Tax Accounting Week 2 Group 2 Problems

TAX 2000 Tax Accounting

Michelle Jolliffe

Week 2 Group 2 Problems

1) Indicate whether each of the items listed below would be included (I) in or excluded (E) from gross income for the 2012 tax year.

I a. Welfare payments

I b. Commissions

E c. Hobby income

I d. Scholarships for room and board

E e. $300 set of golf clubs, an employee award for length of service

I f. Severance pay

E g. Ordinary dividend of $50

I h. Accident insurance proceeds

I i. Inheritances

E j. Gifts

E k. Tips and gratuities

2) John installed a new roof on his friend’s house in return for a used truck worth $8,000. How much income must John report on his tax return for his services ?

John has to report the $8,000 as income regardless of what the real value of his work was. This is because that is what he was paid, and therefore it is taxable as his income.

TAX 2000 Tax Accounting

Michelle Jolliffe

Week 2 Group 2 Problems – (cont.)

3) Larry is a tax accountant and Sheila is a hairdresser. Larry prepares Sheila’s tax return for free and Sheila agrees to style Larry’s hair six times for free in return for the tax return. The value of the tax return is approximately $300 and the hair styling work is approximately $300.

a.) How much of the $300 is includable income to Larry ? Why ?

All of the $300 is includable as income to Larry. Larry does not get a deduction for the $300, because haircuts are not a business expense.

b.) How much of the $300 is includable income to Sheila ? Why ?

Sheila will add what she collects from Larry as payment for the haircut as income to her business. Sheila then gets a deduction for the same amount as a business expense.

11) How much of each of the following prizes or awards is taxable ?

a.) Cheline received a $50,000 gift bag at the Oscars in 2012.

Prizes and awards are taxable income to the recipient. If the...