Tax Problems

24. LO.2 Oak Corporation holds the following general business credit carryovers.
2009 $ 5,000
2010 15,000
2011 6,000
2012 19,000
Total carryovers $45,000
If Oak’s general business credit generated by 2013 activities equals $36,000 and the total credit allowed during the current year is $60,000 (based on tax liability), what amounts of the current general business credit and carryovers are utilized against the 2013 income tax liability? What is the amount of unused credit carried forward to 2014?

25. LO.3, 7 Paul Chaing (4522 Fargo Street, Geneva, IL 60134) acquires a qualifying historic structure for $350,000 (excluding the cost of the land) and plans to substantially rehabilitate the structure. He is planning to spend either $320,000 or $380,000 on rehabilitation expenditures. Write a letter to Paul and a memo for the tax research files explaining the following for the two alternative expenditures.

a. The computation that determines the rehabilitation expenditures tax credit available.
b. The effect of the credit on Paul’s adjusted basis in the property.
c. The cash-flow differences as a result of the tax consequences related to his expenditure choice.

26. LO.3 Green Corporation hires six individuals on January 4, 2013, all of whom qualify for the work opportunity credit. Three of these individuals receive wages of $8,500 during 2013, and each individual works more than 400 hours during the year. The other three individuals each work 300 hours and receive wages of $5,000 during the year.
a. Calculate the amount of Green’s work opportunity credit for 2013.
b. If Green pays total wages of $140,000 to its employees during the year, how much of this amount is deductible in 2013, assuming that the work opportunity credit is taken?

27. LO.3 In March 2013, Sparrow Corporation hired three individuals—Austin, Adam, and
Angela—all of whom are certified as long-term family assistance recipients. Each of these individuals earned $11,000 during 2013. Only Adam continued to work for Sparrow in 2014, and he earned $13,500 then.
In March 2014, Sparrow hired Sam, who also is certified as a long-term family assistance recipient. During 2014, Sam earned $12,000.
a. Compute Sparrow’s work opportunity credit for 2013 and 2014.
b. If Sparrow pays total wages to its employees of $325,000 in 2013 and $342,000 in 2014, what is the entity’s wage deduction in 2013 and 2014?

28. LO.3, 7 Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom’s research-credit base amount for the year is $32,800.
a. Determine Tom’s incremental research activities credit for the year.
b. Tom is in the 25% tax bracket. Determine which approach to the research expenditures and the research activities credit (other than capitalization and subsequent amortization) would provide the greater tax benefit.

29. LO.3 Ahmed Zinna (16 Southside Drive, Charlotte, NC 28204), one of your clients, owns two retail establishments in downtown Charlotte and has come to you seeking advice concerning the tax consequences of complying with the Americans with Disabilities
Act. He understands that he needs to install various features at his stores (e.g., ramps, doorways, and restrooms that are handicap accessible) to make them more accessible to disabled individuals. He asks whether any tax credits are available to help offset the cost of the necessary changes. He estimates the cost of the planned changes to his facilities as follows.
Location Projected Cost
Calvin Street $22,000
Stowe Avenue 8,500
Ahmed reminds you that the Calvin Street store was constructed in 2004, and that the
Stowe Avenue store is in a building that was constructed in 1947. Ahmed operates his business as a sole proprietorship and has approximately eight employees at each location.
Write a letter to Ahmed in which you summarize your conclusions concerning the tax consequences of his proposed capital improvements.

30. LO.3 Jimmy Limited added elevators, access ramps, and several technological improvements to the 1923 building in which it operates a consulting business. Jimmy is an LLC with five full-time employees and about $3 million in gross receipts. The improvements were made to improve access to the building. Expenditures for the accessibility project totaled $7,500. Compute Jimmy’s disabled access credit for the tax year.

31. LO.3 Employees at the Hobby Hut requested that the company provide assistance in locating professional-quality child care services during business hours. The Hut, a C corporation, contracts with the local Kiddie Kare agency to provide Hut employees with information about child care providers’ location, pricing, customer ratings, and operating hours. This year, the Hut paid $15,000 under this contract, which includes a flat fee for a guaranteed number of employee contacts and a per-service charge after that. Compute the Hobby Hut’s credit for employer-provided child care for the tax year.

