to GR: mid-quarter convention
o More than 40% of the value of property other than Realty is placed in service during the fourth quarter
• Realty – mid-month convention

Step 4 – Additional First Year Depreciation
• 50% in the year the asset is placed in service (for qualified property placed in service before 1/1/13)
• NEW RULE: additional first-year depreciation increases to 100% on property placed in service after 9/8/10 and before 1/1/12
• Must be new property

Step 5 – Section 179 = election to write-off asset in year one
• Ceiling amount = $500,000 in 2010 and 2011; $125,000 in 2012; $25,000 after 2012
• Ceiling amount is reduced dollar-for-dollar when property placed in service exceeds $2 million; phaseout begins at $500,000 in 2012 and $200,000 after 2012
• Section 179 is taken before the 50% additional first-year depreciation is calculated
• 179 amount cannot exceed taxable income

ch 13 propety transaction
calculation of gain amount realized
II. Calculation of Gain
Amount Realized (selling price)
+ FMV of other assets received
+ note receivable
+ mortgage or other liability assumed
+ Expenses paid by buyer on behalf of seller (including real estate taxes)
– Commissions
– Legal fees

Less: Adjusted Basis
+ Improvements (example: streets, sewers to improve land and legal costs associated with them)
– Depreciation
Equals: Gain or (Loss)

III. Recognized Gain – Realized Gain is recognized UNLESS there is an exception to the GR
• EXCEPTION: section 121 – Sale of Personal Residence – up to $250,000 ($500,000 if MFJ) of gain may be excluded if certain requirements are met
• EXCEPTION: section 1031 – like-kind-exchange – up to 100% of gain may be deferred
IV. BASIS Considerations
• Allocation problems – purchase land and building – must allocate purchase price
• Acquired asset as a gift – carryover basis
• Acquired asset via inheritance – FMV at date of death
• Conversion of property from personal use to business use – lower of Adjusted Basis or FMV at date of conversion
V. Disallowed Losses
• Sale between related parties – section 267 (See Ch. 6)

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