$20,000 received annually at the end of
years 1 through 5 followed by $13,000
received annually at the end of years 6
through 10. The discount rate is 15
percent.
($20,000 × 3.352 discount factor) +
0.497 discount factor ($13,000 × 3.352
discount factor) = $88,697
Total income $ 95,600
Above-the-line deduction for one-half
SE tax (2,953)
AGI $ 92,647
Standard deduction (27,700)
QBI deduction (20% × ($41,800 −
$2,953)) (7,769)
Taxable income $ 57,178
Income tax on $57,178 (married filing
jointly) $ 6,421
The tax character of income is
determined strictly by tax law.
The Kilos’ realized gain on sale was
$715,000 ($1,150,000 amount realized −
$435,000 cost basis), and their taxable
long-term capital gain was $215,000
($715,000 − $500,000 exclusion). Their
tax is $51,170 ($215,000 × 23.8%
combined 20% income tax and 3.8%
Medicare contribution tax).
$888 taxable income. Although Besito
earned only $180 of the prepaid rent
this year, (15 days in December × $12),
the income is recognized in the year
payment is received.
TRW’s NOL deduction is limited to 80%
of taxable income in years 2023 through
2026. The remaining NOL is deducted in
2027.
21% × $31,000 excess of book income
over taxable income = $6,510 deferred
tax liability.
No deferred tax asset or liability from
permanent book/tax difference.
21% × $55,000 excess of taxable income
over book income = $11,550 deferred
tax asset.
Self-employment tax = $16,955 =
$120,000 × 92.35% × 15.30%.
$100,000 (1 − t) = $60,000
(after-tax income of Transaction 1 =
after-tax income of Transaction 2)
t = 40% marginal tax rate
Mr. Fuentes’s after-tax yield on the
corporate bonds is 3.23 percent (4.75%
before-tax yield − [4.75% × 32%
marginal tax rate]).
AGI $ 462,700
AGI threshold (400,000)
Excess AGI $ 62,700
$62,700 excess AGI ÷ $1,000 (rounded
up) 63
Maximum total credit $ 6,000
Phaseout ($50 × 63) (3,150)
Child credit $ 2,850
$6,500 child credit [$2,000 × 3 children
under age 17 plus one non-child
dependent ($500)].
Entity variable one controlled subsidiary
to another controlled subsidiary.
The child tax credit for non-child
dependents is limited to $500.
Even as a cash-based taxpayer, Firm F
can deduct only $4,720 of the interest
payment (the interest relating to the
four months from September 1 through
December 31).
BDF’s 2023 payroll tax is $12,832
([$160,200 × 6.2%] + [$200,000 ×
1.45%]).
ZEJ’s bad debt expense for financial
statement purposes is $770,000, the
year-end addition to the allowance for
bad debts.
ZEJ’s tax deduction for bad debts is
$840,000, the amount of actual write-
offs of accounts receivable.
Section 179 does not apply because the
total acquisition cost exceeds
$4,050,000.
The six steps of the tax research process
1. Get the facts
2. Identify the issues
3. Locate authority
4. Analyze authority
5. Repeat steps 1-4
6. Communicate conclusions
Milt realized a $15,000 long-term capital
gain (collectibles gain) taxed at a
maximum rate of 28 percent.
Ms. Lincoln’s medical expense
deduction is $9,510 ($14,340 − $4,830
[$64,400 AGI × 7.5%]), and her tax
savings from the deduction is $2,092
($9,510 × 22%). The after-tax cost of the
expenses is $12,248 ($14,340 − $2,092).
The present value decreases as the
discount rate increases.
A taxpayer is neutral concerning paying
an identical amount of implicit or
explicit tax.
$52,000 total income − $1,800 =
$50,200 AGI − $27,700 standard
deduction = $22,500 taxable income.
Because only 50 percent of the meal
expense is deductible, the after-tax cost
is $6,981 ($7,800 − [$3,900 × 21%]).
In the one-year deferral method
authorized by the IRS, only the portion
of the prepayment allocable to services
performed in the year of receipt is
included in taxable income for such
year. The remaining prepayment is
included in taxable income for the
following year.
Qualified business income of $280,000 ×
20% = $56,000 tentative deduction.
Deduction cannot exceed the greater of
$50,000 (50% × $100,000 wages) or
$26,250 (25% × $100,000 wages + 2.5%
× $50,000 unadjusted basis of tangible
depreciable property).
Since the tentative deduction is more
than $50,000 (greater of 1) or 2) above),
Ms. Alvarez’s QBI deduction is $50,000,
before the overall taxable income
limitation.
