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ACCT 308 – Chp. 6 Questions (#33, 37, 38, 39, 43, 46)

Amos is a self-employed tax attorney. He and Monica, his employee, attend a conference in Dallas sponsored by the American Institute of CPAs. The following expense are incurred during the trip:
Amos Monica
Conference registration $900 $900
Airfare 1,200 700
Taxi fares 100 -0-
Lodging in Dallas 750 300
a. Amos pays for all of these expenses. Calculate the effect of these expenses on Amos’s AGI.
b. Would you answer to part (a) change if the American Bar Association had sponsored the conference? Explain.
a. Because Amos pays the expenses related to his tax law practice, he can claim them in calculating AGI. The expenses reduce his AGI by $4,850, determined as follows:

Conference registration ($900 + $900) $1,800
Airline tickets ($1,200 + $700) 1,900
Taxi fares 100
Lodging ($750 + $300) 1,050
$4,850
b. The answer in a. for Amos would not change. These expenses are associated with his business as a tax attorney.

Duck, an accrual basis corporation, sponsored a rock concert on December 29, 2016. Gross receipts were $300,000. The following expenses were incurred and paid as indicated.:
Expense Payment Date
Rental of coliseum $25,000 Dec, 21, 2016
Cost of goods sold:
Food 30,000 Dec, 30, 2016
Souvenirs 60,000 Dec, 30, 2016
Performers 100,000 Jan 5, 2017
Cleaning of coliseum 10,000 Feb 1, 2017
Because the coliseum was not scheduled to be used again until January 15, the company with which Duck had contracted did not perform the cleanup until Jan 8-10, 2017.
Gross receipts $300,000
Less:
Coliseum rental $ 25,000
Food (cost of goods sold) 30,000
Souvenirs (cost of goods sold) 60,000
Performers 100,000 (215,000)
Net income for 2016 $ 85,000

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).

Doug incurred and paid the following expenses during the year:
– $50 for a ticket for running a red light while he was commuting to work.
– $100 for a ticket for parking in a handicapped parking space
– $200 to an attorney to represent him in traffic court as to the two tickets.
– $500 to an attorney to draft an agreement with a tenant for a one-year lease on an apartment that Doug owns.
– $1,000 to an attorney to negotiate a reduction to his child support payments
– $2,500 to an attorney to negotiate a reduction in his qualified alimony payments to a former spouse.
Calculate the amount of Doug’s deductible expenses.
Only the $500 paid to the attorney to draft the lease and the $2,500 paid to the attorney to negotiate a reduction in the alimony payments to the former spouse are deductible by Doug. These expenses are ordinary and necessary expenses incurred in connection with rental property held for the production of income and for deductible alimony. The tickets and the related legal expenses are not deductible because they are personal in nature. Even if related to the conduct of a trade or business or the production of income, they are disallowed as a deduction because they violate public policy. The $1,000 payment for negotiating a reduction in child support payments is personal in nature.
***only include ordinary and necessary expenses****
Trevor, a friend of yours from high school, works as a server at the ST Café. He asks you to help him prepare his Federal income tax return. When you inquire about why his bank deposits substantially exceed his tip income, he confides to you that he is a bookie on the side. Trevor then provides you with the following documented income and expenses for the year:
Tip income $16,000
Gambling income 52,000
Gambling expenses
Payout to winners 29,000
Employee compensation 8,000
Bribe to police officer who is aware of Trevor’s bookie activity 7,500
a. How will these items affect Trevor’s AGI (ignore the impact of self-employment taxes)?
b. His taxable income (ignore the impact of self-employment taxes)?
a. The effect of the illegal gambling business on Trevor’s AGI is as follows:
Gross income $52,000
Deductible expenses:
Salaries $ 8,000
Payouts to winners 29,000 (37,000)
Increase in AGI $15,000

The bribe to police of $7,500 is not deductible because this expense violates public policy.

Trevor also must include the tip income of $16,000 in his gross income.

b. Trevor’s taxable income also increases by $15,000.

Harold conducts a business with the following results for the year:
Revenue $20,000
Depreciation on car 3,960
Operating expenses of car 3,100
Rent 6,000
Wages 8,200
Amortization of intangibles 680
Harold estimates that due to a depressed real estate market, the value of land owned by the business declined by $5,200.
a. Calculate the effect of Harold’s business on his AGI.
b. How would your answer in part (a) change if the activity was a hobby?
a. Harold’s business decreases his AGI by $1,940.
Revenue $20,000
Less:
Depreciation on car $3,960
Operating expenses of car 3,100
Rent 6,000
Wages 8,200
Amortization 680 (21,940)
Net income (loss) ($ 1,940)

The decline in the value of the land of $5,200 has no immediate tax consequence.

b. As the activity is a hobby, Harold cannot deduct any loss.

Sarah owns a vacation cabin in the Tennessee mountains. Without considering the cabin, she has gross income of $65,000. During the year, she rents the cabin for two weeks for $2,500 and uses it herself for four weeks. The total expenses for the year are $10,000 mortgage interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance; and $3,200 depreciation.
a. What effect does the rental of the vacation cabin have on Sarah’s AGI?
b. What expenses can Sarah deduct, and how are they classified (i.e., for or from AGI)?
a. The vacation home is classified as primarily personal because it was rented for fewer than 15 days during the year. As Sarah can exclude the $2,500 of rent income, the vacation home transactions have no effect on her AGI.

b. The only expenses that Sarah can deduct are those she normally would deduct as itemized deductions. This includes the following:

Mortgage interest $10,000
Property tax 1,500
Total $11,500
Sarah cannot deduct any of the utilities, insurance, and maintenance expenses or the depreciation. None of the expenses are deductible for AGI.

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