Problem 1: Ava Giselle is single and operates a single member LLC - Ave Giselle Skincare LLC (AGS). AGS started business in March 2010 and is the only source of income for Ava Giselle. She provided you with the following income statement for 2013. This income statement is prepared using generally accepted accounting principles. However, for tax purposes, AGS reports income and expenses on cash basis.
Sales $ 2,200,000
Cost of Goods Sold 850,000
Gross Profit $ 1,350,000
Compensation paid to employees 85,000
Total Social Security and Medicare Tax related to employees 9,000
Research and Development Expense 169,000
Depreciation Expense 300,000
Net Income before Taxes $ 787,000
Provision for Federal and State Income Tax 275,000
Net Income after Income Tax $ 512,000
The following additional information is provided:
1. For financial statement purposes, research and development costs are written off in the year incurred.
2. When Ava Giselle first started her operations in 2010, $300,000 of costs were incurred and appropriately characterized as "startup costs". For financial statement purposes these costs are capitalized and not amortized.
3. During 2013, $585,000 of depreciable new assets were acquired. All of these new assets are in the category of assets that can be written off over a seven year period. For tax purposes, the current year depreciation for assets acquired in the past two years amounted to $150,000.
4. The accounting provision for federal and state income tax is $275,000.
5. Both 2011 and 2012 tax returns showed tax losses of $300,000 and $50,000 respectively. These calculations only reflect the results of operations separately for 2011 and 2012. Ava Giselle's former CPA had elected to forego the carry back period for both years.
Determine Ava Giselle's taxable income and tax liability for 2013. You may ignore any computations related to self-employment tax and ½ self-employment tax deduction.
Explain your calculations clearly indicating why each deductible expense is claimed. For expenses which are not deductible, explain why the expense is not deductible.
Problem 2: Thomas, a California resident, owns a summer cabin in South Lake Tahoe. During 2013, Thomas stayed 20 days, his parents and siblings stayed 8 days and Thomas rented the 3 bedroom 3 bath cabin for 45 days, at $ 250 per day. The following expenses relate to the summer cabin:
Interest expense on debt secured by the residence
and incurred to acquire the residence $16,000
Property taxes related to residence $ 3,300
Insurance $ 2,000
Utilities $ 3,200
Maintenance $ 2,400
Depreciation (calculated on entire property for this year) $ 9,600
How much can Thomas deduct on his Schedule E?
In arriving at your answer, you should comment on the two different approaches used in Bolton v Commissioner.
Problem 3: Vern owned farm acreage he inherited several years ago. There was no building nor improvement to the land. He decided to sell the farm in an exchange and acquired two rental houses. The Fixer House and The Money-Pit House closed escrows on separate occasions, but both were within the requirements of the 1031 exchange:
The Big Easy Farm:
Inherited Basis $451,739
Mortgage 0
Sale Price 769,633
Closing Costs 26,754
The Fixer House:
Purchase Price $668,050
Mortgage 401,615
Closing Costs 11,744
Cash from Accommodator 278,179
The Money-Pit House:
Purchase Price $740,200
Mortgage 289,829
Closing Costs 14,329
Cash from Accommodator 464,700
Requirement:
1. How much gain is taxable, if any?
2. What is the basis for the exchanged properties combined as a whole?
3. What are the allocated basis for The Fixer House and The Money-Pit House?
Problem 4: Your client called to report that upon noticing water on the walls in three rooms of his home, he decided to check his roof and discovered holes in the roof. The holes were caused by squirrels which had eaten holes under shingles and through the roof wood, permitting rain water to soak through on the house walls.
Can he claim a casualty loss for the cost of repairing the holes in his roof caused by squirrels?
Problem 5: Your client Steve purchased a used car in 2011 for $ 13,000, of which $ 9,000 was financed through a credit union. In late 2013, when the balance was $ 6,500,
Steve lost his job and was unable to continue making payments and the credit union repossessed the car. In 2014, Steve received a Form 1099-C for year 2013. Reported in Box 2 was $ 6,500.
How should Steve report this income and why?
Problem 6: Ken's position with ABC, Inc. requires a good deal of driving. The company provides a car for this purpose. Ken's out-of-pocket travel expenses are reimbursed by ABC, Inc. under an accountable plan. Ken is six foot, five inches tall and the compact cars the company provides make for an uncomfortable ride on longer trips. So, on days when Ken must travel longer distances he uses his own vehicle and keeps track of his mileage. Prior to coming into your office this year, Ken has been filing his own return and deducting the business use of his car using the standard mileage rate. You ask Ken why he has been deducting the mileage subject to the 2% AGI limitation when ABC, Inc. has an accountable plan. He explains that ABC, Inc. is a small company and he doesn't turn in the mileage because he feels guilty about them paying extra just because he's tall and prefers his own car. He understands the 2% limitation, and is satisfied with the tax benefit he is able to receive using Form 2106.
Can Ken continue to deduct the business use of his vehicle on Form 2106?
Problem 7: Chuck and Barb have jointly owned their residence for the past twelve years. The basis in their home is $200,000 and its FMV is $1 million. Sadly, Chuck and Barb are divorcing. The divorce decree states they are to remain co-owners of the residence and Barb can live in the home until their youngest daughter reaches age 18 in five years. At that time the home is to be sold and the proceeds split equally between them.
Shortly after Chuck moved out, Steve moved in and during that same year, Barb and Steve got married. Four years later, as per the divorce decree, the home sold for $1.2 million resulting in a $1 million gain.
How much of the $1 million gain can be excluded from income by Chuck, Barb and Steve?