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Deferred Assets and Liabilities

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Deferred Assets and Liabilities

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Overview

Complete a four-part assessment in which you will compute values, prepare journal entries, and provide written explanations.

Note: An accounting cycle requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order.
Companies must present financial information to the investment community that provides a clear picture of present and potential tax obligations and tax benefits.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

Competency 1: Define financial accounting conventions to support practice as a professional in the field.

*Apply tax rates to temporary differences.

*Analyze carryback and carryforward issues.

* Competency 3: Evaluate economic resources for an enterprise.

* Apply procedures for a capital lease.* Apply procedures for a sales-type lease.

Deferred Assets and Liabilities

Context

Companies spend a considerable amount of time and effort to minimize their income tax payments—and with good reason. Income taxes are major costs of doing business for most business organizations, regardless of the form of ownership.

Leasing of an asset has been around for many years, especially in the private sector. Individuals have utilized this form of asset acquisition for the purchase of realty, personal property, and even services. It has allowed them to acquire assets for little or no money down, use the asset for a determinable period of time, and then simply return the asset and terminate the lease agreement.

Today, leasing of capital assets is the fastest growing form of capital investment for corporations. It allows businesses to acquire large high-dollar assets with little or no responsibility for their maintenance and allows them to trade those assets in for newer models at the end of the lease. Consequently, accounting procedures for handling these transactions has undergone significant change over the last 25 years.

Questions to Consider

As you prepare to complete this assessment, you may want to think about other related issues to deepen your understanding or broaden your viewpoint. You are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of your professional community. Note that these questions are for your own development and exploration and do not need to be completed or submitted as part of your assessment.

* What are the guidelines for determining the most advantageous type of lease for an asset?* What is the advantage of an operating lease versus a capital lease?* What is the difference between a financial lease and a capital lease?
Resources

Deferred Assets and Liabilities

FACTORS THAT IMPACT TAXES

Economic factors: Microeconomic factors (e.g., elasticity, type of entity)Macroeconomic factors (e.g., inflation, political systems)
Social factors:Demographics (e.g., aging population, birth rates)Standard of living (e.g., crime rates, education)Savings rates (e.g., incentives, cost of living)
Political factors:Government revenue (e.g., income tax, sales tax)Type of tax (e.g., progressive, regressive)Income redistribution (e.g., political system, types)
Legal/regulatory factors:Justification for tax system (e.g., tax avoidance, tax evasion)Types of entities (e.g., partnership, corporation)Economic (e.g., employees vs. subcontractors, insurance deduction)
Emerging trend factors:Economic (e.g., command vs. market economies, trade agreements)Technology (e.g., information access, compliance)Intangible taxation (e.g., changing laws, changing regulations)

CREDITS

Subject Matter Expert:Timothy Price

Interactive Design:Tara Schiller

Instructional Designer: JodiRae Foss

Project Manager:Lon Wiessenberger

Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357–1383. Liabilities/Equities – Chapter 13.* This chapter reviews accounting for leases.
Harrington, C., Smith, W., & Trippeer, D. (2012). Deferred tax assets and liabilities: Tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 1–18. Retrieved from http://www.aabri.com/manuscripts/121240.pdf
Spiceland, J. D., Sepe, J. F., Nelson, M. W., & Thomas, W. B. (2016). Intermediate Accounting (8th ed.). New York, NY: McGraw-Hill Education.Chapter 15, “Leases,” pages 852–931.This chapter focuses on issues related to liabilities arising in connection with leases, and in particular those that produce such debtor/creditor relationships, referred to as capital leases. Pay particular attention to leases that do not produce a debtor/creditor relationship, but instead are accounted for as rental agreements.
Chapter 16, “Accounting for Income Taxes,” pages 932–995.This chapter presents accounting issues that focus on accounting and reporting for the effects of income taxes, particularly defining and illustrating temporary differences which are the basis for recognizing deferred tax assets and deferred tax liabilities.

Deferred Assets and Liabilities

Assessment Instructions

Note: Do not proceed with this assessment until you have reviewed faculty feedback on Assessment 4.
This assessment has four parts. The Assessment 5 Data Sheet contains the necessary information for all four parts. Record your answers in the Assessment 5 Template. Submit the completed template for this assessment. Both documents are linked in the Resources under the Required Resources heading.

Imagine your boss has handed you four client files to complete by EOD (end of day.) However, several of the clients require written explanations of your reasoning.

Part 1: Temporary Differences
Use the information for Part 1 in the Assessment 5 Data Sheet to complete the following:

Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2015, 2016, and 2017.
Assuming there were no temporary differences prior to 2015, indicate how deferred taxes will be reported on the 2017 balance sheet. Sharp’s product warranty is for 12 months.
Explain your reasoning. Use the blank area in the template following the journal entries to make your notes.
Prepare the income tax expense section of the income statement for 2017, beginning with the line “Pretax financial income.”
Where appropriate, show all calculations leading to the final solution.

Part 2: Carryback and Carryforward
Use the information in Part 2 of the Assessment 5 Data Sheet to complete the following:

Prepare the journal entries for the years 2015 to 2019 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Bryan Clark Company uses the carryback provision.
All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.
Where appropriate, show all calculations leading to the final solution.

