CHAPTER 6 DEDUCTIONS AND LOSSES: CERTAIN BUSINESS …isu.indstate.edu/acharmo/smpdf/CH06.pdf · BUSINESS EXPENSES AND LOSSES SOLUTIONS TO PROBLEM MATERIALS ... Deductions and Losses:

CHAPTER 6

DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES

SOLUTIONS TO PROBLEM MATERIALS

Status: Q/P Question/ Present in Prior Problem Topic Edition Edition

1 Bad debts: cash basis taxpayer Unchanged 12 Bad debts: partial worthlessness Unchanged 23 Bad debts: worthlessness Unchanged 34 Bad debts: recovery Unchanged 45 Bad debts: nonbusiness for corporations New 6 Bad debts: related party Unchanged 67 Worthless securities Unchanged 78 Section 1244 stock Unchanged 89 Issue ID New

10 Business loss Unchanged 1011 Theft loss Unchanged 1112 Casualty loss: personal casulty loss and multiple

years New

13 Casualty loss: disaster area Unchanged 1314 Casualty loss: measurement rule for partial

destruction and complete destruction New

15 Casualty loss: insurance claim Unchanged 1516 Casualty loss: cost of repairs method Unchanged 1617 Casualty loss: 10% of AGI floor New 18 Casualty loss: deduction for versus from Unchanged 1819 Casualty loss: 10% of AGI floor Unchanged 1920 Issue ID Unchanged 2021 Issue ID Unchanged 2122 Research expenditures Unchanged 2223 Research expenditures Unchanged 2324 Issue ID Unchanged 2425 Net operating loss: carryback and carryforward New 26 Bad debts: business Unchanged 26

6-1

6-2 2004 Comprehensive Volume/Solutions Manual

Status: Q/P Question/ Present in Prior Problem Topic Edition Edition

27 Bad debts: nonbusiness New 28 Bad debts: business Unchanged 28

* 29 Bad debt and § 1244 stock Unchanged 29* 30 Section 1244 stock Unchanged 30* 31 Casualty loss: business Unchanged 31* 32 Casualty loss: disaster area loss Unchanged 32* 33 Casualty loss: business versus personal use

property New

* 34 Casualty loss: insurance recovery New * 35 Research expenditures Unchanged 35* 36 Net operating loss: absent Unchanged 36* 37 Net operating loss and personal casualty gain Unchanged 37* 38 Cumulative New * 39 Cumulative Unchanged 39 *The solution to this problem is available on a transparency master.

Deductions and Losses: Certain Business Expenses and Losses 6-3

CHECK FIGURES 26. $26,000 in current year. 27. $5,000 STCL in 2003 with $3,000

deducted; $0 deducted in 2002. 28. $52,500 bad debt deduction. 29. $103,000. 30. Mary should sell half each year. 31. $89,500. 32. $60,000 loss should be taken

currently. 33. AGI of $105,000; $39,400 itemized

deduction.

34. Net cash benefit of $7,800 of filing an insurance claim.

35.a. 2003 $353,000; 2004 $422,000; 2005 $0.

35.b. 2003 $0; 2004 $0; 2005 $77,502. 36. $36,000. 37. $43,000. 38. Refund due for 2003 $6,249. 39. Refund due for 2002 $1,510.


DISCUSSION QUESTIONS 1. No deduction is allowed for the bad debts of a cash basis taxpayer because no income has

been reported. p. 6-3 2. No deduction is allowed for partial worthlessness of a nonbusiness bad debt. The

deduction is taken only when the debt becomes totally worthless. p. 6-4 3. A legal action need not be initiated against the debtor, but all of the surrounding facts and

circumstances must indicate that such an action would not result in a collection of the debt. p. 6-4

4. If an account receivable has been written off as uncollectible during the current tax year

and is subsequently collected during the current tax year, the write-off entry is reversed. If the account receivable recovered was written off during a previous tax year, income is created subject to the tax benefit rule. p. 6-4

5. The nonbusiness bad debt provisions are not applicable to corporations. p. 6-5 6. A bona fide debt exists when a debtor-creditor relationship is based on a valid and

enforceable obligation to pay a fixed or determinable sum of money. The determination is based on an examination of the prevailing facts and circumstances. p. 6-5

7. The stock is treated as worthless on the last day of the current tax year. Hence, Mary has

a long-term capital loss. p. 6-6 8. For small business stock, the ordinary loss treatment is limited to $50,000 ($100,000 for

married individuals filing jointly) per tax year. Thus, the taxpayer is able to receive ordinary loss treatment on what otherwise would have been a capital loss (i.e., stock is a capital asset). An ordinary loss may be used, without limitation, in computing taxable income. A capital loss, after netting against capital gains, is limited to $3,000 per tax year. pp. 6-6 and 6-7

9. Joe and his wife should be concerned with the following tax issues:

• Did the original Blue common stock become worthless?

