Professional Documents
Culture Documents
CHAPTER 5
BUSINESS DEDUCTIONS
COMPUTATIONAL EXERCISES
1. (LO 2)
a. The entire $8,400 is deductible since the benefit from the payment will be completely received
by the end of 2017.
b. Since the benefit from the payment will not be completely received by the end of 2017,
the only payments deductible in 2016 are for the benefits received in 2016 (nine months;
$8,400 × 9/24 = $3,150).
5-1
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5-2 2017 Essentials of Taxation/Solutions Manual
2. (LO 3) All ordinary and necessary expenses incurred in operating an illegal business are deductible.
Expenses that are in violation of public policy are not deductible (bribes and illegal kickbacks). All
other expenses, which total $291,400, are deductible.
3. (LO 3) Since Stanford is not in the restaurant business and he does not acquire the restaurant, the
$28,000 is not deductible.
He cannot deduct all of the $51,000 related to the investigation of the bakery since he is not in that trade
or business already. Since he did purchase the bakery, the maximum deduction (before amortization)
of the $51,000 is $5,000.
The $5,000 deduction is reduced dollar for dollar for those expenses in excess of $50,000.
The remaining expenses of $47,000 ($51,000 – $4,000) can be amortized over 180 months beginning
with the month business begins, which is November.
4. (LO 4) Research and experimental expenditures may be deferred and amortized if the taxpayer makes
an election. Under the election, research and experimental expenditures are amortized ratably over a
period of not less than 60 months. A deduction is allowed beginning with the month in which the
taxpayer first realizes benefits from the experimental expenditure. The election is binding, and a change
requires permission from the IRS.
Because the benefits from the project will be realized starting in July 2017, Sandstorm Corporation has
no deduction prior to July 2017, the month benefits from the project begin to be realized. The deduction
for 2017 is $12,750, computed as follows:
5. (LO 6) The $5,200 real estate tax Ramona pays is allocated between her and Tabitha, based on the
relative number of days each owns the property during the year.
a. Therefore, $855 is allocated to Tabitha ($5,200 × 60/365) and $4,345 is allocated to Ramona
($5,200 − $855). Consequently, Tabitha may deduct $855 of real estate tax and Ramona may
deduct $4,345.
b. This calculation will also impact the basis in the real estate and the amount realized from the sale.
Ramona’s basis in the real estate is $260,855 [$260,000 (purchase price) + $855 (property taxes
paid by Ramona but allocated to Tabitha)]. Tabitha’s amount realized is $260,855 [$260,000
(sales price) + $855 (property taxes paid by Ramona but allocated to Tabitha)].
6. (LO 7) The mid-quarter convention applies if more than 40% of the value of property other than eligible
real estate is placed in service during the last quarter of the year. Hamlet acquired 100% of assets in the
last quarter of the year. Therefore mid-quarter convention applies.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Deductions 5-3
7. (LO 7) The IRS provides tables that specify cost recovery allowances for personalty and for realty.
Under MACRS, the cost recovery period for residential rental real estate is 27.5 years, and the straight-
line method is used for computing the cost recovery allowance. Nonresidential real estate uses a recovery
period of 39 years; it also is depreciated using the straight-line method. Cost recovery is computed by
multiplying the applicable rate by the cost recovery basis.
a. Residential rental real estate: $1,000,000 × .03636 = $36,360.
b. Nonresidential rental real estate: $1,000,000 × .02564 = $25,640.
8. (LO 7) In 2016, § 179 permits the taxpayer to elect to deduct up to $500,000 of the acquisition cost of
tangible personal property used in a trade or business.
Two additional limitations apply to the amount deductible under § 179. First, the ceiling amount on the
deduction is reduced dollar for dollar when § 179 property placed in service during the taxable year
exceeds a maximum amount ($2,010,000 in 2016). Second, the § 179 deduction cannot exceed the
taxpayer’s trade or business taxable income, computed without regard to the § 179 amount.
§ 179 deduction before adjustment $212,000
Less: Dollar limitation reduction ($212,000 < $2,010,000) (–0–)
Remaining § 179 deduction $212,000
§ 179 deduction allowed due to business income limitation $ 5,600
§ 179 deduction carryforward ($212,000 − $5,600) $206,400
9. (LO 7) The law places special limitations on cost recovery deductions for passenger automobiles. The
luxury auto limits are imposed before any percentage reduction for personal use. The cost recovery
limitations are maximum amounts. If the regular MACRS calculation produces a lesser amount of cost
recovery, the lesser amount is used.
