Ch. 6 Answers

Ch 6 Answers - 49 C Deductions and Losses In General Less Itemized deductions Property taxes on land and barn is 7,500 Property taxes on residence

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Unformatted text preview: 49. C. Deductions and Losses: In General Less: Itemized deductions Property taxes on land and barn is 7,500 Property taxes on residence 4,000 Charitable contributions 3,500 Miscellaneous itemized deductions 18,3 80 Less: Personal exemption Taxable income 6-15 2 Hour] oan ‘ (33,380) {3,5001 §219, !2Q_ if the cattle ranch is classified as a business, Hank’s taxable income is calculated as follows: _ CW 6 Revenues from busmess Less: Expenses Mortgage interest on barn Property taxes on barn and land Cattle feed Hay Maintenance on barn Depreciation on barn Net loss from business Hank’s taxable income is calculated as follows: Other AGI Net loss from business AGI Less: Itemized deductions Property taxes on residence $4,000 Charitable contributions 3,500 Less: Personal exemption Taxable income pp. 6-16to 6-18 a. fimsewve/I-cwm $ 31’000 (9,000) (2,500) (14,000) (4,725) (3,000) (2,950) {$10,115.} $225,000 1 10,1751 $214,825 (7,500) (3,500) 1f the antique book business is classified as a hobby, Sandra’s deductions associated with the hobby may not exceed her gross income from this activity. Income from sale of antique books Deduct: Property taxes and mortgage interest Deduct: Other expenses which do not affect basis Cost of goods sold $12,000 Show registration costs 3,000 Advertising 1 ,000 Dealer’s license 500 Insurance 900 Deduct: Depreciation Net inCome Since the activity is a hobby, all of the deductible expenses (except for any property taxes and mortgage interest) are miscellaneous itemized deductions subject to the 2%-of—the-AGI floor. $22,000 4)— $22,000 l? 400 $ 4,60 1 20 3 it, massive N'iaie‘i‘il . Library U-‘SE’ 0an 60°: 6—16 50. 51. 2009 Individual VolumeISolutions Manual AGI ($90,000 + $22,000) $1 12000 Rate - 2% F100r on deducting miscellaneous itemized deductions $_ 2,240 Antique books activity expenses ($12,400 + $1,200) $18,600 Less: Floor on miscellaneous itemized deductions 12,240) Deductible miscellaneous itemized deductions $_1__6,36§) Sandra’s taxable income is calculated as follows: Gross income: Net income from orthodontia practice $ 90,000 Income from sale of antique books 22,000 AGI $112,000 Personal exemption deduction (3,500) Itemized deductions: Taxes, interest, and charitable contributions $19,000 Miscellaneous itemized deductions [$18,600 v— 2%($112,000)] (16,360) (3 5,3 60) Taxable income $_ __2_;3,1& b. If the antique book activity is classified as a business, Sandra‘s taxable income is calculated as follows: Adjusted gross income: Net income from orthodontia practice $90,000 Net income from antique business Income trom sale of books $22,000 Expenses: Cost of goods sold $12,000 Show registration costs 3,000 Advertising 1,000 Dealer’s license 500 Insurance 900 Depreciation on display 1,200 (18,600! 3,400 AGI $93,400 Personal exemption deduction (3,500) Itemized deductions (taxes, interest, and charitable contributions) (19,0001 Taxable income $79,200. pp. 6-16to 6-18 Since the house was rented for less than 15 days, the rental income of $5,000 is excluded from Adelene’s gross income. The only expenses that can be deducted in this caSe are the real property taxes of $3,800 and the mortgage interest of $2,500. These expenses are classified as itemized deductions (i.e., deductions from AGI). Therefore, there is no effect on AGI. p. 6-19 a. Gross income $7,000 Deduct: Taxes and interest (45865 X $11,500) (1,418) Remainder to apply to rental operating expenses and depreciation $5,582 Utilities and repairs [45t'65 >< ($2,400 + $1,000)] (2.3541 Remainder $3,228 Depreciation (4555 >< $2,000 = $4,846, limited to remainder) (3,228) Net rental income 52. 