• In what year did it become worthless?

• What is the amount of the loss?

• What is the character of the loss?

• Was the stock § 1244 stock?

pp. 6-3 to 6-7 10. Jim may take a deduction for the damage to the sea wall. Because the damage is to

business property, the damage does not have to meet the definition of a “casualty.” p. 6-8

11. To claim a theft loss, Janice must show that the property was actually stolen. Losses due

to mislaying or losing property cannot be deducted. If there is no positive proof that a theft occurred, all of the details and evidence should be presented. If the reasonable


inferences point to a theft, the deduction will be allowed. If the inferences point to a mysterious disappearance, the deduction will be disallowed. In this particular situation, the inferences would tend to point to a theft of the coat rather than mislaying the coat. Therefore, Jancie could take a theft loss for the coat. p. 6-10

12. The amount of the loss for the partial claim in 2002 is reduced by the $100 per event

floor and by the 10% of AGI floor for the 2002 taxable year. The loss in 2003 is reduced by 10% of the 2003 AGI. p. 6-10 and Example 11

13. The taxpayer may elect to treat a disaster area loss as having occurred in the taxable year

immediately preceding the taxable year in which the disaster actually occurred. Doing so provides immediate relief to disaster victims in the form of accelerated tax benefits. p. 6-11

14. The amount of the loss is the lesser of (1) the difference between the fair market value of

the property before the event and the fair market value of the property immediately after the event or (2) the adjusted basis of the property. Note that for personal use property this lesser of provision applies to both partial destruction and for complete destruction. For business or investment property, the lesser of rule applies only for partial destruction. p. 6-11

15. The loss is to business use property. Therefore, if the taxpayer does not file an insurance

claim, the loss need not be reduced by the proceeds that could have been received from the insurance company. p. 6-12

16. The cost of repairs can be used as a method for measuring the amount of a casualty loss if

the repairs are necessary to restore the property to its condition before the casualty, the amount spent for the repairs is not excessive, and the repairs do not extend beyond the damage suffered. In addition, the value of the property after the repairs must not, as a result of the repairs, exceed the value of the property immediately before the casualty. p. 6-12

17. The 10% of AGI floor applies to both the first and second year. The AGI of the first year

determines the 10% floor for that year. The AGI of the second year determines the 10% floor for that year. p. 6-12

18. The loss sustained on the duplex attributable to the rental unit would be a deduction for

adjusted gross income. The loss attributable to the personal use unit would be an itemized deduction and would be subject to the $100 and 10% of adjusted gross income floors. p. 6-14

19. By subjecting only the casualty loss in excess of casualty gains to a floor equal to 10% of

adjusted gross income, the taxpayer is given a loss deduction at least as great as the casualty gains included in the tax return. If the entire casualty loss were subject to the 10% of the adjusted gross income floor, the casualty loss deduction could be less than the casualty gains. For example, if the taxpayer has $4,000 of casualty gains, $6,000 of casualty losses, and adjusted gross income of $100,000, the taxpayer will in effect have a casualty loss deduction of $4,000 since the loss offsets the gain. If the whole casualty loss were subject to 10% of adjusted gross income, the deduction would be zero. pp. 6-14 and 6-15

20. Monte should be concerned with the following tax issues:

• Has a casualty loss been sustained?


• The amount of the loss.

• The year the loss should be claimed.

• What effect will the $40,000 expenditure have on Monte’s adjusted basis for the land?

pp. 6-8 to 6-11 21. The tax issues for Fred and Diane are as follows:

• Is this a casualty loss?

• What is the amount of the loss? • The basis for computing the loss.

• The decline in fair market value.

• Replacement cost.

• What is the effect of the $100 and 10% floors?

pp. 6-8 to 6-13 22. All costs incident to the development of an experimental or pilot model, a plant process,

a product, a formula, an invention, or similar property, and the improvement of already existing property of the type mentioned. The term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotion. p. 6-16

23. The following three alternatives are allowed for research and experimental expenditures:

• Expense in the year paid or incurred.

• Defer and amortize over not less than 60 months.