Year MACRS Amount Recovery Limitation Deduction Allowed
2016 $5,040 $2,212 $2,212
($36,000 × .20 × 70%) ($3,160 × 70%)
2017 $8,064 $3,570 $3,570
($36,000 × .32 × 70%) ($5,100 × 70%)
10. (LO 9) Percentage depletion (also referred to as statutory depletion) uses a specified percentage
provided by the Code. The percentage varies according to the type of mineral interest involved. The
rate is applied to the gross income from the property, but in no event may percentage depletion exceed
50% of the taxable income from the property before the allowance for depletion.
Gross income $340,000
Less: Other expenses (229,000)
Taxable income before depletion $111,000
Depletion allowance $ 47,6001
1
[The lesser of $47,600 (14% × $340,000) or $55,500 (50% × $111,000)].
PROBLEMS
11. (LO 2)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5-4 2017 Essentials of Taxation/Solutions Manual
Because Duck is an accrual basis taxpayer, it may accrue and deduct in 2016 the costs of the performers
of $100,000 even though it is not paid until January 5, 2017 (i.e., the economic performance test is
satisfied). However, the cleaning cost of $10,000 may not be deducted until 2017 when the services are
performed (i.e., at that time, the economic performance test is satisfied).
12. (LO 2) Code § 267 defines “family” to include the taxpayer’s ancestors, descendants, spouse and
siblings. Therefore, the following family members would be considered related parties:
Father
Brother
Grandson
Code § 267 also includes as related parties a corporation and a shareholder who owns more than 50
percent of the corporation’s outstanding stock. Therefore, a corporation and a 55 percent shareholder
would be considered related parties.
13. (LO 2, 3) Robin Corporation can take a deduction for interest of $2,800 in 2016 on the loan from Peter
but must defer the deduction of $2,800 on the loan from Isabelle until 2017, when it is paid. Both
Isabelle and Peter have interest income in 2017 when it is received. The reason for the different
treatment is that Peter owns his 19% plus (by attribution) Isabelle’s 26% for a total of 45%. Because
this is not greater than 50%, he is not a related party with respect to Robin.
Isabelle, however, owns her shares (26%) plus (by attribution) her husband’s shares (19%), her father’s
shares (25%), and her mother’s shares (15%) for a total of 85% ownership. Section 267 disallows the
deduction for the accrued expense in 2016 because Isabelle and Robin are related parties.
14. (LO 2, 3)
a. Brittany’s $24,000 loss ($160,000 amount realized − $184,000 adjusted basis) is not deductible
due to § 267.
b. If the stock is sold for $190,000, Ridge’s recognized gain is $6,000 [$190,000 (sales price) less
$160,000 (basis), reduced by the $24,000 loss that previously was not allowed to Brittany].
If the stock is sold for $152,000, an $8,000 loss [$152,000 (sales price) less $160,000 (basis)]
is recognized by Ridge. The $24,000 loss that was realized by Brittany is not deductible by
either Brittany or Ridge and is lost permanently.
If the stock is sold for $174,000, there is no recognized gain to Ridge [$174,000 (sales price)
less $160,000 (basis), reduced by $14,000 of the $24,000 loss that previously was not
recognized by Brittany]. The remaining $10,000 of unrecognized loss is lost permanently as a
deduction for both Brittany and Ridge.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Deductions 5-5
As you requested in your note, I am providing you with the tax consequences of the proposed
sale of stock to your son Ridge. Although you would have a potential loss of $24,000 ($160,000
selling price − $184,000 cost), you would not be able to recognize this loss on your tax return.
The tax law disallows the recognition of losses between certain related parties.
If you do sell the stock to Ridge, his tax basis for calculating gain or loss on a subsequent sale by
him would be his cost of $160,000. However, if he should sell it at a gain, he could use as much of
your $24,000 disallowed loss as necessary to reduce his gain to zero.
From a planning perspective, you could recognize the $24,000 loss on your tax return if you
were to sell the stock to an unrelated party rather than selling it to Ridge.
If you would like to discuss this further, please let me know.
Sincerely,
Ellen Allen, CPA
Tax Partner
15. (LO 2, 3)
a. Amount realized $12,000
Adjusted basis (17,000)
Realized loss ($ 5,000)
Recognized loss $ –0–
Bonnie and Phillip are related parties under § 267. Therefore, Bonnie’s realized loss of $5,000
is disallowed. Phillip’s adjusted basis for the stock is his cost of $12,000.
b. Amount realized $70,000
Adjusted basis (85,000)
Realized loss ($15,000)
Recognized loss ($15,000)
Amos and Boyd are not related parties under § 267. Therefore, Amos’s realized loss of $15,000
is recognized. Boyd’s adjusted basis for the land is his cost of $70,000.
