18. Eagle Life Insurance Company pays its employees $.30 per mile for driving their personal automobiles to and from work. The company reimburses each employee who rides the bus $100 a month for the cost of a pass. Tom collected $100 for his automobile mileage, and Mason received $100 as reimbursement for the cost of a bus pass.
a. What are the effects of the above on Tom’s and Mason’s gross income?
b. Assume that Tom and Mason are in the 28% marginal tax bracket and the actual before-tax cost for Tom to drive to and from work is $.30 per mile. What are Tom’s and Mason’s after-tax costs of commuting to and from work?
19. LO.2 Several of Egret Company’s employees have asked the company to create a hiking trail that employees could use during their lunch hours. The company owns vacant land that is being held for future expansion but would have to spend approximately $50,000 if it were to make a trail. Nonemployees would be allowed to use the facility as part of the company’s effort to build strong community support. What are the relevant tax issues for the employees?
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Get Help Now!20. LO.2 The Sage Company has the opportunity to purchase a building located next to its office. Sage would use the building as a day care center for the children of its employees and an exercise facility for the employees. Occasionally, portions of the building could be used for employees’ family events such as reunions, birthday parties, and anniversaries.
The company would like to know if the planned uses of the building would fit into a beneficially taxed employee compensation plan.
21. LO.2 Brad is a single individual with $25,000 in taxable interest income and a salary of $86,000 from working in a foreign country for the past 12 months. What tax rate is applied to Brad’s taxable income in 2013?
22. LO.2, 5 Tammy, a resident of Virginia, is considering purchasing a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct any state taxes paid on her Federal income tax return.
23. LO.3 Zack is a farmer who buys his feed and fertilizer from a farmer’s cooperative. In 2012, Zack purchased $300,000 in feed and fertilizer for the farm and $10,000 of household goods. Because the cooperative made a profit in 2012, it distributed to its members
2% of their purchases. Zack received his share of the distribution, $6,200, in March 2013. What is Zack’s gross income from the distribution?
24. LO.2 Andrea entered into a § 529 qualified tuition program for the benefit of her daughter, Joanna. Andrea contributed $15,000 to the fund. The fund balance had accumulated to $25,000 by the time Joanna was ready to enter college. However, Joanna received a scholarship that paid for her tuition, fees, books, supplies, and room and board. Therefore, Andrea withdrew the funds from the § 529 plan and bought Joanna a new car.
a. What are the tax consequences to Andrea of withdrawing the funds?
b. Assume instead that Joanna’s scholarship did not cover her room and board, which cost $7,500 per academic year. During the current year, $7,500 of the fund balance was used to pay for Joanna’s room and board. The remaining amount was left in the § 529 plan to cover her room and board for future academic years. What are the tax consequences to Andrea and to Joanna of using the $7,500 to pay for the room and board?
25. LO.3 Dolly is a cash basis taxpayer. In 2013, she filed her 2012 Virginia income tax return and received a $2,200 refund. Dolly took the standard deduction on her 2012
Federal income tax return, but will itemize her deductions in 2013. Molly, a cash basis taxpayer, also filed her 2012 Virginia income tax return in 2013 and received a $600 refund. Molly had $12,000 in itemized deductions on her 2012 Federal income tax return, but will take the standard deduction in 2013. How does the tax benefit rule apply to Dolly’s and Molly’s situations? Explain.
26. LO.4 Harry purchased equipment for his business and gave the seller cash and a note due in two years. Larry also purchased business equipment, but financed the transaction with a bank loan. Because Harry and Larry were having financial difficulty, the creditors reduced the balance due on each mortgage by $50,000. What are the tax effects of the debt adjustments experienced by Harry and Larry?
27. LO.4 Ralph has experienced financial difficulties as a result of his struggling business.
He has been behind on his mortgage payments for the last six months. The mortgage holder, who is a friend of Ralph’s, has offered to accept $80,000 in full payment of the $100,000 owed on the mortgage and payable over the next 10 years. The interest rate of the mortgage is 7%, and the market rate is now 8%. What tax issues are raised by the creditor’s offer?
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