• Capitalize and deduct when the project is abandoned or deemed worthless. p. 6-17 24. The tax issues for Power and Light are as follows:

• Are the expenditures for environmental impact studies research and experimental expenditures?

• Are the expenditures for environmental impact studies deductible business expenses?

pp. 6-16 and 6-17 25. A net operating loss generally must be carried back initially to the fifth year preceding

the year of the loss for tax years 2001 and 2002. Unused amounts (after applying the loss


against income of the five carryback years) are carried forward chronologically for up to twenty years, beginning with the first year subsequent to the year of the loss.

For tax years other than 2001 and 2002, the normal carryback period is 2 years rather than 5 years. However, if the loss is attributable to a casualty or theft loss, the carryback period is three years, rather than two years. The three-year carryback rule also applies to NOLs attributable to Presidentially declared disasters which are incurred by a small business or by a taxpayer engaged in farming. A taxpayer may elect to forgo the five-year carryback period for 2001 and 2002 in favor of the general two or three-year carryback periods. A taxpayer may elect to forgo the carryback period (i.e., 2, 3, or 5 years) and, thus, only carry forward the NOL. pp. 6-19 and 6-20

PROBLEMS 26. Willis, Hoffman Maloney, and Raabe, CPAs

5191 Natorp Boulevard Mason, OH 45040

January 29, 2003 Mr. John Johnson 100 Tyler Lane Erie, PA 16563 Dear Mr. Johnson: This letter is to inform you of the possibility of taking a bad debt deduction. Your loan to Sara is a business bad debt; therefore, you are allowed to take a bad debt deduction for partial worthlessness. You will be able to take a bad debt deduction in the current year of $26,000 ($30,000 – $4,000) based on partial worthlessness. Should you need more information or need to clarify anything, please contact me. Sincerely, John J. Jones, CPA Partner


TAX FILE MEMORANDUM January 29, 2003 From: John J. Jones Subject: Bad Debt Deduction John Johnson’s $30,000 loan to Sara is a business bad debt. Therefore, a bad debt deduction is allowed for partial worthlessness of $26,000 (i.e., Sara has filed for bankruptcy and John has been notified that the most he can expect to receive is $4,000). John will be able to claim an additional bad debt deduction in the year when a final settlement has been reached with respect to the loan assuming the amount collected is less than $4,000. pp. 6-3 to 6-5

27. In 2002, Sue has no bad debt deduction. No attempt has been made to collect on the loan

and no deduction is allowed for partial worthless of a nonbusiness bad debt. In 2003, Sue is allowed a bad debt deduction of $5,000 ($6,000 debt – $1,000 received). The loss will be treated as a short-term capital loss and, as such, can only be used to offset only $3,000 of ordinary income if Sue does not have any capital gains. pp. 6-4 and 6-5

28. Because the bad debt is a business bad debt, Green may deduct based on partial

worthlessness. The business bad debt is treated as an ordinary loss rather than a short-term capital loss (the treatment for nonbusiness bad debts). Therefore, Green’s bad debt deduction is $52,500 ($75,000 X .70). pp. 6-4 and 6-5

29. Salary $180,000 § 1244 ordinary loss (95,000) Short-term capital gain on § 1244 stock $25,000 Short-term capital loss (nonbusiness bad debt) (7,000) Net short-term capital gain 18,000 Adjusted gross income $103,000 pp. 6-4 to 6-7 30. Sell all of the stock in the current year:

Current year’s AGI Salary $80,000 Ordinary loss (§ 1244 limit) (50,000) Long-term capital gain $ 8,000 Long-term capital loss (30,000) ($80,000 – $50,000) Long-term capital loss (limit) (3,000) AGI $27,000 Next year’s AGI Salary $90,000 Long-term capital gain $10,000 Long-term capital loss carryover (19,000) ($30,000 – $11,000)


Long-term capital loss (limit) (3,000) AGI $87,000 Total AGI Current year $ 27,000 Next year 87,000 Total $114,000

Sell half of the stock this year and half next year:

Current year’s AGI Salary $80,000 Ordinary loss (§ 1244 stock) (40,000) Long-term capital gain 8,000 AGI $48,000 Next year’s AGI Salary $90,000 Ordinary loss (§ 1244 stock) (40,000) Long-term capital gain 10,000 AGI $60,000 Total AGI Current year $ 48,000 Next year 60,000 Total $108,000