c. Amount realized $19,000
Adjusted basis (20,000)
Realized loss ($ 1,000)
Recognized loss $ –0–
Susan and her wholly owned corporation are related parties under § 267 (i.e., she owns greater
than 50% in value of the outstanding stock). Therefore, Susan’s realized loss of $1,000 is
disallowed. The corporation’s adjusted basis for the bond is its cost of $19,000.
d. Amount realized $18,500
Adjusted basis (20,000)
Realized loss ($ 1,500)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Another document from Scribd.com that is
random and unrelated content:
The Project Gutenberg eBook of Referent
This ebook is for the use of anyone anywhere in the United States and
most other parts of the world at no cost and with almost no restrictions
whatsoever. You may copy it, give it away or re-use it under the terms of
the Project Gutenberg License included with this ebook or online at
www.gutenberg.org. If you are not located in the United States, you will
have to check the laws of the country where you are located before using
this eBook.
Title: Referent
Language: English
Way off in the hot distance of the garden a bonging noise sounded. A
cylinder was rushing up the tube to the wall's circular door. The door
peeled open with a faint hiss. Footsteps rustled measuredly along the
path. Mister Grill stepped through a lush frame of tiger-lillies.
"Morning, Roby. Oh!" Mister Grill stopped, his chubby pink face looked
as if it had been kicked. "What have you there, boy?" he cried.
Roby bounced the object against the wall.
"This? A rubber ball."
"Eh?" Grill's small blue eyes blinked, narrowing. Then he relaxed. "Why,
of course. For a moment I thought I saw—uh—er—"
Roby bounced the ball some more.
Grill cleared his throat. "Lunch time. Meditation Hour is over. And I'm
not certain that Minister Locke would enjoy your playing unorthodox
games."
Roby swore under his breath.
"Oh, well, then, go on. Play. I won't tattle." Mr. Grill was in a generous
mood.
"Don't feel like playing." Roby sulked, shoving his sandal-tip into the
dirt. Teachers spoiled everything. You couldn't vomit without
permission.
Grill tried to interest the boy. "If you come to lunch now I'll let you
televise your mother in Chicago afterward."
"Time limit, two minutes, ten seconds, no more no less," was Roby's acid
reply.
"I gather you don't approve of things, boy."
"I'll run away some day, wait and see!"
"Tut, lad. We'll always bring you back, you know."
"I didn't ask to be brought here in the first place." Roby bit his lip,
staring at his new red rubber ball. He thought he had seen it kind of, sort
of, well—move. Funny. He held the ball in his hand. The ball shivered.
Grill patted his shoulder. "Your mother is neurotic. Bad environment.
You're better off here on the island. You have a high I.Q. and it is an
honor for you to be here with the other little boy geniuses. You're
unstable and unhappy and we're trying to change that. Eventually you'll
be the exact antithesis of your mother."
"I love mother!"
"You like her," corrected Grill, quietly.
"I like mother," replied Roby, disquieted. The red ball twitched in his
hand, without his touching it. He looked at it with wonder.
"You'll only make it harder for yourself if you love her," said Grill.
"You're god-damn silly," said Roby.
Grill stiffened. "Don't swear. Besides, you don't really mean god and you
don't mean damn. There's very little of either in the world. Semantics
Book Seven, page 418, Labels and Referents."
"Now, I remember," shouted Roby, looking around. "There was a
Sandman here just now and he said—"
"Come along," said Mr. Grill. "Lunch time."
Mr. Grill stepped out of the seal in the garden wall. He looked around for
Roby. Sunlight struck him warmly in the face as he hurried down the
path.
There! There was Roby. In the clearing ahead of him. Little Roby
Morrison staring at the sky, making fists, crying out to nobody. At least
Grill could see nobody about.
"Hello, Roby," called Grill.
The boy jerked at the sound. He—wavered—in color, density, and
quality. Grill blinked, decided it was only the sun.
"I'm not Roby!" cried the child. "Roby escaped! He left me to take his
place, to fool you so you wouldn't hunt for him! He fooled me, too!"
screamed the child, nastily, sobbing. "No, no, don't look at me! Don't
think that I'm Roby, you'll make it worse! You came expecting to find
him, and you found me and made me into Roby! You're moulding me
and I'll never, never, never change, now! Oh, God!"
"Come now, Roby—"
"Roby'll never come back. I'll always be him. I was a rubber ball, a
woman, a Sandman. But, believe me, I'm only malleable atoms, that's all.
Let me go!"
Grill backed up slowly. His smile was sick.
"I'm a referent, I'm not a label!" cried the child.
"Yes, yes, I understand. Now, now, Roby, Roby, you just wait right there,
right there now, while I, while I, while I call the Psycho-Ward."
Moments later, a corps of assistants ran through the garden.
"God damn you all!" screamed the child, kicking. "Damn you!"
