1. Rebecca is a calendar year taxpayer who operates a business.
She made the following
business related expenditures on December 31, 2020. Indicate the amount of these payments that
she may deduct in 2020 under the cash method of accounting.
a. $18,000 to an advertising consultant who spent most of May 2021 developing a new
ad campaign for the business.
b. $12,000 for property taxes on her factory. These taxes relate to the first six months of
2021.
c. $30,000 for a 15 month lease beginning on December 1, 2020.
2. John bought 600 shares of Intel stock on October 18, 2011 for $18 per share plus a $1,250
commission he paid to his broker. On December 12, 2020, he sells the shares for $25.75 per
share. He also incurs a $1,500 fee for this transaction.
a. What is John’s adjusted basis in the 600 shares of Intel stock?
b. What amount does John realize when he sells the 600 shares?
c. What is the gain/loss for John on the sale of his Intel stock? What is the character
of the gain/loss?
3. Matt and Meg Comer are married. They do not have any children. Matt works as a
history professor at a local university and earns a salary of $95,000. Meg works at the
same university. She earns $105,000 a year. Matt and Meg earned $7,500 in interest
income from a certificate of deposit during 2020. The couple does not itemize
deductions. Other than salary and interest, the Comers’ only other source of income is
from the disposition of various capital assets.
a. What is the Comers’ tax liability for 2020 if they report the following capital gains and
losses for the year?
Stock Date Acquired Date Sold Basis Proceeds
White Inc. 1/5/2005 5/6/2020 7,700 20,700
Black Corporation 7/3/2012 9/4/2020 10,700 9,800
Red Corporation 4/6/2020 10/1/2020 12,500 19,100
Brown Inc. 12/9/2013 2/6/2020 17,500 13,200
Orange Inc. 9/2/2019 1/29/2020 7,900 6,450
4. Nick and Rachel Sutton own 250 shares of Cisco stock that they purchased in June 2012
for $60 a share. On December 21, 2020, Nick and Rachel sell the shares for $47 a share
to generate cash for the holidays.
Later, however, Nick and Rachel decide that Cisco might be a good long-term
investment. On January 10, 2021, the Suttons purchase 250 shares of Cisco stock for $49
a share.
What is the tax impact of the December 21 sale? What is the basis in the Cisco shares
purchased in 2021?
5. Your client owns a small business. This year, she sold business equipment with a
$275,000 initial tax/cost basis and $130,000 accumulated tax depreciation. She purchased
the equipment three years ago. Compute the realized gain or loss and provide the
character of the gain or loss if the amount realized on the sale was $310,000.
6. Jake’s Tax Consulting, a sole proprietorship, opened several years ago and reports the
following net §1231 gains and losses since it began business.
Year Net §1231 Gains/(Losses)
Year 1 $11,000
Year 2 (15,000)
Year 3 8,000
Year 4 (9,000)
Year 5 3,000
Year 6 (43,000)
Year 7 (current year) 89,000
What amount, if any, of the year 7 $89,000 net §1231 gain is treated as ordinary income?
7. Louis owns a small business. He generated $100,000 of income from the sale of
inventory during 2020. He also sold three non-inventory assets during the year. Compute
the income from Louis’ business assuming that:
a. The first sale resulted in $5,000 capital gain, the second sale resulted in a $18,000
capital loss, and the third sale resulted in a $7,500 Section 1231 gain.
b. The first sale resulted in a $45,000 capital loss, the second sale resulted in a
$20,000 Section 1231 loss, and the third sale resulted in a $36,000 capital gain.
8. Philip Jennings exchanges land he holds as an investment with Sarah Jones in a like-kind
exchange. Philip’s land has a $315,000 tax basis and a $510,000 FMV. Sarah’s land has a
$537,000 FMV and a $195,000 tax basis. Philip also transfers $27,000 cash to Sarah as
part of the exchange.
Compute Philip’s realized and recognized gain or loss and Philip’s tax basis in the new
asset.
Compute Sarah’s realized and recognized gain or loss and Sarah’s tax basis in the new
asset.
9. Susan’s filing status is head of household. For 2020, her taxable income is $390,000.
Included in this amount is the following investment income: $22,000 of long-term capital
gain and $17,000 of corporate bond interest. What is Susan’s tax liability for 2020?
1. Rebecca is a calendar year taxpayer who operates a business. She made the following
business related expenditures on December 31, 2020. Indicate the amount of these payments that
she may deduct in 2020 under the cash method of accounting.
a. $18,000 to an advertising consultant who spent most of May 2021 developing a new
ad campaign for the business.
$18,000
b. $12,000 for property taxes on her factory. These taxes relate to the first six months of
2021.
$12,000
c. $30,000 for a 15 month lease beginning on December 1, 2020.
$2,000 deduction on 2020 tax return
$24,000 deduction on 2021 tax return
$4,000 deduction on 2022 tax return
2. John bought 600 shares of Intel stock on October 18, 2011 for $18 per share plus a $1,250
commission he paid to his broker. On December 12, 2020, he sells the shares for $25.75 per
share. He also incurs a $1,500 fee for this transaction.
a. What is John’s adjusted basis in the 600 shares of Intel stock?
$12,050
b. What amount does John realize when he sells the 600 shares?
$13,950
c. What is the gain/loss for John on the sale of his Intel stock? What is the character
of the gain/loss?
