Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Question

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Answer 1

Question

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

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Answer 2

Question

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

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Answer 3

Question

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

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Answer 4

Question

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

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Answer 5

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Answer 6

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Answer 7

Chapter 8, Problem 58CP

To determine

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

Answer 8

Expert Solution & Answer

Explanation of Solution

Letter

Date: December 20, 2018

Mr. JS

1045, C Street

City L, UT 84042

Dear JS,

This letter is in reference regarding the request to explain about the computation and comparison of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

If the stock was not sold and car was not purchased, the adjusted gross income will be $136,000. If the stock was sold and car was purchased, the adjusted gross income will be $134,600. The computations are provided below:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Hope above calculation for both the alternatives must have been clear. However, if any further clarification is needed on the calculation, please feel free to contact us.

Sincerely,

RB, CPA

Partner

MEMO

Date: December 20, 2019

From: JS

Subject: Explanation of the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased.

Fact of the memo: JS wants to sell the inherited IBM stocks with an adjusted basis of $110,000 for $125,000 on December 29, 2018 and with the proceeds he wants to purchase a car of $75,000 which will be used 100% in his business. JS wants to know the effect of these transactions on his adjusted gross income.

Calculation:

No Sale of Stock and No Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery (Note 1)	0
Total Business Expense		(155,500)
Business Income before §179 Expense		756,500
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		116,500
Interest Income		10,000
Dividend Income		9,500
Adjusted Gross Income		136,000

Note 1: Cost Recovery would be $0 because §179 expenses reduces MACRS basis to zero.

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Sale of Stock and Purchase of Car:

Details	Amount ($)	Amount ($)
Fees for Services		$912,000
Less: Business Expenses
Rent of Building	$36,000
Rent of Office Furniture and Equipment	9,000
Office Supplies	2,500
Utilities	4,000
Salary of Secretary	34,000
Salary of Equipment Operators	42,000
Payroll Taxes	7,000
Fuel and Oil	21,000
Cost Recovery: (Note 1)
Car	16,400
Total Business Expense		(171,900)
Business Income before §179 Expense		740,100
Less: §179 Expense Deduction (Note 2)		640,000
Business Income		100,100
Interest Income		10,000
Dividend Income		9,500
Gain on sale of Stock (Note 3)		15,000
Adjusted Gross Income		134,600

Note 1: Cost Recovery:

Cost recovery for front loaders and dump truck would be $0 because §179 expenses reduces MACRS basis to zero.
The additional first year depreciation is $75,000 ($75,000 x 100%). But it is limited to $10,000. The MACRS cost recovery for car is $15,000($75,000×20%). But it is limited to $6,400 for the first year. Hence, total cost recovery for car is $16,400 ($10,000 +$6,400).

Note 2: §179 Expense Deductions:

The total acquisition cost is less than $2,550,000. Hence, the allowable limit for the §179 Expense Deduction would be $$640,000.

Note 3: Gain on sale of IBM Stock:

The inheritance is exclusion to gross income as per §101. Hence, the inheritance of IBM stock amounted to $110,000 is excluded from the gross income.
But the gain on the sale of bonds will be recognized.
JS realized and recognized a gain from the sale of the IBM bonds is $15,000[$125,000(Amount Realized)−$110,000(Adjusted Basis)]

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Ch. 8 - Prob. 1DQ Ch. 8 - Prob. 2DQ Ch. 8 - Prob. 3DQ Ch. 8 - Prob. 4DQ Ch. 8 - Prob. 5DQ Ch. 8 - Prob. 6DQ Ch. 8 - Prob. 7DQ Ch. 8 - LO.2 Robert purchased and placed in service...Ch. 8 - LO.2 Jim owns a very large ranch. A large part of...Ch. 8 - Prob. 10DQ

Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

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Write a letter to JS explaining the computation of adjusted gross income assuming stock was not sold and car was not purchased, and stock was sold and car was purchased. Also, prepare a memo to JS for tax files.

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