Chapter 6 Business Expense by qfq60948


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									                                                           ACCT 401 -- Chapter 6 Assigned Problems

Problem 34   a. Distinguish between items of Total Income and Adjustments FOR AGI . AGI is $69,100.
                  note: Adjustments For AGI include the IRA contribution and the alimony payments. See Form 1040 …… lines 23 to 33.
             b. Itemized deductions are $14,300. Std Deduction is $5,150, so we itemize.

Problem 36   a. They are trying to offset all of the corporate taxable income of $800K so there will be no double taxation (no tax to the corp).
                  How canl the salaries offset all of the corporate profits?
             b. Salaries must be reasonable …….. Otherwise, there is not a deduction.

Problem 37        Deductible losses of $3,500.

Problem 39        A cash bais taxpayer expenses items when paid. Two general exceptions: one, the purchase of capitalized items that are depreciated.
                        And two, prepaid expense contracts lasting longer than 12 months (the Supreme Courts "12 month rule").
             a. Since the contract is longer than a year, it must be prorated over the 18 months.
                  For 2005, expense would be $20,000 (5/18 proration). What would the expense be for 2006? 2007?

Problem 42        Illegal activities are taxed (example: Al Capone …… Chicago mobster). Trade or business expenses that do not violate public policy rule
                  are deductible even in illegal activities (distinguish from personal expenses in an illegal acitivity). Exception is drug activity.
                  All expenses related to drug activity are not deductible. Cost of Goods is deductible (considered part of gross income).
             a. Net Income is $415,000. Kickbacks and bribes are not deductible.
             b. Net Income is $450,000. Gross income less cost of goods sold.
                  Question: Is the receipt of bribes, kickbacks, drug sales, betting, prostitution etc. included as income to the recipient?

Problem 47   a. He could deduct $30,000
             b. He could deduct $30,000
             c.   Nothing could be deducted
             d. He could deduct $500 immediately plus amortize what is left ($25,000) over 180 months. Answer = $5,556.

Problem 48        Hobby Losses - lacks a profit motive. Expenses can be used to offset income, but not below zero (no loss allowed). Why a hobby loss rule?
                  Expenses of a hobby loss are subject to 2% of AGI reduction, unless allowed in full under some other section (property tax, interest exp)
                  Alex must report the $18,000. The property taxes of $3,000 can be deducted (first) as an itemized deduction.
                  This leaves expenses of $16,250 of expenses related to the hobby, but only $15,000 are "deductible".
                  However, the $15,000 is a miscellaneous deduction subject to a 2% "haircut" ($1,200). Taxable income is $39,900.

Problem 51        House rented for 45 days and used personally for 20 days. Rental proration 69.2% (45/65). Tax and interest prorated 45/365 (1.2%)
             a. Rental income before depreciation is $3,228. Depreciation is $4,846, but is limited to $3,228. No loss can be taken due to personal use.
             b. Gross income of $7,000 would be entirely offset by the interest and taxes (45/65 x $11,500). Itemized deductions would be less, right?

Problem 57   a. Eleanor's $13,000 loss is not deductible.
             b. $22,000 gain, $6+D13,000 loss, and no gain or loss

Problem 59   a. Loss ($5,000) disallowed to Bonnie due to relationship under Section 267 IRC. Fred's basis is $12,000.
             b. Loss ($15,000) is allowed for Amos. Not related under Section 267 IRC. Boyd's basis is $70,000.
             c.   Loss ($1,000) disallowed to Susan due to relationship w/ corporation. Corporation's basis is $19,000.
             d. Loss ($1,500) is allowed for Ron. Not related under Section 267 IRC. Agnes' basis is $18,500.
             e. Martha and Kim are related under Sec 267. However, 267 applies only to losses. Gain to Martha of $45,000. Kim's basis is $220,000.

Problem 60   a. Chris can only deduct interest related to taxable income. Only $12,000 of interest is deductible ($160,000 / $200,000 x $15,000)

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