$1,900 long-term capital gain
3. Matt and Meg Comer are married. They do not have any children. Matt works as a
history professor at a local university and earns a salary of $95,000. Meg works at the
same university. She earns $105,000 a year. Matt and Meg earned $7,500 in interest
income from a certificate of deposit during 2020. The couple does not itemize
deductions. Other than salary and interest, the Comers’ only other source of income is
from the disposition of various capital assets.
a. What is the Comers’ tax liability for 2020 if they report the following capital gains and
losses for the year?
Stock Date Acquired Date Sold Basis Proceeds Holding Gain/Loss
Period
White Inc. 1/5/2005 5/6/2020 7,700 20,700 Long 13,000
Black 7/3/2012 9/4/2020 10,700 9,800 Long (900)
Corporation
Red 4/6/2020 10/1/2020 12,500 19,100 Short 6,600
Corporation
Brown Inc. 12/9/2013 2/6/2020 17,500 13,200 Long (4,300)
Orange Inc. 9/2/2019 1/29/2020 7,900 6,450 Short (1,450)
Net Short-term = 5,150 short-term capital gain
Net Long-term = 7,800 long-term capital gain
Gross Income 220,450
Less: Above the Line 0
= AGI 220,450
Less: Standard Deduction (24,800)
= Taxable Income 195,650
7,800 of taxable income is preferred, taxed at 15% = 1,170 tax
187,850 of taxable income is ordinary = 33,243 tax
Total tax liability = 34,413
4. Nick and Rachel Sutton own 250 shares of Cisco stock that they purchased in June 2012
for $60 a share. On December 21, 2020, Nick and Rachel sell the shares for $47 a share
to generate cash for the holidays.
Later, however, Nick and Rachel decide that Cisco might be a good long-term
investment. On January 10, 2021, the Suttons purchase 250 shares of Cisco stock for $49
a share.
What is the tax impact of the December 21 sale? What is the basis in the Cisco shares
purchased in 2021?
Sale: Purchase:
Amount Realized 11,750 Purchase Price 12,250
Less: Basis (15,000) + Disallowed Loss 3,250
Realized Loss (3,250) = Basis in new shares 15,500
Recognized Loss 0
Disallowed loss is 3,250 due to wash sale rules
5. Your client owns a small business. This year, she sold business equipment with a
$275,000 initial tax/cost basis and $130,000 accumulated tax depreciation. She purchased
the equipment three years ago. Compute the realized gain or loss and provide the
character of the gain or loss if the amount realized on the sale was $310,000.
Adjusted Basis in Equipment:
Tax/Cost Basis 275,000
Less: Depreciation (130,000)
Adjusted Basis 145,000
Sale:
Amount Realized 310,000
Less: Adjusted Basis (145,000)
Realized Gain 165,000
130,000 of the gain is ordinary income due to depreciation recapture
35,000 of the gain is Section 1231 gain
6. Jake’s Tax Consulting, a sole proprietorship, opened several years ago and reports the
following net §1231 gains and losses since it began business.
Year Net §1231 Gains/(Losses)
Year 1 $11,000
Year 2 (15,000)
Year 3 8,000
Year 4 (9,000)
Year 5 3,000
Year 6 (43,000)
Year 7 (current year) 89,000
What amount, if any, of the year 7 $89,000 net §1231 gain is treated as ordinary income?
Nonrecaptured losses in 5-year look back period:
Year 2 4,000
Year 4 9,000
Year 6 43,000
Total Losses 56,000
Of the $89,000 net Section 1231 gain, $56,000 must be treated as ordinary income. The
remaining gain, $33,000, is treated as long-term capital gain.
7. Louis owns a small business. He generated $100,000 of income from the sale of
inventory during 2020. He also sold three non-inventory assets during the year. Compute
the income from Louis’ business assuming that:
a. The first sale resulted in $5,000 capital gain, the second sale resulted in a $18,000
capital loss, and the third sale resulted in a $7,500 Section 1231 gain.
Gross Income = $97,000. Louis has a $2,500 capital loss carryforward.
b. The first sale resulted in a $45,000 capital loss, the second sale resulted in a
$20,000 Section 1231 loss, and the third sale resulted in a $36,000 capital gain.
Gross income = $77,000. Louis has a $6,000 capital loss carryforward.
8. Philip Jennings exchanges land he holds as an investment with Sarah Jones in a like-kind
exchange. Philip’s land has a $315,000 tax basis and a $510,000 FMV. Sarah’s land has a
$537,000 FMV and a $195,000 tax basis. Philip also transfers $27,000 cash to Sarah as
part of the exchange.
Compute Philip’s realized and recognized gain or loss and Philip’s tax basis in the new
asset.
Amount Realized 537,000
Less: Adjusted Basis (342,000)
Realized Gain 195,000
Recognized Gain 0
Basis in new property = 342,000
Compute Sarah’s realized and recognized gain or loss and Sarah’s tax basis in the new
asset.
Amount Realized 537,000
Less: Adjusted Basis (195,000)
Realized Gain 342,000
Recognized Gain 27,000
Basis in new property = 195,000
9. Susan’s filing status is head of household. For 2020, her taxable income is $390,000.
Included in this amount is the following investment income: $22,000 of long-term capital
gain and $17,000 of corporate bond interest. What is Susan’s tax liability for 2020?
Taxable income = 390,000
22,000 is Preferred, taxed at 15% = 3,300 tax
368,000 is Ordinary, use table = 102,154 tax
Total tax liability = 105,454
