ACC 287 Lecture Notes - Lecture 3: Sole Proprietorship, Gross Income, Internal Revenue Service

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18 May 2018

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1. progressive

2. regressive

3. proportional

4. Marginal

5. Average

6. effective tax rates

What are the two types of tax paying entities?

1. Individuals

2. C corps

What are the 5 types of flow through entities?

1. sole proprietorship

2. partnerships

3. s corps

4. LLC's or LLP's

5. Trusts

What are the 3 components of Gross Income?

1. Earned income

2. Investments

3. Flow through

What is the formula for taxable income and tax due?

Total income

Minus: Exclusions

Gross Income

Minus: Deductions

Exemptions

Taxable Income

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Times: Tax Rate

Income Tax Before Credits

Minus: Tax Credits

Total Tax Liability

Minus: Prepayments

Balance Due or Refunds

What are the two levels of taxable income for a C corp?

1. C corp taxable income

2. tax imposed when dividends are distributed to shareholders and taxed at their level

How do you mitigate the first level of tax ( taxable income) in a C corp?

paying shareholder employee salaries and bonuses(sketch)

How do you mitigate the 2nd level of tax ((dividend income) in a C corp?

DRD or reduced rate for dividends recieved

What is the tax calculation for a corp/

Total Income

Minus: Exclusions

Equals: Gross income

Minus: Business Deductions

Equals: Taxable income

Are flow through entities taxed on an entity level?

How are flow through entities taxed?

Income is allocated to shareholder, partner, member levels then taxed

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Document Summary

1. progressive: regressive, proportional, marginal, average, effective tax rates. What are the two types of tax paying entities: individuals, c corps. What are the 5 types of flow through entities: sole proprietorship, partnerships, s corps, llc"s or llp"s, trusts. What are the 3 components of gross income: earned income, investments, flow through. What are the two levels of taxable income for a c corp: c corp taxable income, tax imposed when dividends are distributed to shareholders and taxed at their level. How do you mitigate the first level of tax ( taxable income) in a c corp? paying shareholder employee salaries and bonuses(sketch) What is the tax calculation for a corp/ Are flow through entities taxed on an entity level? no. Income is allocated to shareholder, partner, member levels then taxed. Add: partner contribution (cash or property + share of debt)

Related Questions

1. Jeremy earned $260,000 in salary and $9,000 in interest income during the year. Jeremy has two qualifying dependent children who live with him. He qualifies to file as head of household and has $20,500 in itemized deductions. Neither of his dependents qualifies for the child tax credit. (use the tax rate schedules.). (Do not round intermediate calculations. Round "Income tax liability" to 2 decimal places.)

a. Use the 2017 tax rate schedules to determine Jeremyâs taxes due.

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability	?

2. b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of $12,500. What is Jeremyâs tax liability including the tax on the capital gain?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability	?

3. c. Assume the original facts except that Jeremy had only $3,000 in itemized deductions. What is Jeremyâs total income tax liability?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Taxable income	$0
	Income tax liability ?

4. Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the coupleâs joint year 2 tax return and each spouseâs separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewellaâs separate year 3 tax return understated Crewellaâs self-employment income, causing the joint return year 2 tax liability to be understated by $13,300 and Crewellaâs year 3 separate return tax liability to be understated by $6,700. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.)

a. What amount of tax can the IRS require Jasper to pay for the Dahvillâs year 2 joint return?

Amount of tax: ?

5. Trudy and Ben file a joint return. Trudyâs reported income creates $200 of income tax and Benâs reported income creates $180 of income tax. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for?

a. $50

b. $180

c. $380

d. $430

6. James received $25,000 of compensation from his employer and he received $1,900 of interest from a municipal bond. What is the amount of Jamesâs gross income?

a. $0

b. $1,900

c. $25,000

d. $26,900

7. Which of the following is a from AGI deduction?

a. moving expenses

b. rental and royalty expenses

c. business expenses for a self employed taxpayer

d. charitable contributions

8.Which of the following is not an itemized deduction?

a. personal casualty losses

b. medical expenses

c. personal property taxes for a personal use automobile

d. charitable contributions

e. none of the choices are correct

9. In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the coupleâs only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Julietteâs most favorable filing status for year 1?

a. head of household

b. single

c. married filing separately

d. qualifying widow

10. Caroline and her husband Chris got divorced in May of this year. During the year, Caroline provided all the support for herself and her 23-year-old child Hans (not a full-time student) who lived in the same home as Caroline for the entire year. Hans earned $29,000 this year. What is the Carolineâs most favorable filing status for the year?

a. head of household

b. married filing separately

c. surviving spouse single

maroonleopard66

5. The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parentsâ home for three months of the year and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support.

d. Assume the original facts except that Jason earned $5,500 while working part-time and used this amount for his support. Can the Samsons claim Jason as their dependent?

yes or no?

6. [The following information applies to the questions displayed below.]

Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the coupleâs joint year 2 tax return and each spouseâs separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewellaâs separate year 3 tax return understated Crewellaâs self-employment income, causing the joint return year 2 tax liability to be understated by $9,800 and Crewellaâs year 3 separate return tax liability to be understated by $9,500. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.)

a. What amount of tax can the IRS require Jasper to pay for the Dahvillâs year 2 joint return?

Amount of tax: ?

7. Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the coupleâs joint year 2 tax return and each spouseâs separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewellaâs separate year 3 tax return understated Crewellaâs self-employment income, causing the joint return year 2 tax liability to be understated by $9,800 and Crewellaâs year 3 separate return tax liability to be understated by $9,500. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. (Leave no cells blank - be certain to enter "0" wherever required.)

b. What amount of tax can the IRS require Jasper to pay for Crewellaâs year 3 separate tax return?

