Tax and Research

9 September 2016

Research and Planning Midterm Chapter 1 20. Discuss what is meant by the term “double taxation” of corporations. Develop an example of double taxation using a corporation and shareholder. The term “double taxation” refers to the taxing of the same income twice. This type of taxation typically results from a C corporation paying tax on its taxable income and shareholders paying income tax on any dividends received from the C Corporation. The impact of double taxation of C corporations has been substantially reduced by the fact that since 2003, dividends are taxed at a maximum rate of 15%.

The most well-known example of double taxation in the U. S. is the income tax levied once on corporate income and then again when profits are distributed as dividends to shareholders. 21. Limited liability companies (LLCs) are very popular today as a form of organization. Assume a client asks you to explain what this type of organization is all about. Prepare a brief description of the federal income tax aspects of LLCs. A Limited Liability Company or LLC is a legal form of business organization with daily activities like a partnership but with limited liability similar to a corporation.

Tax and Research Essay Example

An LLC is formed in the state in which it operates. An LLC is formed by filing Articles of Organization with the state in which you will be doing business. Limited liability companies (LLCs) are generally taxed as partnerships. Therefore, the LLC is not subject to income tax on its taxable income but such income is allocated to the members (owners) of the LLC.. 23. Partnerships and S corporations are flow-through entities. In connection with filing annual tax returns, these entities must include Form K-1 in the returns. What is Form K-1, what is its purpose, and who receives the form?

Form K-1 is an integral part of the annual partnership tax return. It reports a partner’s allocable share of partnership ordinary income and separately-stated items, such as dividends, long-term capital gains, etc. The K-1 is prepared for each partner in the partnership and is filled with Form 1065(annual Partnership tax return). If a partnership has ten partners, there will be a K-1 for each. A copy of each partner’s K-1 is provided to them so that they can report the information on their own tax returns. Chapter 2 4. List the conditions that must be met in order to claim a dependency exemption for qualifying children and relatives.

Briefly explain each one. (1) Identification number- all dependents must have social security numbers reported on the taxpayer’s return, (2) Citizenship – dependents must meet a citizenship test(dependents must be U. S. citizens or nationals, or residents of the U. S. , Canada, or Mexico for some part of the year), (3) Married dependents cannot normally file a joint return but they are entitled to the exemption if they file solely to claim a refund of tax withheld , and (4) No dependent – dependents who file a tax return cannot claim personal or dependency exemptions on their returns.

Additional requirements for Qualifying children are (1) Relationship test – eligible children must be the taxpayer’s child (including natural, adopted, foster, and stepchildren) or sibling (including half-siblings and step-siblings), (2) Age test – a qualifying child must be under 19, a full-time student under 24, or permanently and totally disabled, (3) Abode test – a qualifying child must have the same principal abode as the taxpayer for more than half of the year, and (4) Support test – a qualifying child may not be self-supporting for more than one-half of his or her own support during the year.

Requirements for Other dependents – (1) Relationship test –other relatives must be related to the taxpayer or reside in the taxpayer’s household for the entire year, (2) Gross income test – the dependent must have gross income less than the amount of the personal exemption, and (3) Support test – The dependent must receive over one-half of their support from the taxpayer. 6. Under what circumstances must a taxpayer use a rate schedule instead of a tax table? A taxpayer will use a rate schedule instead of a tax table if taxable income exceeds the maximum in the tax table (currently $100,000) or if the taxpayer is using a special tax computation method such as shortyear computation. 17. Explain what is meant by the phrase maintain household. The phrase “maintain a household” means to pay over one-half of the costs of the household. These costs include property taxes, mortgage interest, rent, utility charges, upkeep and repairs, property insurance and food consumed on the premises. Such costs do not include clothing, education, medical treatment, vacations, life insurance and transportation. Chapter 3 6.

