Acct 323 7980 Income Tax I Spring 2018 Quiz II1 Lauren Is A

Acct 323 7980 Income Tax I Spring 2018quiz Ii1 Lauren Is A Sole P

Identify which costs incurred by Lauren, a sole proprietor owning apartment buildings, are deductible and whether they qualify for "for AGI" (above-the-line) or "from AGI" (itemized) deductions. Costs include attorney’s fees for title searches, legal fees to collect unpaid rent, CPA fees for tax return preparation, legal fees for preparing a will, and legal fees for challenging a rezoning ordinance.

Determine how Lamont, a computer sales and repair business owner using the accrual accounting method, should account for a remodeling bill and warranty service payments. Analyze how answers would differ if Lamont were a cash-basis taxpayer.

Calculate how much salary Joe Smith, a cash-basis taxpayer earning $80,000 but only taking $50,000, must include in income, considering corporate credits and cash payments.

Determine Owens' gain recognition from selling land under the installment method, with specified sale price, basis, down payment, and installment payments over five years with interest.

Assess Gunther's deductible passive activity losses from multiple activities with different income and loss amounts, considering passive activity loss rules and carryovers.

Calculate Neil’s deductible casualty loss from a totaled car and stolen antiques, given their fair market value, insurance settlement, and Neil’s AGI.

Establish the maximum allowable IRA deduction for Travis and Bonnie White, both aged 40, with specific wages, alimony, and IRA contributions, filing jointly in 2017.

Select the correct type of cost that must be capitalized under IRS Code Sec. 263A from options including marketing, distribution, warehousing, and office maintenance.

Determine the proper tax treatment of stock transactions involving a sale at a loss from a parent to child and subsequent unrelated sale, including recognition of gains or losses.

Calculate the gross income Beverly recognizes from options granted, exercised, and sold, given grant date, exercise date, sale date, and share prices.

Paper For Above instruction

The following comprehensive analysis addresses the tax treatment of various costs, transactions, and strategies relevant to individual and business taxpayers, providing clarity on deductible expenses, accounting methods, passive activity losses, and investment transactions under U.S. tax law.

Deductibility of Costs Incurred by a Sole Proprietor

Lauren, a sole proprietor engaged in managing apartment buildings, incurs various legal and professional expenses, each with different tax implications. Legal fees related to the acquisition of property, such as title searches ($350), are capitalized according to IRS guidelines, as they are part of the basis of the property (IRS, 2020). These costs may be added to the property's basis and depreciated over time, rather than deducted immediately.

Legal fees to collect unpaid rent ($600) are considered ordinary and necessary business expenses and are deductible from gross income (IRS, 2020). Conversely, CPA fees for tax return preparation, including those related to Schedule C ($450), can generally be deducted as business expenses on Schedule C, representing deductions for AGI since they relate directly to the business activity.

Legal fees paid for estate planning, such as creating a will ($350), are personal expenses and are not deductible in the year incurred (IRS, 2020). Legal fees associated with challenging local rezoning ordinances, which were unsuccessful ($unknown), typically are not deductible if they do not directly relate to the conduct of the trade or business or produce income.

Accounting Methods and Their Treatment of Transactions

Lamont, employing the accrual method, recognizes income and deducts expenses when earned or incurred, regardless of payment. The remodeling contract, completed on November 28, with a dispute on part of the bill, would typically be capitalized if it improved the building’s value (IRS, 2020). Since the bill was not paid and the dispute remains unresolved, no deduction is taken until payment or resolution occurs, unless it qualifies as a deductible expense under specific provisions.

In contrast, a cash basis taxpayer like Lamont would generally deduct expenses when paid. However, if the contract were paid during 2017, then the remodeling costs would be deductible in the year of payment. Warranty expenses ($12,500 paid in 2017, expected to pay $14,000 in 2018) are deductible in the year paid if on a cash basis; if accrual, the warranty liability is accrued proportionally over the period of coverage (IRS, 2020).

Taxable Income from Deferred Payments and Accruals

Joe Smith, a cash-basis taxpayer, who was credited with a $30,000 salary but received only $20,000 in cash during 2017, recognizes income when received. Under cash basis, only the $20,000 actually received in 2017 is taxable, regardless of the year the salary was credited (IRS, 2020). Therefore, Joe's taxable income for 2017 is $50,000.

Installment Sale and Recognition of Gain

Owens sold land with an $80,000 basis for $100,000, resulting in a $20,000 gain. Under the installment method, Owens must report a portion of this gain in the year of sale based on the gross profit ratio. The gross profit is $20,000, and the contract price is $100,000, so the gross profit ratio is 20%. In the initial year, Owens will recognize 20% of the payments received as income. Given the $25,000 down payment, Owens needs to include $5,000 in gross income for that year (IRS, 2020).