Deferred Assets and Liabilities

Part 3: Lessee Entries: Capital Lease
Use the information in Part 3 of the Assessment 5 Data Sheet to complete the following:

Identify and explain the type of lease. Use the blank area in the template following the journal entries to make your notes.
Compute the present value of the minimum lease payments.
Prepare all necessary journal entries for Southern for this lease through January 1, 2016.
Where appropriate, show all calculations leading to the final solution.

Part 4: Lessee-Lessor Entries: Sales-Type Lease
Use the information in Part 4 of the Assessment 5 Data Sheet to complete the following:

Discuss the nature of this lease to Capital and Hinton. Use the blank area in the template following the journal entries to make your notes.
Calculate the amount of the annual rental payment.Prepare all the necessary journal entries for Hinton for 2015.
Prepare all the necessary journal entries for Capital for 2015.
Where appropriate, show all calculations leading to the final solution.

Deferred Assets and Liabilities

Assessment Data Sheet

Part 1: Temporary Differences

Sharp Company has two temporary differences between its income tax expense and income taxes payable. The information is shown below.

	2015	2016	2017
Pretax financial income	$420,000	$455,000	$472,500
Excess depreciation expense on tax return	(15,000)	(20,000)	(5,000)
Excess warranty expense in financial income	10,000	5,000	4,000
Taxable income	$415,000	$440,000	$471,500

The income tax rate for all years is 40%.

Part 2: Carryback and Carryforward

The pretax financial income (or loss) figures for Bryan Clark Company are as follows.

2013	$ 80,000
2014	125,000
2015	40,000
2016	(80,000)
2017	(190,000)
2018	60,000
2019	50,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2013 and 2014 and a 40% tax rate for the remaining years.

Part 3: Lessee Entries: Capital Lease

On January 1, 2015, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,336 at the beginning of each year, starting January 1, 2015. The machine has an estimated useful life of 12 years.

The machine reverts back to the lessor at the end of the lease term. Southern uses the straight-line method of depreciation for all of its plant assets. Southern’s incremental borrowing rate is 6%, and the Lessor’s implicit rate is unknown.

Part 4: Lessee-Lessor Entries: Sales-Type Lease

On January 1, 2015, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease.

The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
Equal rental payments are due on January 1 of each year, beginning in 2015.
The fair value of the equipment on January 1, 2015, is $225,000, and its cost is $180,000.
The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis.
Capital set the annual rental to ensure an 11% rate of return. Hinton’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Below is a partial answer to the above homework questions by one of our writers. If you are interested in a custom non plagiarized top quality answer, click order now to place your order.

Deferred Assets and Liabilities

Part 1: Temporary Differences

Date	Account Title	Debit	Credit
	Section 1: Journal entries
2015	Income tax expense	168,000
	Deferred tax asset (10,000 x 40%)	4,000
	Deferred tax liability (15,000 x 40%)		6,000
	Income tax payable (415,000 x 40%)		166,000

2016	Income tax expense	182,000
	Deferred tax asset (5,000 x 40%)	2,000
	Deferred tax liability (20,000 x 40%)		8,000
	Income tax payable (440,000 x 40%)		176,000

2017	Income tax expense	189,000
	Deferred tax asset (4,000 x 40%)	1,600
	Deferred tax liability (5,000 x 40%)		2,000
	Income tax payable (471,500 x 40%)		188,600

	Section 2: Balance sheet entries
	Current asset
	Deferred tax asset (4000+2000+1600)	7,600

	Long-term liability
	Deferred tax liability (6000+8000+2000)	16,000

	Section 3: Income tax expense
	Pretax income	472,500
Less:	Income tax expenses	188,600
	Net deferred tax	400
	Net income post tax	283,500

Explanation:

2015

Deferred tax asset = 10,000 x 40% = 4000

Deferred tax liability 15,000 x 40% = 6000

Income tax payable 415,000 x 40% = 166,000

2016

Income tax expense

Deferred tax asset 5,000 x 40% = 2000

Deferred tax liability 20,000 x 40% = 8000

Income tax payable 440,000 x 40% = 176,000

2017

Deferred tax asset = 4,000 x 40% = 1600

Deferred tax liability = 5,000 x 40% = 2000

Income tax payable = 471,500 x 40% = 188,600

Part 2: Carryback and Carryforward

	Date	Account Title	Debit	Credit
1	2015	Income Tax Expense	$16,000
2		Income Tax Payable		$16,000
3	2016	Income Tax Refund Receivable	$36,000
4		Benefit Due to Loss Carryback		$36,000
5	2017	Income Tax Refund Receivable	$16,000
6		Benefit Due to Loss Carryback		$16,000
7		Deferred Tax Asset	$60,000
8		Benefit Due to Loss Carryforward		$60,000
9	2018	Income Tax Expense	$24,000
10		Deferred Tax Asset		$24,000
11	2019	Income Tax Expense	$20,000
12		Deferred Tax Asset		$20,000

