Acct553 W4 You Decide Memo

T, an individual taxpayer, plans to incorporate his farming and ranching activities, currently operated as a sole proprietorship. His primary purpose of incorporating is to transfer a portion of his ownership in land to his son and daughter. T believes that gifts of stock rather than land will keep his business intact. Included in the property he plans to transfer is machinery purchased two years earlier.

- Dividends received from Spouse A’s investment into Company E is also included as income since the IRS states that dividends from investments is also taxable.

2- If Jonathan ultimately doesn’t agree with the finding of the IRS, what are his options?

In order to determining how the $300,000 fee was received as Federal income on the part Mrs. John Smith, we first have to determine the requirements for income. According to Code Sec. 61(a)(1) of the Internal Revenue Code (IRC) “gross income includes all income from whatever source derived,” that is including the following items: compensation for services, including fees, commission, fringe benefits and similar items (Intuit-TaxAlmanac, 2006). In John’s case, income received from fees that were paid by his client from rendered services will meet that requirement of gross income. Under Section

SFAS No. 87 “Employers’ Accounting for Pensions” maintains that pension information should be prepared on the accrual basis and retained three fundamental aspects of past pension accounting: 1. delaying recognition of certain events, 2. Reporting net cost, and 3. offsetting assets and liabilities” (Schroeder, Clark, & Cathey, "Pensions and Other Postretirement Benefits," 2011). “The components of pension costs reflect different aspects of the benefits earned by employees and the method of financing those benefits by the employer. The following are required to be included in the net pension cost recognized by the employer sponsoring a defined benefits pension plan: 1. Service cost, 2. Interest cost, 3. Return on plan assets, 4. Amortization of unrecognized prior service cost, 5. Amortization of gains and losses, 6. Amortization of the unrecognized net obligation or unrecognized net asset at the date of the initial application of SFAS No. 87” (Schroeder, Clark, & Cathey, "Pensions and Other Postretirement Benefits," 2011).

The $300,000 that John received for services rendered from the court case is considered earned income for the year. The $300,000 is earned income for John Smith and will be reported as gross income either on Schedule C of the individual return or as gross income on the LLC return. “US code defines gross income in 26 U.S.C § 61 states except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.”

Salta Company installs a manufacturing machine in its factory at the beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5 years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the machine produces 84,500 units of product. Determine the machines’ second year depreciation under the units of production method:

I would imagine that since this activity is done with the intention, and expectation, to gain a profit it would qualify as a business. The main indicator is that you would like to purchase new equipment with the intent to make more money. The IRS would use the “3 of 5”

Also, I sell handcrafted jewelry which earned me $20,000 last year. Do my business activities constitute a trade or business for federal income tax purposes? Or, is this just a hobby? Should I establish a separate trade or business to get tax benefits on these earnings? Does it make any difference that I use my car primarily for transporting my jewelry to different shops around town? Finally, I think I can earn more money if John were willing to invest $15,000 for new jewelry making equipment since my original equipment, which cost $10,000 five years ago, is almost obsolete. Does this make sense from a tax perspective?

IRC 183 states in part “a hobby can not generate a tax loss that can

The reason this distinction is important is in the scenario where a loss may be incurred. If this activity is classified as a business any losses may be deducted whereas if it were classified as a hobby, the losses would not be able to be deducted. Also, when classified as a business she is allowed more deductions such as first year expenses and auto expenses. As a hobby she may only deduct expenses up to as much as her income. Expenses in excess of hobby income are considered personal losses.

Natalie estimates that all of her baking equipment will have a useful life of 5 years or 60 months and no salvage value. (Assume Natalie decides to record a full month’s worth of depreciation, regardless of when the equipment was obtained by the business.)

Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a publicly held company. During the course of the audit, Barber discovered that DGF has been making illegal bribes to foreign government officials to obtain business, and he reported the matter to senior management and the board of directors of DGF.

Depreciation is the decline in the future economic benefits of a depreciable non-current asset through wear and tear and obsolescence. It is an allocation process. It can be calculated by two main methods, each reflecting in a distinct prospect in the way the asset is used. Depreciation is to be treated as an estimated expense that does not set aside cash for the replacement of a non-current asset. In determining the cost of acquisition of the lathes, any capital expenditure made must be added to the purchase price of the lathes. This amount will be considered as the historical cost and will be used in calculating the depreciation expense

During a preliminary meeting with the financial controller a few days ago, the tax principal of Excellent Tax Services