Income tax, ACT 4494 final exam help


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PROBLEMS (18 Points Total for Problems). Show and label all your work in a neat and
orderly manner.
PROBLEM 1 (10 Points)
David realized the following net Section 1231 gains and (losses) for the years 2010 through 2014
as shown below. He did not realize any Section 1231 gains or losses for the years before 2010.
Net Section 1231 Gain or (Loss)
Please remember to show and label your work.
David realized a net Section 1231 gain in 2015 of $72,000. How much of the net Section 1231
gain of $72,000 in 2015 is
(1) treated as ordinary income $______________________
(2) treated as though it were a long-term capital gain $______________________
PROBLEM 2 (8 Points)
Ann bought depreciable equipment and placed it in service in her business in January in a year in
which bonus depreciation was NOT allowed. The asset cost $40,000. Assume that it is 5-year
property under the Modified Accelerated Cost Recovery System (MACRS) and the cost recovery
percentage for the first year is 20.00 percent. She is using the prescribed MACRS procedures.
She did not buy any other depreciable assets for her business during that year. She elected to
deduct $12,000 of the $40,000 cost under Section 179. She estimates that the salvage value of
the equipment is $4,000 at the end of its 5-year useful life.
What is her cost recovery deduction for (1) the year she purchased the depreciable equipment (do
not include the Section 179 deduction—just determine the cost recovery deduction under the
MACRS under Section 168) and (2) the second year show owned and used the depreciable
equipment in her business? Please show and label all work.
(1) Cost recovery deduction for the first year $__________________________
(2) Cost recovery deduction for the second year $_________________________
ESSAYS (42 Points Total for Essays—7 Essay Questions @ 6 Points Each)
Please be sure to answer the essay questions thoroughly. Use complete sentences and correct
grammar and spelling.
ESSAY 1 (6 Points)
Jones Corporation bought land and an old building for a total cost of $500,000 with $400,000
assigned to the land and $100,000 assigned to the old building. Jones Corporation wants to build
a new building on the land. Jones Corporation incurred and paid a cost of $60,000 to raze (tear
down) the old building to prepare the land to build a new building on it. What is the tax
treatment of the $60,000 cost to raze the old building?
ESSAY 2 (6 Points)
Assume that a taxpayer wants to maximize business deductions for the current year. The
taxpayer purchased several items of depreciable personal property that are eligible for the
Section 179 deduction. Some of the items of depreciable personal property are 5-year property
under MACRS and such items are 7-year property under MACRS. Each of the items is eligible
for the Section 179 deduction. None of the assets is a vehicle. The taxpayer purchased the assets
as used property. Used assets are NOT eligible for bonus depreciation.
Explain how the taxpayer should choose which items on which to claim the Section 179
deduction if the taxpayer is subject to limits that prevent the taxpayer from deducting all of the
eligible items under Section 179.
ESSAY 3 (4 Points)
Explain the basic differences and similarities between a defined benefit pension plan and a
defined contribution pension plan.
SHORT ESSAY 4 (6 Points)
Explain the basic differences and similarities between contributions to a traditional IRA and
contributions to a Roth IRA.
SHORT ESSAY 5 (6 Points)
Explain the basic differences and similarities between distributions from a traditional IRA and
distributions from a Roth IRA. Are distributions from a Roth IRA ever taxable? If so, under what
SHORT ESSAY 6 (6 Points)
Define and explain in detail the following types of income: (1) active income, (2) portfolio
income, and (3) passive income. Include an example of each of the three kinds of income in your
SHORT ESSAY 7 (6 Points)
List and briefly explain any three (3) of the nontaxable fringe benefits an employer may provide
to its employees.

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