53. Deductions and LOSSes: In General 6-17 She can itemize $10,082 of property taxes and mortgage interest ($11,500 total less $1,418 allocated to rental). Thus, under the court’s approach, Anna has no net rental income and has an itemized deduction of$10,082. Example 29 The roof replacement of $12,000 is a capital. expenditure and the related depreciation is included in the $7,000 of depreciation. b. Gross income $7,000 Deduct: Taxes and interest (45765 X $11,500 = $7,962), but limited to income 17,0001 5—;0; Anna can deduct the remaining taxes and interest of $4,500 ($1 1,500 less rental allocation of $7,000) as itemized deductions. Under the IRS's approach, she has no net rental income and has an itemized deduction of $4,500. Example 28 Since Anna used it for less than 15 days, it is classified as rental property. Rental Personal Percentage of use 87% 13% Gross income $ 7,000 $ —0— Expenses: Interest and taxes ($9,000 + $2,500) $10,005 $1,495 Utilities and repairs ($2,400 + $1,000) 2,958 442 Depreciation ($7,000) 6,090 910 Total expenses $19,053 $2,847 Net income (loss) {$12,0fi) $ —0— Anna could deduct $325 ($2,500 X 13%) of property taxes as itemized deductions and take a rental loss deductionfor AGl of$12,053. The mortgage interest of$1,170 ($9,000 X 13%) is not deductible as an itemized deduction because it is not qualified residence interest. Example 25. The roof replacement of $12,000 is a capital expenditure and the related depreciation is included in the depreciation of $7,000. p. 6-24 income: Salary $43,000 Dividend 400 Rental of vacation home (Note 2) +0— Adjusted gross income $43,400 Itemized deductions: State income taxes (greater than sales tax) $3,300 Property tax on home 2,200 interest on home mortgage 8,400 interest and property taxes on vacation home (Note 2) 4,893 Charitable contributions 1,100 Tax return preparation fee (Note 3) —0— 5 19,893) Taxable income before personal exemption $23,501 6-18 54. 55. 56. 2009 Individual VolumeISolutions Manual Notes (I) The municipal bond interest of $2,000 is excludible from gross income and the interest (2) Rental Income expense of$3,100 on the loan to buy municipal bonds is not deductible. p. 6-2? $4,000 Less: Taxes and interest (60/365 >< $5,856) 1963) Remainder $3,037r Less: Utilities and maintenance (U2 X $2,600) 1 300 Remainder $133? Less: Depreciation ($3,500, limited to $1 J3?) (1,73 1 Net income from vacation home $ _:O—_ Note that $4,893 ($5,856 totai —$963 vacation home portion) of property taxes and mortgage interest on the vacation home are itemized deductions. Example 29 (3) Tax preparation fees are reduced by 2% of AG] (in this case 2% ofAGl exceeds $300). Concept Summary 6~3 Sales revenue $50,000 Deduct: Cost of goods sold $19,000 Advertising 1,000 Utilities 2,000 Rent 4,000 Insurance l,500 Wages to Boyd 7,000 {34,5001 AGI Velma and Clyde can deduct only the $7,000 in wages they paid to Boyd. Chelsie is not entitled to a deduction on her tax return. The obligation is that of Velma and Clyde since it related to their business. 11' Chelsie had made a gift of the $1,000 to Velma and Clyde or had she loaned the $1,000 to them, then they could deduct it assuming they pay the $1,000 to Boyd. p. 6-22 From a tax perspective, the same tax consequences are produced regardless of whether the $625,000 is allocated to goodwill or to a covenant not to compete- Under either circumstance, the asset is a § 19'? intangible. Therefore. the $625,000 must be capitalized and can be amortized over 15 years (i.e., $41 ,667 per year). The 8—year legal life of the covenant is not relevant to the calculation. p. 6-25 a. Jay is selling the assets of the sole pr0prietorship. Of the sales price of $200,000, $136,000 is allocated to the listed assets in accordance with their fair market values. The recognized gain on each asset is the difference between its fair market value and its basis. The residual $27,000 ($200,000 ~— $173,000) appears to represent a payment I for goodwill. Therefore, since Jay has a basis of $0 for the goodwill, he has a gain of $27,000. Since goodwill is a capital asset, the gain is classified as a long-term capital gain. Long-term capital gains are eligible for beneficial tax rates. ...
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This note was uploaded on 12/03/2008 for the course ACG 352 taught by Professor B during the Fall '08 term at Bryant.

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Ch 6 Answers - 49 C Deductions and Losses In General Less Itemized deductions Property taxes on land and barn is 7,500 Property taxes on residence

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