A landlord who receives prepaid rent is required to report that amount as gross income when the payment is received. Why would Congress choose to do this? What problem does this create for the taxpayer? Congress taxes prepaid rental income because of concern that taxpayers might otherwise spend the money and then be unable to pay the tax when it comes due. Taxing such amounts is to tax income when taxpayers have the greatest wherewithal to pay. The problem created for the taxpayer is that they are taxed before they incur related expenses.

Repairs, insurance, depreciation, interest and other expenses are incurred as the income is earned. Therefore, there is a mismatching of revenue and expense. 7. Office space is often without carpet, wall covering, or window covering. Furthermore, many rental agreements specify that these improvements cannot be removed by a tenant if removal causes any damage to the property. What issue does this raise? The issue raised by such arrangements might cause the IRS to question whether the improvements are being made in lieu of rent.

If this was the case then the owner of the property may be required to include the value of the improvements in gross income. Chapter 4 7. What is the tax significance of the face amount of a life insurance policy? The face amount of life insurance is excluded from the gross income of a beneficiary if the amount is paid upon the death of the insured. If the amount paid exceeds the face of the policy then the excess is taxable. 21. What types of income qualify for the foreign-earned income exclusion?

The exclusion is applicable to earnings from personal services rendered in foreign countries. To qualify for the foreign earned income exclusion, a taxpayer must either be a bona fide resident of one or more foreign countries for the entire taxable year or be present in one or more foreign countries for a minimum of 330 days during a period of 12 consecutive months. Chapter 5 1. What problem may exist in determining the amount realized for an investor who exchanges? common stock of publicly traded corporation for a used building?

How is the problem likely to be resolved? It will probably be difficult to determine the fair market value of the used building received by the investor. The problem is likely to be resolved by using the FMV of the property given to measure the amount realized. 15. Four years ago, Susan loaned $7,000to her friend Joe. During the current year, the $7,000 loan is considered worthless. Explain how Susan should treat the worthless debt for tax purposes. The debt is a non-business bad debt and the loss should be treated as a short-term capital loss. Chapter 6

Why is the distinction between deductions for AGI and the deductions from AGI important for individuals? Deductions for AGI reduce the taxpayer’s gross income by the full amount of the deduction even if the standard deduction is used. Deductions from AGI are not beneficial unless their sum exceeds the standard deduction, in which case these deductions will be included as itemized deductions. 2. Sam owns a small house that he rents out to students attending the local university. Are the expenses associated with the rental unit deductions for or from AGI?

Expenses incurred in producing rental income are deductions for AGI. Chapter 7 1. a. For what persons may a taxpayer deduct medical expenses? A taxpayer may deduct medical expenses incurred on behalf of himself, their spouse, their dependents, and their children. The taxpayer may also deduct medical expenses paid for an individual who would otherwise qualify as a dependent except for the fact that the gross income test is not met, even though the taxpayer may not take an exemption for the individual. b.

In the case of children of divorced parents, must the parent who is entitled to the dependency exemption pays the medical expenses of the child to ensure that the expenses are deductible? Explain. No, the medical expenses incurred by the divorced parents of a child are deductible by whichever parent incurs the expenses, even though the parent incurring the expenses is not entitled to the dependency exemption for the child. c. Who should pay the medical expenses of an individual who is the subject of a multiple support agreement?

The taxpayer who is the subject of a multiple support agreement is treated as the dependent of the taxpayer who is entitled to take the dependency exemption. Since a taxpayer may deduct medical expenses subject to the 7. 5% of AGI limit incurred for a dependent, the taxpayer entitled to the dependency exemption under the multiple support agreement should be the one who pays the medical expenses. 12. What is an ad valorem tax? If a tax that is levied on personal property is not an ad valorem tax, under what circumstances may it still be deductible?

An ad valorem tax is a tax determined by the value of the property being taxed rather than some other measure. A personal property tax that is not an ad valorem tax is still deductible as an ordinary business expense depending on if the property is used in a trade or business. If the tax is not an ad valorem tax and the property is not used in a trade or business or income-producing activity, the tax imposed on personal property is not deductible.

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