Chapter+2 (1) - Concepts in Federal Taxation Chapter 2...

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January 31, 2014 Concepts in Federal Taxation Chapter 2: Income tax concepts
Contact Details - Email: [email protected] - Office Hours: By appointment Discussion Sessions - Solutions to homework problems. - Additional problems - In some occasions additional problems will be graded (5 points) Homework - Only hard copies. Homework Problems
Problems - Quiz 1 - Chapter 2: P24, 29, 32, 56, 41 and 42 - Chapter 1: P59, 53, 54, 56, Homework Problems
Tina owns and operates Timely Turn Tables (TTT) as a sole proprietorship. TTT’s taxable income during the current year is $80,000. In addition to the TTT income, Tina has the following income and expenses during the current year: Interest income $ 11,000 Royalty income 28,000 Deductions for AGI 2,500 Deductions from AGI 15,000 a. What is Tina’s current year taxable income and income tax liability? Quiz 1
Tina’s taxable income is $97,600 and her income tax liability is $20,621: Gross Income: Income from TTT $ 80,000 Interest income 11,000 Royalty income 28,000 $ 119,000 Deductions for adjusted gross income (2,500) Adjusted gross income $ 116,500 Deductions from adjusted gross income Itemized deductions (greater than standard) (15,000) Personal exemption ( 3,900 ) Taxable income $ 97,600 Quiz 1
b. Tina would like to lower her tax by incorporating Timely Turn Tables. How much income tax will she save if she incorporates TTT and pays herself a salary of $40,000? - Quiz 1
Alternatively, you can think that the other sources of income of Tina (interest income and royalty income) can also be incorporated. In this case, the solution is: Corporation Income = TTT Income + Interest Income + Royalty Income – Salary Corporation Income = 80,000 + 11,000 + 28,000 – 40000 = 79,000 Quiz 1
Corporation Tax liability = 13,750+34%*(79,000 – 75,000) = 15,110 Individual Tax liability = 892.5 + 15%*(18,600-8,925) = 2,343.75 Total liability tax = 17,453.75 Difference = $ 3,167.25 Quiz 1
Doiko Corporation owns 90% of the stock in Nall, Inc. Trebor owns 40% of the stock of Doiko. Trebor’s sister owns the remaining 60% of Doiko. During the current year, Trebor purchased land from Nall for $43,000. Nall had purchased the land for $62,000. Write a memorandum to the controller of Nall, Inc., explaining the potential tax problem with the sale of the land to Trebor. #24
Doiko Corporation and Nall, Inc. are related parties because Doiko owns more than 50% of the stock in Nall. Although Trebor directly owns only 40% of Doiko, he is deemed to own his sister’s Doiko shares for purposes of the related party rules. Therefore, Trebor is deemed to control Doiko, which controls Nall. This makes Trebor and Nall related parties. Because the sale to Trebor results in a $19,000 loss, Nall will not be allowed to deduct the loss because Trebor is a related party. #24

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