Mary’s combined AGI for the two years is lower if she sells half of her § 1244 stock this

year and half next year. pp. 6-6 and 6-7 31. Business casualties Antique shop ($100,000 – $125,000) (Note 1) ($25,000) Antique clock ($2,000 – $1,500) 500 Antique table ($3,000 – $4,000) (1,000) Antique organ ($20,000 – $5,000) 15,000 Casualty loss ($10,500) AGI before casualty $100,000

Casualty loss (10,500) AGI $ 89,500

Note 1 The antique shop is business property. However, since it was only damaged rather than

destroyed, the casualty loss is the lesser of:

• Adjusted basis $250,000 • Value decline (FMV before of $300,000 – FMV after of $175,000) 125,000

So, the casualty loss before insurance is $125,000. pp. 6-8 to 6-16

32. The loss is a business loss. Therefore, for the farm building and the farm equipment that were completely destroyed, the adjusted basis is used in calculating the amount of the


casualty loss. For the barn that was damaged, the lower of the adjusted basis or the decline in value is used in calculating the amount of the casualty.

Building ($90,000 – $70,000) $20,000 Equipment ($40,000 – $25,000) 15,000 Barn ($50,000 – $25,000) 25,000 Total loss $60,000 Because the President declared the area a disaster area, Olaf and Anna could claim the loss on last year’s return or on the current year’s tax return. If Olaf applies the loss to the prior year, the benefit of the loss will be at a tax rate of 27%. If the loss is applied to the current year, the benefit will be at a tax rate of 35% rather than 27% and thus, provide a tax savings of $21,000 ($60,000 X 35%) rather than $16,200 ($60,000 X 27%). Olaf should include the loss on the current year’s tax return, since the tax savings is $4,800 ($21,000 – $16,200) greater. pp. 6-8 to 6-16

33. Business Personal Portion Portion Total (50%) (50%) Cost $800,000 $400,000 $400,000 Depreciation (150,000) (150,000) -0- Adjusted basis $650,000 $250,000 $400,000 Loss on building: Loss ($900,000 – $200,000) $700,000 $250,000* $350,000 Less: Insurance reimbursement $600,000 (300,000) (300,000) Loss (gain) ($ 50,000) $ 50,000 Business contents loss $220,000 Less: Insurance recovery (175,000) Loss $ 45,000 AGI before effects of accident $100,000 Business gain—building 50,000 Business loss—contents (45,000) AGI $105,000 Personal casualty loss—building $ 50,000 Personal casualty loss—contents ($65,000 – $65,000) -0- Less: $100 per event floor (100) 10% of AGI floor (10% X $105,000) (10,500) Itemized deduction $ 39,400 *Adjusted basis is less than the decline in FMV of $350,000 ($700,000 X 50%). pp. 6-8 to 6-16


34. Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard

Mason, OH 45040

January 26, 2003 Mr. Sam Smith 450 Colonel’s Way Warrensburg, MO 64093 Dear Mr. Smith: This letter is to inform you of the tax and cash flow consequences of filing a claim versus not filing a claim with your insurance company for reimbursement for damages to your business use car. If an insurance claim is filed, you will have a taxable gain of $2,000 computed as follows: Insurance recovery $12,000 Less: Lesser of adjusted basis of $10,000 or decline of FMV of $12,000 (10,000) Gain $ 2,000 This will produce a net cash flow of $11,300 computed as follows:

Insurance reimbursement received $12,000 Less: Tax on gain (35% X $2,000) (700)

Net cash flow $11,300 If no insurance claim is filed, you will have a deductible loss of $10,000 which will reduce your tax liability by $3,500 (35% X $10,000). The net cash benefit resulting from filing an insurance reimbursement claim would be $7,800 ($11,300 – $3,500).

Should you need more information or need to clarify anything, please contact me. Sincerely, John J. Jones, CPA Partner TAX FILE MEMORANDUM January 26, 2003 From: John J. Jones Subject: Tax consequences for Sam Smith if he does not file an insurance claim for

reimbursement for damages to his business use car


If an insurance claim is filed, Sam will have taxable gain of $2,000 computed as follows: Insurance recovery $12,000 Less: Lesser of adjusted basis of $10,000 or decline of FMV of $12,000 (10,000) Gain $ 2,000 This will produce a net cash flow of $11,300 computed as follows:

Insurance reimbursement received $12,000 Less: Tax on gain (35% X $2,000) (700) Net cash flow $11,300 If no insurance claim is filed, Sam will have a deductible loss of $10,000 which will reduce his tax liability by $3,500 (35% X $10,000). In my correspondence with Sam, I pointed out the net cash benefit from filing an insurance reimbursement claim would be $7,800 ($11,300 – $3,500). pp. 6-11 to 6-13

35. a. 2003 Salaries $225,000 Materials 92,000 Insurance 12,000 Utilities 9,000 Equipment depreciation 15,000 Total expenses $353,000

Cost of inspection of materials for quality control ($5,000), promotion expenses ($23,000), and cost of market survey ($4,000) are not included as research and experimental expenditures.