"Tut," declared Grill quietly, as they forced the child into the vac-
cylinder. "You're using a label for which there is no referent!"
The cylinder sucked them away.
A star blinked on the summer sky and vanished.
*** END OF THE PROJECT GUTENBERG EBOOK REFERENT ***
Updated editions will replace the previous one—the old editions will be
renamed.
Creating the works from print editions not protected by U.S. copyright
law means that no one owns a United States copyright in these works, so
the Foundation (and you!) can copy and distribute it in the United States
without permission and without paying copyright royalties. Special rules,
set forth in the General Terms of Use part of this license, apply to
copying and distributing Project Gutenberg™ electronic works to protect
the PROJECT GUTENBERG™ concept and trademark. Project
Gutenberg is a registered trademark, and may not be used if you charge
for an eBook, except by following the terms of the trademark license,
including paying royalties for use of the Project Gutenberg trademark. If
you do not charge anything for copies of this eBook, complying with the
trademark license is very easy. You may use this eBook for nearly any
purpose such as creation of derivative works, reports, performances and
research. Project Gutenberg eBooks may be modified and printed and
given away—you may do practically ANYTHING in the United States
with eBooks not protected by U.S. copyright law. Redistribution is
subject to the trademark license, especially commercial redistribution.
1.D. The copyright laws of the place where you are located also govern
what you can do with this work. Copyright laws in most countries are in
a constant state of change. If you are outside the United States, check the
laws of your country in addition to the terms of this agreement before
downloading, copying, displaying, performing, distributing or creating
derivative works based on this work or any other Project Gutenberg™
work. The Foundation makes no representations concerning the
copyright status of any work in any country other than the United States.
1.E.1. The following sentence, with active links to, or other immediate
access to, the full Project Gutenberg™ License must appear prominently
whenever any copy of a Project Gutenberg™ work (any work on which
the phrase “Project Gutenberg” appears, or with which the phrase
“Project Gutenberg” is associated) is accessed, displayed, performed,
viewed, copied or distributed:
This eBook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
eBook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.
1.E.6. You may convert to and distribute this work in any binary,
compressed, marked up, nonproprietary or proprietary form, including
any word processing or hypertext form. However, if you provide access
to or distribute copies of a Project Gutenberg™ work in a format other
than “Plain Vanilla ASCII” or other format used in the official version
posted on the official Project Gutenberg™ website (www.gutenberg.org),
you must, at no additional cost, fee or expense to the user, provide a
copy, a means of exporting a copy, or a means of obtaining a copy upon
request, of the work in its original “Plain Vanilla ASCII” or other form.
Any alternate format must include the full Project Gutenberg™ License
as specified in paragraph 1.E.1.
1.E.7. Do not charge a fee for access to, viewing, displaying, performing,
copying or distributing any Project Gutenberg™ works unless you
comply with paragraph 1.E.8 or 1.E.9.
1.E.8. You may charge a reasonable fee for copies of or providing access
to or distributing Project Gutenberg™ electronic works provided that:
• You pay a royalty fee of 20% of the gross profits you derive from
the use of Project Gutenberg™ works calculated using the method
you already use to calculate your applicable taxes. The fee is owed
to the owner of the Project Gutenberg™ trademark, but he has
agreed to donate royalties under this paragraph to the Project
Gutenberg Literary Archive Foundation. Royalty payments must be
paid within 60 days following each date on which you prepare (or
are legally required to prepare) your periodic tax returns. Royalty
payments should be clearly marked as such and sent to the Project
Gutenberg Literary Archive Foundation at the address specified in
Section 4, “Information about donations to the Project Gutenberg
Literary Archive Foundation.”
• You provide a full refund of any money paid by a user who notifies
you in writing (or by e-mail) within 30 days of receipt that s/he does
not agree to the terms of the full Project Gutenberg™ License. You
must require such a user to return or destroy all copies of the works
possessed in a physical medium and discontinue all use of and all
access to other copies of Project Gutenberg™ works.
• You comply with all other terms of this agreement for free
distribution of Project Gutenberg™ works.
1.F.
1.F.4. Except for the limited right of replacement or refund set forth in
paragraph 1.F.3, this work is provided to you ‘AS-IS’, WITH NO
OTHER WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR ANY PURPOSE.
The Foundation’s business office is located at 809 North 1500 West, Salt
Lake City, UT 84116, (801) 596-1887. Email contact links and up to date
contact information can be found at the Foundation’s website and official
page at www.gutenberg.org/contact
Please check the Project Gutenberg web pages for current donation
methods and addresses. Donations are accepted in a number of other
ways including checks, online payments and credit card donations. To
donate, please visit: www.gutenberg.org/donate.
Most people start at our website which has the main PG search facility:
www.gutenberg.org.