Calculations

1. Income tax expense

40,000 x 40%

= $16,000

3. Income tax refund receivable

80,000 x 45%

= $36,000

5. Income tax refund receivable

40,000 x 40%

= $16,000

7. Deferred Tax Asset

[(190,000 – 40,000) x 40%]

= $60,000

9. Income Tax Expense

(60,000 x 40%)

= $24,000

11. Income Tax Expense

50,000*40%

= $20,000

Part 3: Lessee Entries: Capital Lease

Date	Account Title	Debit	Credit
Jan 2015	Leased equipment	$135,250
	Lease liability		$135,250

Jan 2015	Lease liability	$17,336
	Cash		$17,336

Jan 2015	Depreciation	$13,525
	Accumulated depreciation		$13,525

Jan 2016	Lease liability	$10,261
	Interest expense	$7,075
	Cash		$17,336

Explanation:

The lease can be considered a capital lease. This is because the lease life exceeds 75% of the asset’s life. According to FASB, a capital lease may meet either of the following criteria:

The lease life is more than 75% of asset’s life.
Ownership transfer is done at the end of the lease
Present value is higher than 90% of the asset’s fair value
The leasee has an option to buy the lease asset below market value once the lease has expired.

Given that the lease life exceeds 75% of asset’s life, it is considered a capital lease. The calculations are provided as below.

10/12 x 100 = 83.3%

Equipment is capitalized at the minimum of fair value and present value of the lease payments. However, there is no fair value given and thus present value of minimum lease payments is used.

Depreciation calculation:

= Capitalized amount / Life of project

= 135,250 / 10

= $13,525

Part 4: Lessee-Lessor Entries: Sales-Type Lease

Date	Account Title	Debit	Credit
	Lessor Accounts
	Lease receivables	225,000
	Equipment		225,000

	Installment received
	Cash	31,224
	Lease receivable		31,224


	Hilton’s Accounts
	Leased asset equipment	225,000
	Lease liability		225,000

	Depreciation	14,062.5
	Accumulated depreciation		14,062.5

Explanation:

No interest factor is considered because payment for the lease is made on 1^st January. This means that interest has not accumulated.

The type of lease in this case is a capital lease. This is because the lease term is equivalent to 75% of its economic life or more. To calculate 75% of the lease term, the following calculation is done.

12/16 x 100 = 75%

Given that the lease period is 12 years while economic life is 16 years, it means that the lease period is 75%……..

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Federal Income Tax System

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Federal Income Tax System

Overview
Analyze official rules and instructions of th Federal Income Tax System to determine an individual’s tax liability and complete a basic tax return.
Note: Completing a tax return requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in this assessment will result in
incorrect entries in future assessments. Do not complete Assessment 2 until you have submitted and received faculty feedback for Assessment 1.

Federal Income Tax System

Using an official primary source to obtain answers to tax questions is an essential academic skill and step toward financial literacy.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
Competency 1: Analyze the background of the federal income tax system.
o Provide evidence of requirements for a tax return from an official primary source.
o Determine whether filing a return is mandatory for a scenario.
o Determine filing status.
o Determine filing cost for an e-return.
Competency 2: Analyze the basics of individual income tax return preparation.
o Analyze official rules, instructions, and tax tables to determine the tax owed.
o Analyze official rules, instructions, and tax tables to determine the amount of a refund.

Federal Income Tax System

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Context
“The art of taxation consists in so plucking the goose to obtain the largest amount of feathers with the least possible amount of hissing.” — Jean-Baptiste Colbert, French Minister of Finance from 1665 to 1683 under the rule of King Louis XIV. If the scenario described in Colbert’s quote seems familiar, it is probably because it is repeated annually by the millions of U.S. citizens who are obligated to pay homage to the Internal Revenue Service by remitting many of their hard-earned
dollars because they underpaid Uncle Sam throughout the prior tax year. The federal tax system is a huge structural machine that seems more complex each year.
Try to keep the hissing down as we begin to pluck the feathers off the goose one at a time.

Reference
Quotegarden.com. (n.d.). Quotations about taxes. Retrieved from http://www.quotegarden.com/taxes.html

Question to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

Federal Income Tax System

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Until what age can a parent claim a child as a dependent?
How much money does a person have to earn to trigger the filing requirement?
Is it necessary to purchase tax software to calculate every return?

Resources
The following resources are required to complete the assessment.
Internet Resources
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
IRS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to taxn questions.
Download the appropriate forms and publications from the IRS Web site to ncomplete this assessment.
IRS.gov. (n.d.). Retrieved from http://www.irs.gov/
IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1
IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu

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Redistributive Tax System

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Redistributive Tax System

Supply-side economists hold the belief that the introduction of a redistributive tax system would go against the goal of expanding the long-term economic growth over time. Their explanation is that the redistributive tax system would improve the disposable income of the low-income earners. This would have the effect of making the low-income earners more comfortable with working at lower wages, making the goal of expanding economic growth difficult to achieve.

A tax designed to alter the distribution of income or wealth. In practice, the redistribution is usually in the direction of greater equality, but history has recorded rulers who have used taxation to redistribute in their own favour and hence to increase inequality. A system of lump-sum taxation under which some consumers pay positive taxes while others receive subsidies is redistributive: it reduces income inequality if the subsidies are received by low-income consumers and positive taxes are paid by high-income consumers. The redistributive effect of the tax system can only be found by considering the net effect of all taxes; the redistributive effect of government intervention in total must take into account all transfers and taxes.

