For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions that would determine the treatment), and any limitations that might be placed on the deduction.
a.Allison is self-employed. She pays the following taxes during the current year: State income tax$1,200
Federal income tax4,000
Self-employment tax3,200
Property tax on residence700
Tax on business equipment200
b.A customer who owed Leon $5,000 declared bankruptcy last year. At that time, the customer's accountant estimated that only 40% of the customer's debts would be paid. In the current year, Leon receives $1,000 from the bankruptcy court as final payment on the $5,000 debt.
What will be an ideal response?
| a. | Allison can deduct the state income tax and the property tax on her residence as an itemized deduction. One-half of the self-employment tax, $1,600, is deductible for adjusted gross income. The tax on business equipment is capitalized as part of the cost of the equipment. Federal income taxes are not deductible. |
| b. | If Leon is a cash basis taxpayer, no deduction is allowed. He will include the $1,000 he receives in the current year in his gross income. If Leon is an accrual basis taxpayer, he would deduct $3,000 ($5,000×60%) bad debt expense for last year. In the current year, he can deduct an additional $1,000 ($2,000 expected payment - $1,000 actual payment) as a bad debt expense. |
Business
You might also like to view...
Which of the following costs usually would not be included in the inventory cost?
A) Storage costs B) Related tariffs C) Invoice price less purchases discounts D) Insurance on goods in transit
Business
Which of the following is NOT a warehouse activity?
A) identifying B) order picking C) dispatching D) receiving E) transportation
Business
A ________ works for an enterprise resource planning (ERP) vendor or a third party and helps budget, plan, train, configure, and implement an ERP system
A) developer B) consultant C) systems analyst D) business analyst
Business
Explain the e-government relationships
What will be an ideal response?
Business