Requirements: Make sure that you show your work. I suggest that you submit a Word document; however, you may also show the details of any calculations in an excel spreadsheet. (If you choose, you could embed the excel calculations in the Word doc.). Bottom line: you need to show your work for your calculations.
For question 2 (the short essay question), the response should consist of several paragraphs that are clearly written. Make sure that you develop a logical rationale for your answer.
((15 points) Elizabeth. owner of a retail clothing boutique in FancySchmancySurburb, Illinois, operates this store as a sole proprietorship. In 2021, the store had qualified business income of $850,000. She paid w-2 wages of $100,000 and her unadjusted basis in assets is $2,000,000 (this amount includes furniture and fixtures and the building which she owns. Note: the value of the land is excluded from the $2,000,000).
Elizabeth is married to Henry. Their gross income excluding income from her shop is $400,000. They file jointly and take the $25,100 standard deduction.
Determine Elizabeth and Henry’s taxable income in 2021.
Assume instead that rather than a retail store, Elizabeth was an attorney and her $850,000 of income was from the practice of law. All other facts are the same. Determine Elizabeth and Henry’s taxable income in 2021
(5 points) James states, “While the Sec. 199A qualified business income deduction is a deduction for individual taxpayers on their 1040 returns, this deduction is in response to the reduction of the corporate tax rate in the TCJA of 2017.” Do you agree? If so, explain the rationale that Congress used in enacting this Sec. 199A.
((15 points) Peter is the sole shareholder in a calendar year S corporation. In 2021, his stock basis is $50,000, his share of the AAA is $ 11,000, and his share of corporate AEP is $ 16,000. He receives a $29,000 distribution, and his share of S corporation items includes a $ 12,000 long- term capital loss and a $ 18,000 ordinary income.
Determine Peter’s ending balance in AAA, AEP, and stock basis.
How much income, gain, or loss will Peter have from the above transactions in the S corporation? Be specific in terms of the amount of income (or loss) and the character of the income or loss.
Peter notes, “It sure is great this is an S corporation because I know that I won’t get taxed on the $29,000 distribution. What will you tell Peter? Write one or two paragraph explaining the tax implications of the S corporation transactions.
(15 points) Shetland Corporation, a C corporation, has E&P of $1,000,000. The corporation stock is held as follows:
Matthew 1,000 shares
Aaron 1,000 shares
Fay 1,000 shares
Marlyebone Partnership 1,000 shares
Devon Corp. 1,000 shares
Total Shares 5,000 shares
Matthew would like to redeem 500 shares of stock. The fair market value of the stock is $200,000. Matthew acquired the stock 10 years ago and has a basis of $200/share in her stock. Note: Since Shetland Corporation is not traded on an exchange, Matthew does not have the option for selling his stock on an open market.
Here is additional information about Shetland Corporation:
Aaron is Matthew’s first cousin
Fay is Matthew’s mother
Matthew owns 10% of Marlyebone Partnership
Matthew owns 20% of the shares in Devon Corporation
Will this redemption of 500 shares of Matthew’s stock be treated as a qualified stock redemption or will it be treated as a distribution? Support your answer with calculations.
How much tax must Matthew pay if this transaction is treated as a qualified stock redemption? Matthew is an individual in the 37% tax bracket.
How much tax must Matthew pay if this transaction is treated as a distribution (i.e. this transaction is NOT a qualified stock redemption)? (Matthew does not have any additional capital transactions).
Matthew is still in the planning stage for this transaction. What would you recommend?
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