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Sole Proprietor Income Deductions

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Sole Proprietor Income Deductions

Analyze official rules and instructions to complete a Schedule C and related required tax forms, to reflect income and deductions related to self-employment as a sole proprietor.

Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 2 until you have submitted and received faculty feedback for

Assessment 1.

The use of Schedule C is required when the individual’s business is not incorporated or formed as a partnership or limited liability company.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Analyze the background of the federal income tax system.o Analyze official information to identify tax forms required for a sole proprietorship

• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze official rules and instructions to determine eligible business tax credits.o Analyze official rules and instructions to determine eligible deductions.o Analyze official rules and instructions to correctly compute SE tax and SE deduction.o Interpret official rules and instructions to record correct entries on all tax forms.

Sole Proprietor Income Deductions

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Context

“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” — Ronald Reagan.

If an individual is searching for a tax strategy to offset his or her income from a primary job, being self-employed on the side is quite possibly one of the best options, along with being a real estate property owner or an investor. Each of these has the advantage of allowing an individual to reduce current income by any losses suffered from freelancing, renting out property, or investing.

However, the individual takes on additional work for the filing process. Schedule C must be completed, a task that requires an individual to know much more about the tax rules for recognizing income and maximizing expenses than many persons are willing to invest the time to research.

Question to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

• What are the financial advantages of self-employment?• Can a person have multiple Schedule Cs?• What are the financial implications of hiring employees versus independent contractors?

Resources
The following resources are required to complete the assessment.

Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
RS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions.

Download the appropriate forms and publications from the IRS Web site to complete this assessment.• IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu

Suggested Resources

FORM 1040: SCHEDULE C SELF-EMPLOYED BUSINESS INCOME
Taxpayers who attribute a large portion of their taxable income to operating a self-employment business or trade must complete Schedule C to determine the presence of a business income or loss. The income from this endeavor is netted with related ordinary and necessary business expenses to calculate the increase or decrease in AGI that result from the self-employed trade or business.

In addition to completing and filing Schedule A with the taxpayers Form 1040, it may be necessary to file Schedule SE (Self-employment Tax), as well as Forms 8829 (Expenses for Business Use of Your Home) and 4562 (Depreciation and Amortization).

• J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return. Hoboken, NJ: Wiley.

• J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return. Hoboken, NJ: Wiley.

• Herman, T. (2014, February 16). Home-office deduction simplified. The Wall Street Journal, p. 2.

• Flynn, K. E., Belak, P., & Soltis, G. (2014). Understanding individual tax compliance: Advanced deductions and related issues. Journal of Business Case Studies, 10(4), 425–440

• Korb, P. J., & Williams, J. L. (2014). Simplified option versus regular method for home office deductions. The CPA Journal, 84(12), 36–39.

• Intuit Inc. (2015, January 26). Intuit’s QuickBooks Online Self-Employed integrates with Stripe, simplifying tax reporting for on-demand economy workers [Press release]. Business Wire.

• Everett, J. O., Hennig, C. J., Raabe, W. A., & Sonnier, B. M. (2013). Tax planning opportunities for individual net operating losses. Journal of Taxation, 119(3), 108–116.

Sole Proprietor Income Deductions

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Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.• lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html• IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.

o The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.

Assessment Instructions

1.Calculating correct entries for self-employment requires significant research. For those are who self-employed, entries from self-employment tax forms are necessary to complete the 1040 form.

For this assessment, use information and publications from IRS.gov and the other IRS resources linked in the Resources under the Required Resources heading to research the regulations and complete the appropriate self-employment schedules, based on the provided scenario.

Sole Proprietor Income Deductions

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Complete the following:

• Read the information provided in the scenario below.

• Download the appropriate forms and publications from IRS.gov to complete this assessment.

• Complete the entries on tax forms required for a sole proprietorship return.

• Analyze official rules and instructions to correctly compute SE tax and SE deduction.o 1040sc.o 1040sse.

• Determine whether Jacob’s business is eligible for any tax credits.o Is Jacob’s business eligible to use the Work Opportunity Credit and Disabled Access Credit?

• Determine eligible business deductions.

• Interpret official rules and instructions to record correct entries on all related self-employed schedules.

• Submit the tax forms.

Scenario
Jacob Weaver is a contractor operating as a sole proprietorship (EIN 99-3456789).
• 2016 net income: $133,000.

• Clients owe him a total of $53,000 for work completed in 2016.

• 2016 estimated tax payments: $25,000.

• Jacob and Taylor bought their first house in 2016.

• He is using a bedroom in his house as a home office. The room is 15′ x14′.

• He has one half-time employee, Martin, who had been unemployed since returning from Afghanistan and is disabled.o Martin worked for Jacob for 20 hours a week, for 41 weeks of 2016.o Martin earned $10,500.o Jacob had to spend $7,350 for disabled access equipment for Martin

Sole Proprietor Income Deductions

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Self-employed Business Income

Self-employed Business Income-Schedule C

Instructions

Use the IRS.gov website and interactive tools, linked in Required Resources, to complete all related self-employed schedules, based on the scenario information below.

