Answer only the following expenses are deductible for

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ANSWER: Only the following expenses are deductible for AGI: Alimony $24,000 Moving expenses 2,500 Contribution to IRA 4,000 Deductions for AGI $30,500 The 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 for AGI. Mortgage interest on personal residence $ 6,000 Property taxes on personal residence 2,500 Alimony payments 12,000 Moving expenses 7,000 Charitable contributions 1,500 State income taxes 5,000 Investment interest ($8,000 of expenses limited to net investment income of $7,500) 7,500 Unreimbursed employee expenses 2,500 Sales taxes 2,600 ANSWER: Arnold and Beth’s deduction for AGI is $19,000 and consists of the following items: Alimony payments $12,000 Moving expenses 7 ,000 Deduction for AGI $19 ,000 All 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 hardware store 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 $250,000 Salaries and commissions 100,000 Rent 10,000 Insurance 5,000 Utilities 6,000 Accounts receivable, 1/1/2014 40,000 Accounts receivable, 12/31/2014 38,000 Accounts payable, 1/1/2014 12,000 Accounts payable, 12/31/2014 11,000 Calculate Sandra’s net profit using the cash method for 2014. ANSWER: Sandra’s accrual method net profit is calculated as follows: Revenue $250,000 Less: Expenses Salaries and commissions $100,000 Rent 10,000 Insurance 5,000 Utilities 6,000 (121 ,000 ) Net profit $129 ,000 To convert to cash method net profit, the following adjustments must be made. Net profit—accrual method $129,000 Deduct: Decrease in accounts payable ($11,000 – $12,000) (1,000) Add: Decrease in accounts receivable ($38,000 – $40,000) 2 ,000 Net profit—cash method $130 ,000

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