Problem 1: Billy Dent, as the owner of an apartment building, receives and makes the following payments during 2010:
Received in January 2010 rent that was due in December 2009 $5,000
Received in December 2010 rent not due until January 2011 $4,000
Security deposit which is to be refunded when tenant vacates the apartment-- $500
How much rental income must Billy Dent include on his 2010 income tax return?
Problem 2: Arnold and Barbara Cane were divorced in June 2010. Pursuant to the divorce decree, Arnold is obliged to perform as follows:
a. Transfer title of their personal home to Barbara. They purchased the house in 1992 and their basis today is $400,000. The fair market value of the house is $500,000. The house is subject to a 25-year, $250,000 mortgage.
b. Arnold is to continue making payments on the house until it is fully paid off. In 2010, Arnold made payments totaling $18,000.
c. Arnold is to make $3,000 per month payments to Barbara. Of this amount one-half is for child support. The divorce decree further states that alimony is to cease upon the death of the wife. In 2010, he made six payments.
How do the transactions in the divorce agreement affect Arnold's and Barbara's taxable income?
Problem 3: A Fluent, an investor in stocks and bonds, wanted to increase his portfolio but wanted to minimize his tax liability on the income from the bonds. He is presented with the following alternative investments: U.S. Series EE bonds, bonds for industrial development for mass transit, and qualified veterans' mortgage bonds. Which should he choose for his investment? Why?
Problem 4: Which of the following trade or business expenditures of Ajax Inc. are deductible on its current year tax return? If an expenditure is not deductible, explain why it is not a valid deduction.
Expenditure Amount
Salaries and wages to employees-- $400,000
Purchase of new office building-- $250,000
Payment of illegal parking fines of President-- $1,400
President's daughter's wedding-- $16,000
Entertainment expenses related to company business-- $25,000
Interest on money borrowed to buy tax-exempt securities-- $9,000
Total Expenditures $700,400
Problem 5: For the current month, Jackson Cement Co. incurred payroll expenses as follows:
Gross salaries and wages $675,000
Payroll taxes:
OASDI (Social Security Tax) employer's share $41,850
HI (Medicare Tax) employer's share $9,788
Total $726,638
Amounts withheld and paid to the government:
Employee income taxes withheld-- ($108,990)
OASDI employer's share-- ($41,850)
HI employer's share-- ($9,788)
a. What amount can Jackson claim as a tax deduction for salary and wage expense?
b. How much can Jackson deduct as tax expense?