Complete the tax forms required for a sole proprietorship return.

Determine if Jacob’s business is eligible for any tax credits.

Determine eligible business deductions.

Analyze official rules and instructions to correctly compute SE tax and SE deduction.

Interpret official rules and instructions to record correct entries on tax forms.

Scenario:

Jacob Weaver is a contractor operating as a sole proprietorship (EIN 12-3456789).

2016 Gross income: $243,322.25.

Business expenses: Fuel for equipment $64,080.00

Repairs and maintenance $17,342.00

Lubricants for Equipment $9,670.00

Insurance $6,500.00

Wages $6,300.00

Vehicles $1,768.00

Legal and Professional Expenses $1,750.00

Taxes and Licenses $1,412.00

Advertising $300.00

Clients owe him a total of $53,000, for work completed in 2016.

2016 estimated tax payments were $18,000.

He is using a bedroom in his house as a home office. (Square footage of home 5,600 Office 240 sq. ft.)

He has one half-time employee, Martin, who had been unemployed since returning from Afghanistan, and is disabled.

Martin worked for Jacob for 20 hours a week, for 41 weeks of 2016.

He earned $10,500.

Jacob had to spend $7,350 for disabled access equipment for Martin.

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Tax Credits on 1040 to Reduce Tax Liability

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Tax Credits on 1040 to Reduce Tax Liability

Assessment 5

Overview

Determine eligibility for available tax credits and complete an official worksheet for each credit, to demonstrate eligibility.Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 5 until you have submitted and received faculty feedback for Assessment 4.

Tax credits work to lower taxpayer liability rather than provide refund incentives. A tax credit is subtracted directly from the taxpayer’s tax obligation, providing equal relief to all taxpayers. This can make the credit more valuable than a deduction taken during the filing process.

Tax Credits on 1040 to Reduce Tax Liability

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By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Analyze the background of the federal income tax system.
o Interpret official rules and instructions to record correct entries on tax forms.• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze tax rules to complete tax credit worksheets to prove eligibility.o Apply laws and rules to correctly enter data on Schedule A.o Apply rules and tax tables to record the correct tax owed on the 1040.o Correctly calculate the amount of a refund on the 1040.

Context

“When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.” — Henry Louis Mencken, one of the most influential American writers of the early twentieth century.

Politicians have a penchant for finding ways for doing one of two things:

• Enacting tax credits for the benefit of individual taxpayers as a means of putting more money in taxpayer pockets to stimulate the economy.• Enacting tax credit legislation for the benefit of specific groups or industries in the business sector.
The hope is that businesses will take the additional monies and reinvest them in the business for the benefit of the economy.

There are credits for foreign taxes paid, child and dependent care expenses, and for the elderly or disabled; credits for education, retirement savings contributions, and residential energy; and child tax credit, adoption, retirement savings, and earned income credits.

Tax Credits on 1040 to Reduce Tax Liability

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Reference

Quotegarden.com. (n.d.). Quotations about taxes. Retrieved from http://www.quotegarden.com/taxes.html

Question to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

• How do tax credits directly benefit an individual taxpayer?• Which is more advantageous: a deduction or a tax credit?• What can you do if you have already filed your tax return and you discover you are eligible for a tax credit?

Resources

Required Resources

The following resources are required to complete the assessment.
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate

IRS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions. Download the appropriate forms and publications from the IRS Web site to complete this assessment.

• IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
Click the links provided below to view the following multimedia pieces:

Tax Credits on 1040 to Reduce Tax Liability

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FORM 1040: TAX CREDITS

This final section of Form 1040 incorporates a variety of tax credits designed to reduce tax liability for certain taxpayer groups. The unique aspect of these credits is that they are subtracted directly from the total federal tax liability of the taxpayer(s). The affect of these credits can reduce or eliminate the taxpayer’s financial obligation.If a taxpayer is eligible for any/all of the credits, additional tax forms must be completed and filed with the Form 1040.

The primary forms are Form 1116 ( Foreign Tax Credit), Form 2441 (Credit for Child and Dependent Care Expenses), Form 8863 (Education Credits), Form 8880 (Credit for Retirement Savings Contributions, Form 8839 (Qualified Adoption Expenses), and Schedule EIC (Earned Income Credit).Licensed under a Creative Commons Attribution 3.0 License.

Library Resources

• J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return. Hoboken, NJ: Wiley.

• J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return. Hoboken, NJ: Wiley.

• Galletta, P. Z. (2014). Taking credit for your work: A roundup of federal tax credits available to individuals. The CPA Journal, 84(12), 17–23.

• Crawford, C., & Crawford, C. (2014). 2014 individual tax landscape. The CPA Journal, 84(12), 6–8.

• Baldwin, D. R., Carlton, L. H., Fava, K. L., Haim, D, Horn, J., Morrow, S., . . . Zidik, D. J., Jr. (2014). Individual taxation: Digest of recent developments: Part II. The Tax Adviser, 45(4), 274–280.

