Application Problems
- Mr. C, a self employed consultant, uses a room of his home as a business office. This room represents 10 percent of the home’s square footage. This year, Mr. C incurred the following expenses in connection with his home:
| Home mortgage interest | $12,980 |
| Property tax on residence | 2,200 |
| Homeowner’s insurance | 1,475 |
| Utilities | 2,100 |
| Furnace repairs | 300 |
Mr. C purchased the home in 1998 for $225,000. For MACRS depreciation purposes, he allocated $185,000 to the building and $40,000 to the land.
Compute his home office deduction for the year.
- This year, Ms. W’s sole proprietorship, WW Bookstore, generated $120,000 net profit. In addition, Ms. W recognized a $17,000 gain on the sale of business furniture and shelving, all of which was recaptured as ordinary income. The business checking account earned $960 interest income.
Which of these income items are subject to self employment tax?
- Ms. J is a self employed attorney. This year, her net profit exceeded $250,000, which put her in the 35 percent tax bracket. Early in the year, Ms. J hired Mr. B as a paralegal and paid him a salary of $33,000.
Compute the employer payroll tax on Mr. B’s salary.
- KLMN Partnership’s financial records show the following:
| Gross receipts from sales | $670,000 |
| Cost of goods sold | (460,000 |
| Operating expenses | (96,800 |
| Business meals and entertainment | (6,240 |
| Realized loss on sale of equipment | (13,500 |
| Charitable contribution | (1,500 |
| Distribution to partners | (10,000 |
Compute KLMN’s ordinary business income for the year. (Remember the deduction limitation for business meals and entertainment and only ordinary expenses are deducted in deriving ordinary business income.)
- Refer to the facts in the preceding problem. Mr. T is a 10 percent general partner in the KLMN Partnership. During the year, he received a $1,000 cash distribution from KLMN.
Compute Mr. T’s share of partnership ordinary income and separately stated items.
- This year, individual X and individual Y formed XY Partnership. X contributed $50,000 cash, and Y contributed business assets with a $50,000 FMV. Y’s adjusted basis in these assets was only $10,000. The partnership agreement provides that income and loss will be divided equally between the two partners. Partnership operations for the year generated a $42,000 loss.
How much loss may each partner deduct currently and what basis will each partner have in her interest at the beginning of the next year?
- Mr. B and Ms. G are equal general partners in the BG Partnership. Mr. B receives a $4,000 monthly guaranteed payment for services. This year, BG Partnership generated $95,000 business profit (before consideration of Mr. B’s guaranteed payments).
a) Compute each partner’s distributive share of BG’s ordinary business income.
b) Compute each partner’s net earnings from self employment (the amount subject to self employment tax).
c) How would your answers change if BG’s profit was only $32,000 instead of $95,000?
8.Zelda owns a 50% general interest in YZ Partnership. At the beginning of the current year, the adjusted basis in her partnership interest was $95,000. In the current year, YZ generated a $110,000 business loss, earned $15,000 dividend and interest income on its investments and recognized a $7,000 capital gain. YZ also made a $5,000 distribution to Zelda. Compute Zelda’s adjusted basis in the partnership at the end of the year.