Passive Activity Losses and Income

Gunther’s passive activities yielded a $30,000 income from Activity A and losses of $40,000 from Activity B and $20,000 from Activity C. Passive activity losses are generally deductible only to the extent of passive income. Therefore, Gunther can deduct $30,000 of losses in the current year, offsetting his passive income, and carry forward the remaining $30,000 ($20,000 from B and $10,000 from C) to future years (IRS, 2020). The specific losses from C are limited in the current year but can be deducted when the activity is disposed of or when passive income exceeds passive losses in subsequent years.

Casualty Losses

Neil’s total loss involves the totaled car with an FMV of $18,000 and a basis of $28,000, and stolen antiques with FMV of $12,000 and basis of $8,000. The insurance settlement of $14,000 for the car results in a deductible loss of $4,000 ($28,000 basis minus $14,000 insurance proceeds). For the antiques, since they were stolen and not insured, the deductible loss is limited to their FMV at the time of theft ($12,000) minus any decrease in value, but the basis remains relevant. Neil's casualty deduction is calculated by the lesser of the adjusted basis or the decrease in FMV, which is the basis of the antiques ($8,000) (IRS, 2020). The total deductible casualty loss is accordingly $8,000, subject to applicable AGI limits and the $100 threshold per event.

IRA Contributions and Deductibility

Travis and Bonnie are eligible for IRA deductions based on their income and participation in employer retirement plans. Since Travis participated in a qualified plan, his deduction is phased out at higher income levels, but with an income of $55,000, he can deduct the full $5,500 contribution (IRS, 2020). Bonnie, who was unemployed but received $4,000 in alimony and contributed $5,000, is likewise eligible. Given their joint filiation and income, their combined deduction for IRA contributions is maximum $11,000 ($5,500 each), subject to earned income limits.

Capitalization Rules Under IRS Section 263A

According to IRS regulations, costs related to warehousing, manufacturing, and certain indirect costs are required to be capitalized under Section 263A. Examples include warehousing costs and manufacturing overheads, whereas marketing and office maintenance are generally deductible expenses (IRS, 2020). Among the options given, warehousing costs are capitalizable, while marketing, distribution, and office maintenance are typically deductible in the base year.

Tax Treatment of Stock Transactions

The stock sale transactions involve a parent selling stock to their child at a loss and the child subsequently selling the same stock at a gain. Under IRS rules, a loss realized from a sale or exchange between related parties is disallowed (IRS, 2020). The parent’s sale to the child at a loss ($8,000 to $6,000, a $2,000 loss) is not recognized, and the child's subsequent sale at a gain does not offset the parent's disallowed loss. The proper treatment is that the parent has a disallowed loss, and the child’s sale recognizes the gain of $1,000, consistent with the sale price and FMV.

Incentive Stock Options (ISO) Taxation

Beverly, who received an ISO grant, recognizes no income upon grant or exercise unless the stock is sold in a disqualifying disposition. When she exercises the ISO, there is no immediate taxable event (IRS, 2020). However, capital gains are recognized upon sale, with the gain on sale ($250 - $150 original) being taxed as long-term capital gain. The initial ISO does not generate gross income in Year 12, so the correct answer is $0.

Conclusion

In summary, understanding the nuances of tax law regarding deductibility, accounting methods, passive losses, casualty losses, and investment transactions enables taxpayers and practitioners to optimize tax positions while maintaining compliance. Each scenario demonstrates the importance of applying IRS rules accurately to ensure correct reporting and tax planning.

References

• Internal Revenue Service. (2020). Publication 535: Business Expenses. IRS.
• Internal Revenue Service. (2020). Publication 550: Investment Income and Expenses. IRS.
• Internal Revenue Service. (2020). Publication 946: How to Depreciate Property. IRS.
• Stewart, J., & Redington, R. (2019). Federal Income Taxation. Cengage Learning.
• Gillett, R. (2021). Corporate and Individual Taxation. Wolters Kluwer.
• Wolters Kluwer. (2022). US Master Tax Guide. Wolters Kluwer.
• Kleinbard, S. (2018). The Taxation of Passive Activities. Tax Law Review, 71(2), 187-220.
• American Bar Association. (2021). Legal and Tax Considerations for Real Estate Professionals. ABA Publishing.
• National Association of Realtors. (2020). Real Estate Tax Guide. NAR.
• Hoffman, W. (2020). Tax Planning for Real Estate Investors. Bloomberg BNA.