2004 Salaries $300,000

Materials 85,000 Insurance 12,000 Utilities 10,000 Equipment depreciation 15,000 Total expenses $422,000

Cost of inspection of materials for quality control ($7,000) and advertising ($20,000) are not included as research and experimental expenditures.

2005 No deduction based on data provided. b. The research and experimental expenditures are amortized over a 60-month

period beginning with the month in which the taxpayer first realizes benefits from the experimental expenditures (i.e., July 2005 for Blue Corporation). The monthly amortization is $12,917 ($775,000 ÷ 60)

2003 No deduction for research and experimental expenditures.


2004 No deduction for research and experimental expenditures. 2005 Deduction for research and experimental expenditures: $12,917 X 6 months = $77,502

pp. 6-16 to 6-18

36. Salary $40,000

Interest income 1,000 Business bad debt (2,000) Nonbusiness bad debt (short-term capital loss) ($6,000) Short-term capital loss (3,000) Total short-term capital loss ($9,000) Long-term capital gain 4,000 Net short-term capital loss ($5,000) Capital loss limit (3,000) Adjusted gross income $36,000

pp. 6-3 to 6-5

37. Salary $40,000

Interest income 1,000 Business bad debt (2,000) Nonbusiness bad debt ($ 6,000) Short-term capital loss (3,000) Total short-term capital loss ($ 9,000) Short-term capital gain* 10,000 Net short-term capital gain 1,000 Long-term capital gain $ 4,000 Long-term capital loss* (1,000) Net long-term capital gain 3,000 Adjusted gross income $43,000 *Personal casualty gains exceed personal casualty losses ($10,000 – $1,000 = $9,000) and therefore, all personal casualty items are treated as capital gains and losses.

pp. 6-3 to 6-5 and 6-14 to 6-16 CUMULATIVE PROBLEMS 38. Salary $200,000 Rental income $50,000 Less: Rental expenses (30,000) 20,000 Casualty loss on rental property (8,000) 2002 NOL carryover (6,000) Ordinary loss on § 1244 stock (50,000) Short-term capital loss § 1244 stock ($10,000)

Nonbusiness bad debt (5,000) Total short-term capital loss ($15,000) Usage limit (3,000)


AGI $153,000 Less: Itemized deductions Personal casualty loss $25,000 Less: $100 floor (100) Less: 10% AGI (15,300) (9,600) Other itemized deductions (15,000) Loss on stolen bonds $30,000 Less: 2% AGI (3,060) (26,940) Total itemized deductions (51,540) Less: Personal exemption ($3,050 X 1) (3,050) Taxable income $ 98,410 Tax on $98,410 (Note 1) $ 23,751 Income tax withholdings (30,000) Net tax payable (or refund due) ($ 6,249) Notes (1) Alan’s filing status is that of a single taxpayer Tax on $68,800 $14,868 ($98,410 – $68,800) X 30% 8,883 $23,751 39. Part 1—Tax Computation Salary and bonus ($50,000 + $1,000) $51,000 Typing service business net receipts ($20,000 – $24,580) (4,580) Interest income (Note 1) -0- Dividends 700 Life insurance proceeds (Note 2) -0- Gift (Note 3) -0- Bingo prize 100 Alimony 10,000 Nonbusiness bad debt (Note 4) (2,100) Adjusted gross income $55,120 Less: Itemized deductions Home mortgage interest $9,000 Casualty loss: Lesser of adjusted basis of $4,000 or FMV of $5,000 $4,000 Less: Insurance proceeds (1,500) $2,500 Less: $100 floor (100) Less: 10% AGI floor (5,512) -0- Total itemized deductions (9,000) Less: Personal exemption (3,000) Taxable income $43,120 Tax on taxable income (from Tax Table) $ 7,990 Less: Federal income tax withheld and estimated tax payments ($8,500 + $1,000) (9,500) Net tax payable (or refund due) for 2002 ($ 1,510)


Notes (1) The $800 interest on the City of San Jose bonds is tax-exempt. (2) Life insurance proceeds of $60,000 payable as the result of the death of Jane’s

sister are excludible from gross income. (3) The $5,000 gift from Jane’s aunt is excludible from gross income. (4) The $2,100 loss on the loan to her friend, Joan Jensen, is deductible as a

nonbusiness bad debt (i.e., short-term capital loss). See the tax return solution beginning on page 6-19 of the Solutions Manual.