Total cost of depreciable personalty
$ 1,580,000
Section 179 election/2023 dollar
amount(1,160,000)
Tax basis after 179 deduction $
420,000
80% bonus depreciation(336,000)
Tax basis after bonus depreciation
$ 84,000
Year 1 percentage for 7-year MACRS
0.1429
Year 1 regular MACRS depreciation
$ 12,004
Total deduction ($1,160,000 + $336,000
+ $12,004) $ 1,508,004
________________________________
$24,500 × 92.35% × 15.3%.
Underhill’s book amortization for
purchased goodwill is zero.
Consequently, the $1,500 tax deduction
is a favorable difference between book
and taxable income. At a 21% tax rate,
the difference results in a $315 deferred
tax liability.
Lynn must recognize $16,460 gain (20%
× $82,300 recognized gain) as ordinary
income under the 20 percent recapture
rule. The $65,840 remaining gain is
Section 1231 gain.
Hardy realizes a $30,000 gain ($90,000
amount realized [$77,500 FMV of
property acquired + $12,500 boot
received] − $60,000 tax basis of
transferred property). Hardy recognizes
$12,500 gain equal to the boot received.
Its basis in the property acquired is
$60,000 (substituted basis of property
transferred).
Foreign tax credit limitation: $449,400 ×
($240,000 foreign source income ÷
$2,140,000 taxable income) = $50,400
Which of these corporations form an
affiliated group eligible to file a
consolidated tax return? Groups that
own 80% or more of the other group.
Mr. Forest, a single taxpayer, recognized
a $252,000 loss on the sale
If the equipment is purchased in 2022,
100% of the cost is immediately
deductible through bonus depreciation
(or a combination of Section 179 and
bonus depreciation).
Firm L cannot deduct any of the Section
179 expense because it has no taxable
income. The entire $21,300
nondeductible expense is carried over
into 2024.
$135,000 ÷ 180 months = $750 per
month amortization. Underhill’s first-
year deduction is $1,500 (2 months ×
$750).
Roof Corporation has $15,500
nonrecaptured Section 1231 losses from
year 1 and year 3 ($1,500 remaining
from year 1, after recapture against year
2 gain and $14,000 from year 3).
Therefore, the entire $7,500 Section
1231 gain recognized in year 4 is
recaptured as ordinary income.
In year 5, Roof has $8,000
nonrecaptured Section 1231 loss
remaining from year 3, after recapture
of the year 4 gain. Therefore, $8,000 of
the year 5 gain is ordinary and the
$1,000 remaining gain is treated as a
capital gain.
Qualifying property takes a substituted
basis.
Employees don't include the value of
any compensatory fringe benefits in
gross income because the benefit
doesn't consist of a direct cash
payment.
The $4,733,000 taxable gift ($4,750,000
− $17,000 annual exclusion) is less than
Mr. Ito’s $12.92 million lifetime
exclusion, so no amount of the gift is
subject to gift tax.
Dividend deduction for recipient corp
Less than 20% = 50%
20% - 79% = 65%
80% or more = 100%
of Section 1244 stock. What is the
character of this loss?
Mr. Zan can deduct $1,880 of the
expenditures ($5,000 − $3,120 excess
expenditures over $50,000) and must
capitalize the $51,240 remainder. He
can elect to amortize the capitalized
cost over 180 months at the rate of
$284.67 per month. First-year
amortization would be $854 (3 months
× $284.67), and Mr. Zan’s first-year
deduction would be $2,734 ($1,880 +
$854).
If Lynn is a noncorporate business, the
20 percent recapture rule is
inapplicable. Because Lynn claimed only
straight-line depreciation on the
warehouse, the entire $82,300 gain is
Section 1231 gain.
He must recognize the interest as
income in 2023 under the doctrine of
constructive receipt.
($9,882,590 + $447,600 permanent
differences) × 21% = tax expense per
books
Because Mr. Zhao does not own at least
80 percent of ZJL’s outstanding stock
immediately after the exchange, he
must recognize the entire $154,000
realized gain ($400,000 FMV of stock
received − $246,000 adjusted basis of
business assets transferred) on the
exchange of property for stock.
FF realized a $35,300 gain ($250,000
insurance reimbursement − $214,700
adjusted basis) on the involuntary
conversion of its warehouse. Because FF
spent at least $250,000 on the
construction of a replacement building
and the replacement occurred within
the two taxable years following the year
of the conversion, it does not recognize
any of the realized gain. FF’s basis in the
replacement building is $264,700
($300,000 cost − $35,300 unrecognized
gain).
State M apportionment percentage:
115.94% ÷ 3 = 38.65% would be 0.3865.
State N apportionment percentage:
184.06% ÷ 3 = 61.35% would be 0.6135.
$50,000 ordinary and $202,000 capital