Using the space below each item, briefly identify the federal tax issue(s) and the related federal tax consequence(s) for each of the following independent factual situations. Assume cash-basis taxpayers in all situations. Assume you are the tax preparer for the taxpayers involved and they have asked you if the transactions have any ramifications for tax purposes. What would you tell them? What are the tax issues? What specific dollar impact will the transaction have on the computation of federal taxable income? What will be the character of the transaction (for example, ordinary income/deduction, capital gain/loss, §1231 gain/loss, §1245 gain, §1250 gain, etc.)? Will the transaction be taxable (deductible) for self-employment tax purposes? Are there other issues that the client should be made aware of? You are not required to prepare a letter to client or memo to file, rather just a reasonable response as reflected in the example provided. Upload your completed Word document (or PDF) by Sundaytday 12/12/21 using the link provided in the Connect assignment.
Modern Corporation (assume it is a C corporation formed and doing business in Minnesota, the type of corporation subject to the 21% federal income tax rate) sold a used pick-up truck to the company president (also the sole shareholder who is being paid a reasonable salary) for only $1,000 (a very good deal). The president planned to keep the truck at the family’s lake cabin and use it mostly for hunting and fishing trips with his children. The fully-depreciated truck was originally purchased by the corporation for $30,000, and had an estimated value of $10,000 at the time it was sold to the company president. You are the tax preparer for both the corporation and the company president/sole shareholder. Are there any issues that should concern either the corporation or the president/shareholder?
The issue to be resolved is whether this bargain purchase is taxable to the president/sole shareholder. The corporation should probably be reporting a $10,000 (not $1,000) as ordinary income due to §1245 recapture on the sale (which would be taxed at 21%), and a $9,000 non-deductible dividend paid. Since the president/sole shareholder is already being paid a reasonable salary, he should be reporting $9,000 dividend income for the bargain element, which will be taxed at the lower preferential tax for qualified dividends.
- Lynn, who is single, graduated in December 2018 and started working full-time in January 2019. Lynn has asked you to start preparing his returns with tax year 2020. As part of your standard practice, you review his three prior returns. He tells you he did not have to file for 2017 or 2018 because his income was below the filing threshold. You look at his 2017 Forms W2 and see nothing unusual. You look at his 2018 Forms W2 and see that he had federal income tax withheld of $350. You look at his 2019 Forms 1040 and W2, and see he properly reported wage income (his only source of income) of $80,000 and the standard deduction. You inquire and discover that he paid student loan interest of $3,880 in 2019, although nothing was reported in his 2019 tax return relating to student loan interest paid. What do you tell Lynn after reviewing his prior returns?