Internet Resources

Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
• lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html

• IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.

Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.o Chapter 9, “Tax Credits (Lines 47 through 54 and Line 64A, Form 1040).”

Tax Credits on 1040 to Reduce Tax Liability

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Assessment Instructions

Note: The assessments in this course are presented in sequence and must be completed in order. In Assessments 2–5, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 5 until you have submitted and received faculty feedback for Assessment 4.
This assessment will require significant research and critical thinking to complete each required form successfully. An incorrect entry on one form will create incorrect entries in other forms.

There are two parts to this assessment. Be sure to complete both parts and submit the necessary materials.• Part 1: Determine eligible tax credits by completing official worksheets.• Part 2: Complete Schedule A and the 1040.

Preparation

• Read the information provided in the scenario below.• Download the following tax forms and instructions from IRS.gov, linked in the Resources under the Required Resources heading:o 1040.o Schedule A.o 2441.o 3800.o 5884.o 6251.o 8826.
Part 1Use the information in the scenario, on IRS.gov, and in the interactive IRS tools to interpret official rules and instructions to determine available tax credits.

Tax Credits on 1040 to Reduce Tax Liability

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• Complete an official worksheet for each tax credit to demonstrate eligibility.• Submit each tax credit worksheet.
Part 2Use the information in the scenario, on IRS.gov, and in the interactive IRS tools to Interpret official rules and instructions to complete the following:

• Complete Schedule A.• Enter data from Schedule A into the 1040.• Apply the rules and tax tables to calculate the tax owed and the amount of any refund.• Submit Schedule A and the completed 1040.
Scenario—Use form for 2016

• Jacob and Taylor Weaver, ages 45 and 42 respectively, are married and are filing jointly in 2016.o They have three children, Ashley, age 9; Patrick, age 6; and John, age 18.o Social Security numbers are: Jacob, 222-33-4444; Taylor, 555-66-7777; Ashley, 888-99-1234; Patrick, 789-56-4321; John, 123-45-6789.
Jacob is self-employed as a contractor.o 2016 net income: $133,000.o Clients owe him a total of $53,000 for work completed in 2016.o 2016 estimated tax payments: $25,000.

• Taylor works part-time as a paralegal.o She earned $26,000 in 2016.o Federal income withholding: $2,350.• Weavers $350 paid with their 2015 state tax return.• Jacob and Taylor bought their house in 2016.o Home mortgage interest: $7,246.o Property tax: $2,230.

• Charities: $4,500.• $435 to rent a moving truck.• $8,000 to put new siding on the house.• $11,600 for child care expenses ($5,800 for each child).o It was paid to Lil Tigers Daycare, 1115 S. Garrison St., Muncie, IN 47305 (EIN 98-7654321).• Taylor is a part-time student at Ball State University in Muncie.

o She received a 1098-T indicating tuition and fees for 2016 in the amount of $6,011.• Health insurance for the family, through Taylor’s job, cost $6000 for all 12 months of 2016.o They paid deductibles and co-payments of $550.• Dental insurance for the family was $1200.• Car insurance for the family car was $600.

Tax Credits on 1040 to Reduce Tax Liability

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After-Tax Cost of Debt

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After-Tax Cost of Debt

The XYZ Inc.’s currently outstanding bonds have a 10 percent yield to maturity and an 8 percent coupon. It can issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40 percent, what is XYZ’s after-tax cost of debt?

What Is the Cost of Debt?

The cost of debt is the effective interest rate that a company pays on its debts, such as bonds and loans. The cost of debt can refer to the before-tax cost of debt, which is the company’s cost of debt before taking taxes into account, or the after-tax cost of debt. The key difference in the cost of debt before and after taxes lies in the fact that interest expenses are tax-deductible.

Impact of Taxes on Cost of Debt

Since interest paid on debts is often treated favorably by tax codes, the tax deductions due to outstanding debts can lower the effective cost of debt paid by a borrower. The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses. To calculate the after-tax cost of debt, subtract a company’s effective tax rate from 1, and multiply the difference by its cost of debt. The company’s marginal tax rate is not used; rather, the company’s state and federal tax rates are added together to ascertain its effective tax rate.

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Applying the IRS Code Rules

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Applying the IRS Code Rules

Complete 6 problems that require you to apply research and knowledge of the rules and laws associated with at-risk or passive activity losses, as well as the individual alternative minimum tax (AMT).

Note: The assessments in this course are presented in sequence and must be completed in order. Do not complete Assessment 6 until you have submitted and received faculty feedback for Assessment 5.

Tax regulations are in a state of constant change. Being able to locate and correctly interpret and apply the information to a problem is a highly valued skill.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

Competency 1: Analyze the background of the federal income tax system.
- Correctly explain the tax effect in a specified scenario for the last year and the current year.
Competency 2: Analyze the basics of individual income tax return preparation.
- Correctly calculate the initial basis, allowed losses, and ending at-risk amounts.
- Correctly explain how to treat a loss on a federal income tax return.
- Correctly calculate what can be deducted on a final income tax return.
- Correctly calculate the loss disallowed by at-risk rules and how much of the loss is disallowed by the passive loss rules.
- Correctly calculate itemized deductions for AMT purposes and identify the amount of the AMT adjustment.