32. LO.4 Which of the following individuals qualify for the earned income credit?
a. Thomas is single, 21 years old, with no qualifying children. His income consists of $9,000 in wages.
b. Shannon, who is 27 years old, maintains a household for a dependent 11-year-old son and is eligible for head-of-household tax rates. Her income consists of $16,050 of salary and $50 of taxable interest (Shannon’s AGI is $16,100).
c. Keith and Susan, both age 30, are married and file a joint return. Keith and Susan have no dependents. Their combined income consists of $28,500 of salary and $100 of taxable interest (their AGI is $28,600).
d. Colin is a 26-year-old, self-supporting, single taxpayer. He has no qualifying children and generates earnings of $9,000.

33. LO.4, 7 Cooper National is incorporated in Alabama. It generated a $5 million profit on its overseas operations this year. Cooper paid the following to various other countries.
• $1 million in income taxes.
• $1.5 million in value added taxes.
What are Cooper’s alternatives as to the treatment of these tax payments on its U.S. Federal income tax returns?

34. LO.4 Jimenez Enterprises is incorporated in Arkansas. It generated a $5 million profit on its overseas operations this year. Jimenez paid $1 million in income taxes to various countries on these profits. Jimenez’s marginal Federal income tax rate is 35%. Compute the Jimenez foreign tax credit and carryovers for the year.

35. LO.4 Same as Problem 34, except that Jimenez paid $2 million in income taxes to other countries.

36. LO.4 Ann and Bill were on the list of a local adoption agency for several years seeking to adopt a child. Finally, in 2012, good news comes their way and an adoption seems imminent.
They pay qualified adoption expenses of $4,000 in 2012 and $11,000 in 2013.
The adoption becomes final in 2013. Ann and Bill always file a joint income tax return.
a. Determine the amount of the adoption expenses credit available to Ann and Bill if their combined annual income is $100,000. What year(s) will they benefit from the credit?
b. If Ann and Bill’s modified AGI in 2012 and 2013 is $200,000, calculate the amount of the adoption expenses credit.

37. LO.4 Durell and Earline are married, file a joint return, and claim dependency exemptions for their two children, ages 5 years and 6 months. They also claim Earline’s 18- year-old son from a previous marriage as a dependent. Durell and Earline’s combined
AGI is $68,000.
a. Compute Durell and Earline’s child tax credit.
b. Assume the same facts, except that Durell and Earline’s combined AGI is $122,000.
Compute their child tax credit.

38. LO.4 Paul and Karen are married, and both are employed (Paul earned $44,000 and
Karen earned $9,000). Paul and Karen have two dependent children, both under the age of 13. Paul and Karen pay $3,800 to various unrelated parties to care for their children while they are working. Assuming that Paul and Karen file a joint return, what, if any, is their tax credit for child and dependent care expenses?

39. LO.4 Jim and Mary Jean are married and have two dependent children under the age of 13. Both parents are gainfully employed and earn salaries as follows: $16,000 (Jim) and $5,200 (Mary Jean). To care for their children while they work, Jim and Mary Jean pay Eleanor (Jim’s mother) $5,600. Eleanor does not qualify as a dependent of Jim and
Mary Jean. Jim and Mary Jean file a joint Federal income tax return. Compute their credit for child and dependent care expenses.

40. LO.4, 7 Bernadette, a longtime client of yours, is an architect and the president of the local Rotary chapter. To keep up to date with the latest developments in her profession, she attends continuing education seminars offered by the architecture school at State
University. This year, Bernadette spends $2,000 on course tuition to attend such seminars.
She also spends another $400 on architecture books during the year. Bernadette’s son is a senior majoring in engineering at the University of the Midwest.

During the calendar year, Bernadette’s son incurs the following expenses: $8,200 for tuition ($4,100 per semester) and $750 for books and course materials. Bernadette’s son, whom she claims as a dependent, lives at home while attending school full-time. Bernadette is married, files a joint return, and has a combined AGI with her husband Morrie of $110,000.
a. Calculate Bernadette’s education tax credit.
b. In her capacity as president of the local Rotary chapter, Bernadette has asked you to present a 20- to 30-minute speech outlining the different ways the tax law helps defray (1) the cost of higher education and (2) the cost of continuing education once someone is in the workforce. Prepare an outline of possible topics for presentation.
A tentative title for your presentation is “How Can the Tax Law Help Pay for
College and Continuing Professional Education?”