Amount of tax: ?

8. Camille Sikorski was divorced last year. She currently provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camilleâs home, which she owns, for the entire year, and Camille paid for all the costs of maintaining the home. She received a salary of $80,000 and contributed $5,200 of it to a qualified retirement account (a for AGI deduction). She also received $11,000 of alimony from her former husband. Finally, Camille paid $3,700 of expenditures that qualified as itemized deductions.

a. What is Camilleâs taxable income?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Total deductions from AGI	$0
	Taxable income	?

9. Camille Sikorski was divorced last year. She currently provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camilleâs home, which she owns, for the entire year, and Camille paid for all the costs of maintaining the home. She received a salary of $80,000 and contributed $5,200 of it to a qualified retirement account (a for AGI deduction). She also received $11,000 of alimony from her former husband. Finally, Camille paid $3,700 of expenditures that qualified as itemized deductions.

b. What would Camilleâs taxable income be if she incurred $11,300 of itemized deductions instead of $3,700?

cription		Amount
(1)	Gross income		?
(2)	For AGI deductions		?
(3)	Adjusted gross income		$0
(4)	Standard deduction		?
(5)	Itemized deductions		?
(6)	?		?
(7)	Personal and dependency exemptions		?
(8)	Total deductions from AGI		$0
	Taxable income ?

10. Camille Sikorski was divorced last year. She currently provides a home for her 15-year-old daughter, Kaly, and 18-year-old son, Parker. Both children lived in Camilleâs home, which she owns, for the entire year, and Camille paid for all the costs of maintaining the home. She received a salary of $80,000 and contributed $5,200 of it to a qualified retirement account (a for AGI deduction). She also received $11,000 of alimony from her former husband. Finally, Camille paid $3,700 of expenditures that qualified as itemized deductions.

c. Assume the original facts but now suppose Camilleâs daughter, Kaly, is 25 years old and a full-time student. Kalyâs gross income for the year was $6,300. Kaly provided $3,780 of her own support, and Camille provided $6,300 of support. What is Camilleâs taxable income?

	Description	Amount
(1)	Gross income	?
(2)	For AGI deductions	?
(3)	Adjusted gross income	$0
(4)	Standard deduction	?
(5)	Itemized deductions	?
(6)	?	?
(7)	Personal and dependency exemptions	?
(8)	Total deductions from AGI	$0
	Taxable income	?

pinkeel861

Please show me steps on how to solve these problems!..

1. Isabel, a calendar-year taxpayer, uses the cash method ofaccounting for her sole proprietorship. In late December shereceived a $26,000 bill from her accountant for consulting servicesrelated to her small business. Isabel can pay the $26,000 billanytime before January 30 of next year without penalty. Assume hermarginal tax rate is 40 percent this year and next year, and thatshe can earn an after-tax rate of return of 10 percent on herinvestments.

1-a. What is the after-tax cost if Isabel pays the $26,000 bill inJanuary?

(PV of single payment at various ARR: [0%- 1year: 0.909], [10%-2year: 0.826])

2. Daniel is considering selling two stocks that have not faredwell over recent years. A friend recently informed Daniel that oneof his stocks has a special designation, which allows him to treata loss up to $30,000 on this stock as an ordinary loss rather thanthe typical capital loss. Daniel figures that he has a loss of$36,000 on each stock. If Daniel%u2019s marginal tax rate is 35percent and he has $72,000 of other capital gains (taxed at 15percent), what is the tax savings from the special taxtreatment?

3. Matteo, who is single and has no dependents, was planning onspending the weekend repairing his car. On Friday, Matteo%u2019semployer called and offered him $200 in overtime pay if he wouldagree to work over the weekend. Matteo could get his car repairedover the weekend at Autofix for $148. If Matteo works over theweekend, he will have to pay the $148 to have his car repaired, buthe will earn $200. Assume Matteo pays tax at a flat 15 percentrate. (Do notround intermediate calculations. Round your answers to 2 decimalplaces.)

3-a. Considering monetary considerations only, should Matteo workor repair the car if the $148 he must pay to have his car fixed isnot deductible? work or repair?

3-b. Given the answerin a-1 above, by how much is Matteo better or worse off?

3-c. Considering monetaryconsiderations only, should Matteo work or repair the car if the$148 he must pay to have his car fixed is deductible for AGI? workor repair?

3-d. Given the answer in b-1 above, byhow much is Matteo better or worse off?

4. Marc and Michelle are married and earned salariesthis year of $64,000 and $12,000, respectively. In addition totheir salaries, they received interest of $350 from municipal bondsand $500 from corporate bonds. Marc and Michelle also paid $2,500of qualifying moving expenses, and Marc paid alimony to a priorspouse in the amount of $1,500. Marc and Michelle have a10-year-old son, Matthew, who lived with them throughout the entireyear. Thus, Marc and Michelle are allowed to claim a $1,000 childtax credit for Matthew. Marc and Michelle paid $6,000 ofexpenditures that qualify as itemized deductions and they had atotal of $5,500 in federal income taxes withheld from theirpaychecks during the course of the year.

4-a. What is Marc and Michelle%u2019sgross income?

4-b.What is Marc andMichelle%u2019s adjusted gross income?

4-c.What is the totalamount of Marc and Michelle%u2019s deductions from AGI?

4-d.What is Marc andMichelle%u2019s taxable income?

4-e.What is Marc andMichelle%u2019s taxes payable or refund due for the year?(Round your answer to two decimal places.)

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ACC 287 Lecture Notes - Lecture 3: Sole Proprietorship, Gross Income, Internal Revenue Service

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