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Context

There is a separate tax system from the one you have been studying. The goal of this second system is to identify individual and corporate taxpayers who might escape paying taxes by using the Internal Revenue Code’s advanced tax incentives and programs. This alternative minimum tax (AMT) system employs rules based on a taxpayer’s AMT income. As you will learn, little income escapes the IRS.

Over the coming decade, a growing number of taxpayers will become liable for the AMT. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As more taxpayers incur the AMT, there will likely be increased pressure to reduce or eliminate the tax (CBO, 2010).

Questions to Consider

epen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.

What are some advantageous rules individual taxpayers can employ to avoid the AMT?
How far in advance should a taxpayer develop a tax strategy?
Is developing a tax strategy something only high-income people should do?

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Resources

Required Resources

The following resources are required to complete the assessment.

Assessment 6 Problems: Applying the IRS Code In a Word document, provide complete answers with explanations to the problems below.

Problem 1

In 2014, Matthew contributes equipment with an adjusted basis of $40,000 and a FMV of $36,000 to Construction Limited Partnership (CLP) in return for a 3% limited partnership interest. Matthew’s share of CLP income and losses for the year were as follows:

Interest $ 1,000

Dividends 600

Capital gains 1,800

Ordinary loss (8,650)

CLP had no liabilities. What are Matthew’s initial basis, allowed losses, and ending at-risk amount?

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Problem 2

During the current year, Ben worked 1,500 hours as a tax consultant and 500 hours as a real estate agent. His one other employee (his wife) worked 350 hours in the real estate business. Ben earned $60,000 as a tax consultant, and together the couple lost $18,000 in the real estate business. How should Ben treat the loss on his federal income tax return?

Problem 3

Chrystal died owning an interest in a passive activity property. The property had an adjusted basis of $270,000, a fair market value of $284,000, and suspended losses of $25,000. What can be deducted on her final income tax return?

Problem 4

Howard has a $76,000 loss from an investment in a partnership in which he does not participate. His basis in the interest is $70,000.

a. How much of the loss is disallowed by the at-risk rules?

b. How much of the loss is disallowed by the passive loss rules?

Problem 5

Roberta gave her daughter a passive activity last year that had an adjusted basis of $37,500. The activity had suspended losses of $17,500 and a fair market value of $60,000. In the current year, her daughter realized income of $9,000 from the passive activity. What is the tax effect on Roberta and her daughter last year and in the current year?

Problems are continued on the next page

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Problem 6

Create a table for the answer to this problem. Include these categories: AMT; Regular Tax: Adjustment.

Charles had the following itemized deductions in 2014:

State income taxes $3,000

Charitable contributions 4,900

Mortgage interest (personal residence) 14,000

Medical expenses [$8,000-(7.5% ×$75,000)] 2,375

Miscellaneous [$3,200-(2%×$75,000)] 1,700

What are Charles’ itemized deductions for AMT purposes?
What is the amount of the AMT adjustment?

Internet Resources

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IRS.gov. (n.d.). Retrieved from http://www.irs.gov/
IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1
IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu

Wiley. (2012). Wiley registered tax return preparer exam review. Hoboken, NJ: Author.
Halperin, D. I., & Warren, A. C., Jr. (2014). Understanding income tax deferral. New York University Tax Law Review, 67 Tax L. Rev. 317.
Dungan, A., & Parisi, M. (2014). Individual income tax rates and shares, 2011: Statistics of income. SOI Bulletin, 33(4), 5–50.
Flynn, K. E., Belak, P., & Soltis, G. (2014). Understanding individual tax compliance: Advanced deductions and related issues. Journal of Business Case Studies, 10(4), 425–440.

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Internet Resources

lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html
IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.
- The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.

Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.

Chapter 13, “At-Risk/Passive Activity Loss Rules and the Individual Alternative Minimum Tax.”

Assessment Instructions

For this assessment, complete the following:

Download the Assessment 6 Problems document, linked in the Resources under the Required Resources heading.
Using the primary source of IRS.gov and the IRS Interactive Tax Assistant and Tax Trails (linked in the Resources under the Required Resources heading), locate and interpret regulations and publications that relate to each problem.
Record your answers to the problems in a Word document.
Provide an explanation for each answer.
Submit the Word document containing your answers to the problems and the explanations for your answers.

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Inclusions, Exclusions, and AGI Assessment 3

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Inclusions, Exclusions, and AGI Assessment 3

Overview

Apply the rules associated with inclusions and exclusions to an individual’s gross income and apply another set of code rules to determine a taxpayer’s AGI.Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 3 until you have submitted and received faculty feedback for Assessment 2.

Understanding the ever-changing rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes is a skill that is developed through practice.By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze official rules and instructions to correctly calculate deductible self-employment taxes.o Interpret official rules and instructions to record correct entries on tax forms.o Apply rules and instructions to correctly compute AGI for the year.

