Taxes in the Financial Statements
GAAP
What is Generally accepted accounting principles
For tax purposes, an increase in wealth that has been realized.
What is Income?
MACRS
What is Modified accelerated cost recovery system
A deduction is permitted if a business account receivable subsequently becomes partially or completely worthless.
What is bad debt?
The gain from the sale or exchange of a capital asset.
What is a Capital Gain?
The book tax expense that relates to the current reporting period’s net income and is actually payable to the appropriate governmental agencies for the current period.
What is Current tax expense ?
A method of accounting that recognizes expenses as incurred and income as earned.
Accrual Method
The system by which taxpayers are allowed to recover their investment in an asset by reducing their taxable income by the asset’s cost or initial basis.
What is Cost Recovery?
Income from interest, dividends, rentals, royalties, capital gains, or other investment sources.
What is Portfolio Income?
The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.
What is fair market value?
A reduction in the book tax expense that relates to the current reporting period’s net income but will not be realized until a future reporting period.
What is Deferred tax benefit ?
The annual increase in the cash surrender value of a life insurance policy:
Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
Expenditures paid or incurred prior to the beginning of the business that would have been deductible as an ordinary and necessary business expense if business operations had begun.
What are Startup expenditures ?
Investors would offset these losses against other types of income and therefore avoid paying income taxes on this income.
What are Tax Shelters?
The reputation and other unidentifiable intangible assets of a company.
What is Goodwill?
Hot, Inc.'s primary competitor is Cold, Inc. When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?
Scale the deferred tax assets and liabilities by total sales or total assets.
To compare the tax amounts properly, it is useful to scale these numbers by total assets or revenues. Raw values may not be informative and a focus on only a portion of the tax information may be misleading.
Calculate David's AGI
For the current year, David has wages of $80,000 and the following property transactions:
Long-term capital gain $9,000
Short-term capital loss (12,000)
Loss on sale of camper (2,000)
(Camper was used for family vacations)
What is $77,000?
The loss from the sale of the camper is personal and therefore is not deductible
On May 30, 2019, Jane purchased a factory building to use for her business. In August 2020, Jane paid $300,000 for improvements to the building. Determine Jane's total deduction with respect to the building improvements for 2020.
What is $2,889 ?
MACRS cost recovery ($300,000 × 0.00963); 39-year real property; month 8
Jim had a car accident in 2020 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. He received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim's AGI for the year is $60,000, determine his deductible loss on the car.
What is $19,000 ?
The car is used for business use; hence, the amount of the loss is $40,000 (adjusted basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not subject to the $100 floor per event and the 10%-of-AGI limitation. So the loss is $19,000.
Albert purchased a tract of land for $140,000 in 2017 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2020 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2020?
What is -0-?
Neither gain nor loss is recognized by Albert associated with the perceived fluctuations in the value of the land. The requisite realization event (i.e., sale or other disposition) has not occurred.
Seacrest, Inc., earns book net income before tax of $500,000. In computing its book income, Seacrest expenses $50,000 more in warranty expense for book purposes than it is allowed to deduct for tax purposes. Seacrest records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% and no valuation allowance is required, calculate Seacrest's deferred income tax asset reported on its GAAP financial statements.
What is $10,500
Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2020. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2021. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:
What is $1,200 in 2020.
Tan Company acquires a new machine (10-year property) on January 15, 2020, at a cost of $200,000. Tan also acquires another new machine (7-year property) on November 5, 2020, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2020.
What is $25,716 ?
MACRS cost recovery ($200,000 × 0.10)$20,000
MACRS cost recovery ($40,000 × 0.1429) 5,716
When Kate died, she owned a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000.
Calculate The heir's adjusted basis and Kate's Final Deductions.
What is 130,000 and 15,000?
The heir receives a $30,000 step-up in basis ($130,000 FMV – $100,000 decedent's basis). A $15,000 passive activity loss deduction is allowed on the decedent's final return ($45,000 suspended loss – $30,000 step-up in basis).
During 2020, Jack and LaTonya, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker's commissions and other selling expenses totaling $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence?
What is $400,000 ?
Section 121 is an exclusion provision rather than a postponement provision. Thus, the adjusted basis of the new residence is the cost of $400,000.