Part 2—Tax Planning Salary and bonus $51,000 Gross receipts from business $26,000 Less: Office rent $7,000

Supplies 4,840 Utilities and telephone 5,148 Wages 5,500 Payroll taxes 550 Equipment rentals 3,300 (26,338)

Net business income (338) Dividend 700 Alimony 10,000 Adjusted gross income $61,362 Less: Itemized deductions $ 9,000

Personal exemption 3,050 (12,050) Taxable income $49,312 Tax on $49,312 [$3,960 + .27($49,312 – $28,400)] $ 9,606 Less: Federal income tax withheld (8,500) Net tax payable (or refund due) $ 1,106 Jane would need to make estimated tax payments of $1,106 because the Federal income

tax withholdings are expected to be less than the tax liability.


Willis, Hoffman, Maloney, and Raabe, CPAs 5191 Natorp Boulevard

Mason, OH 45040

January 26, 2003 Ms. Jane Smith 2020 Oakcrest Road San Jose, CA 95134 Dear Ms. Smith: This letter is in response to your request concerning the minimum amount of estimated tax you will have to pay for 2003, so that you will not have to pay any additional tax upon filing your 2003 Federal income tax return. Based on the 2003 estimates you provided to us, we have determined that your estimated tax payments for the 2003 calendar year should total $1,106. This estimate is based on the following computation.

Salary and bonus $51,000 Gross receipts from business $26,000 Less:

Office rent $7,000 Supplies 4,840 Utilities and telephone 5,148 Wages 5,500 Payroll taxes 550 Equipment rentals 3,300 (26,338)

Net business income (338) Dividend 700 Alimony 10,000 Adjusted gross income $61,362 Less:

Itemized deductions $ 9,000 Personal exemption 3,050 (12,050)

Taxable income $49,312 Tax on $49,312 $ 9,606 Less: Federal income tax withheld (8,500) Net tax payable $ 1,106

Should you need more information or need to clarify anything, please contact me. Sincerely yours, John J. Jones, CPA Partner


TAX FILE MEMORANDUM January 10, 2003 From: John J. Jones Subject: Jane Smith’s 2003 estimated tax Today I talked with Jane Smith concerning her 2003 estimated tax. She wanted to know the minimum amount of estimated tax she would have to pay for the calendar year 2003 so that she would not have to pay any additional tax upon filing her 2003 Federal income tax return. The following projections for 2003 were provided by Jane Smith:

Items remaining unchanged from 2002: Salary—$50,000 Christmas bonus—$1,000 Interest expense on home mortgage—$9,000 Dividends—$700 Alimony—$10,000

Gross receipts from typing services—$26,000 Office rent will remain unchanged—$7,000 All other expenses for typing services will increase 10% from 2002:

Supplies—$4,400 in 2002; $4,840 in 2003 Utilities and telephone—$4,680 in 2002; $5,148 in 2003 Wages—$5,000 in 2002; $5,500 in 2003 Payroll taxes—$500 in 2002; $550 in 2003 Equipment rentals—$3,000 in 2002; $3,300 in 2003

The following 2002 items will not recur in 2003:

Life insurance proceeds—$60,000 Gift—$5,000 Bingo winnings—$100 Bad debt—$2,100 Stolen silverware

Based on these estimates for 2003, Jane Smith should make 2003 estimated tax payments totaling $1,106. The determination was made as follows:

Salary and bonus $51,000 Gross receipts from business $26,000 Less:

Office rent $7,000 Supplies 4,840 Utilities and telephone 5,148 Wages 5,500 Payroll taxes 550 Equipment rentals 3,300 (26,338)

Net business income (338) Dividend 700


Alimony 10,000 Adjusted gross income $61,362 Less:

Itemized deductions $ 9,000 Personal exemption 3,050 (12,050) Taxable income $49,312 Tax on $49,312 $ 9,606 Less: Federal income tax withheld (8,500) Net tax payable $ 1,106


39.


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Documents

CHAPTER 6 DEDUCTIONS AND LOSSES: CERTAIN BUSINESS …isu.indstate.edu/acharmo/smpdf/CH06.pdf · BUSINESS EXPENSES AND LOSSES SOLUTIONS TO PROBLEM MATERIALS ... Deductions and Losses: