ANSWER: Only the following expenses are deductible for AGI:Alimony$24,000Moving expenses2,500Contribution to IRA4,000Deductions for AGI$30,500The other expenses, after applying any statutory floors, are deductions from AGI.
100. Arnold and Beth file a joint return. Use the following data to calculate their deduction forAGI.Mortgage interest on personal residence$ 6,000Property taxes on personal residence2,500Alimony payments12,000Moving expenses7,000Charitable contributions1,500State income taxes5,000Investment interest ($8,000 of expenses limited to net investment income of $7,500)7,500Unreimbursed employee expenses2,500Sales taxes2,600ANSWER: Arnold and Beth’s deduction for AGI is $19,000 and consists of the followingitems:Alimony payments$12,000Moving expenses7,000Deduction for AGI$19,000All of the other items are itemized deductions. Note that the taxpayer must choose between the state income taxes and the sales taxes.101. Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardwarestore to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.ANSWER: Since the hardware store is not incorporated, the issue of the reasonableness of the salaries is not relevant. Robin and Jeff will report income of $125,000 each regardless of whether it is labeled as salary or as a distribution of the hardware store’s net income. Therefore, there is nothing wrong with the hardware store (i.e., a partnership) taking a $250,000 salary deduction.
102. Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method.Revenue$250,000Salaries and commissions100,000Rent10,000Insurance5,000Utilities6,000Accounts receivable, 1/1/201440,000Accounts receivable, 12/31/201438,000Accounts payable, 1/1/201412,000Accounts payable, 12/31/201411,000Calculate Sandra’s net profit using the cash method for 2014.ANSWER: Sandra’s accrual method net profit is calculated as follows:Revenue$250,000Less:ExpensesSalaries and commissions$100,000 Rent10,000Insurance5,000Utilities6,000(121,000)Net profit$129,000To convert to cash method net profit, the following adjustments must be made.Net profit—accrual method$129,000Deduct: Decrease in accounts payable ($11,000 – $12,000)(1,000)Add: Decrease in accounts receivable ($38,000 – $40,000)2,000Net profit—cash method$130,000