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Context

I don’t know what to do or where to turn in this taxation matter. Somewhere there must be a book that tells all about it, where I could go to straighten it out in my mind. But I don’t know where the book is, and maybe I couldn’t read it if I found it.” — Warren G. Harding, the 29th President of the United States, 1921–1923.

About now, you may be nodding your head in agreement with President Harding’s quote about the complexity of the tax code, with its many inclusions and exclusions. What started out as a simple document, designed to raise capital to make the new nation independent from the British Empire, has evolved over the centuries and decades into a complex maze of rules and regulations.Nowhere is that more pronounced than in the rules for including and excluding income in the calculation of a taxpayer’s adjusted gross income (AGI) for income tax purposes.

Gross income is commonly defined as the amount of a company’s or a person’s income before all reductions, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. Since not all of an individual’s personal income is subject to taxation, one must crack open the voluminous tax codebook to discover exclusions from the tax collector’s grasp.

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Question to Consider

To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.The primary purpose of the Internal Revenue Service is to raise revenue for the government. However, the U.S. Congress has chosen to exempt certain income from taxation, such as scholarships, gifts, life insurance proceeds, municipal bond interest, and employee fringe benefits.

• Why you believe Congress has provided these exemptions to taxpayers?

• Which of the additional exemptions would you challenge?

• Which of the additional exemptions do you agree with?

Resources

Required Resources

The following resources are required to complete the assessment.

Internet Resources

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Download the appropriate forms and publications from the IRS Web site to complete this assessment.•IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu

FORM 1040: INCOME

This section of the Form 1040 encompasses the major components of total income and many types of nontaxable income for the filing taxpayer(s). Major components of this section include interest income, dividend income, unemployment compensation, social security benefits, and other types of income received by the taxpayer(s).
Licensed under a Creative Commons Attribution 3.0 License.

FORM 1040: ADJUSTED GROSS INCOME

Filing taxpayers can deduct additional items from total income for purposes of computing AGI. These items are termed “for AGI deductions”, or “above the line” deductions. The line refers to the AGI line on Form 1040.
The major items covered in this section of the Form 1040 are student loan interest, health savings accounts, moving expenses, self-employment taxes, early withdrawals from savings, and deductions for alimony paid.
Licensed under a Creative Commons Attribution 3.0 License.

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Resources

J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return.

Hoboken, NJ: Wiley.J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return.

Hoboken, NJ: Wiley.Drake, A. E. (2015, January 5). Reducing your taxes before the end of the year. Mondaq Business Briefing.Vento, J. J. (2014, March).

Beating the tax man. USA Today, 142(2826), 58–59.

Ashton, M. (2015, March 5). The forgotten tax deductions.

Mondaq Business Briefing.

Halperin, D. I., & Warren, A. C., Jr. (2014). Understanding income tax deferral.

New York University Tax Law Review, 67 Tax L. Rev. 317.

Internet Resources

Access the following resources by clicking the links provided.

Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.htmlIRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions.

You can search this channel by topic.
Cruz, A., Deschamps, M., Niswander, F., Prendergast, D., Schisler, D., & Trone, J. (2016). Fundamentals of taxation 2016 [with taxation software] (9th ed.). New York, NY: McGraw-Hill.Chapter 3,

“Gross Income: Inclusions and Exclusions.”Chapter 4, “Adjustments for Adjusted Gross Income.”

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Assessment Instructions

Incorrect entries in Assessment 2 affect the entries in Assessment 3.
For this assessment, use information and publications from IRS.gov and the other IRS resources linked in the Resources under the Required Resources heading to determine the adjusted gross income (AGI) for Jacob and Taylor Weaver, based on the provided scenario.

Complete the following:

Read the information in the scenario below.Download the appropriate forms and publications from IRS.gov.Enter information from Assessment 2, Schedules C and SE, into the 1040 form.Apply the rules for adjustments to adjusted gross income.Enter applicable information from the scenario into the 1040 form.Interpret official rules and instructions to record correct entries on the tax form.Calculate the AGI for the Weavers.Submit the tax form.

Scenario

Jacob and Taylor Weaver, ages 45 and 42 respectively, are married and are filing jointly in2016. They have three children, Ashley, age 9; Patrick, age 6; and John, age 18.Social Security numbers are: Jacob, 222-33-4444; Taylor, 555-66-7777; Ashley, 888-99-1234; Patrick, 789-56-4321; John, 123-45-6789. Taylor works part-time as a paralegal.She earned $26,000 in 2016.Taxes withheld: $4,200 withheld.Estimated tax payments: $25,000.$350 paid with their 2015 state tax return.Jacob and Taylor bought their first house in 2016.

Home mortgage interest: $7,246.Property tax: $2,230.Federal income withholding: $2,350.Charities: $4,500.$435 to rent a moving truck.$8,000 to put new siding on the house.$11,600 for child care expenses ($5,800 for each child).It was paid to Lil Tigers Daycare, 1115 S. Garrison St., Muncie, IN 47305 (EIN 98-7654321).Taylor is a part-time student at Ball State University in Muncie.She received a 1098-T indicating tuition and fees for 2016 in the amount of $6,011.Health insurance for the family, through Taylor’s job, cost $6000 for all 12 months of 2016.They paid deductibles and co-payments of $550.

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