Question

The following questions came in yesterday. Your firm has a policy of returning calls within 24 hours which is one of the reasons that your firm is so popular. Your firm has an intern from ASU. Normally, you would pass these questions to the intern because they are not overly complicated. Your billing rate is $100 per hour for general consulting work, so it is expected that you would only work directly on complicated problems. The billing rate for interns is twice the intern’s rate of pay, which can be profitable. You personally review all answers before the answers are sent to clients.

The intern is taking a mental health weekend at Padre Island. So, you must answer these questions yourself. That would be good from a firm income standpoint, except your time might be better spent attending an executive seminar where you could meet new wealthy clients.

1. Sam Howard called. He is the CFO of a local company. He has been providing advice to his nephew, Drew, who will graduate from High School in May. Drew originally wanted to drive for Uber, but he found out that the minimum age is 21, so he plans to drive for DoorDash. Sam wants to know the answers to these questions:
   1. (8 points) If Drew drives for DoorDash, will Drew have to declare the income from driving? Explain.

2. (8 points) Sam has heard of the Hobby rules and wants to know: “Drew will only be able to drive for DoorDash from now until August, when he starts at University. Drew will have to pay for gas and other supplies. Will IRS think that his driving is a hobby, so that he cannot deduct driving expenses? What are the factors to determine whether Drew’s driving is a hobby or not?

3. (2 points) Drew’s mother does not want Drew to work in the Fall while going to school for his first semester. She is afraid that his grades will suffer and has offered to pay for Drew’s living expenses for the fall semester, so Drew is not planning to work in the Fall. Will Drew have to declare the income received from his mother on his tax return?

4. (2 points) Drew has applied for a scholarship. If Drew gets the scholarship, will Drew have to pay tax on the amount of scholarship that he receives?

5. (8 points) If Drew gets the scholarship, are there any limitations on how Drew uses the scholarship money, so that the scholarship is not taxable? If so, what are the limitations?

6. (No points) How much are you going to charge Sam Howard for answering his questions?

2. Mrs. Hopkins lives across the street from you. You have been helping her with her taxes for the past couple of years. Her son told her to invest in real estate several years ago, so she purchased a vacant lot in Grape Creek and a second home on Lake Nasworthy.
   1. (8 points) Mrs. Hopkins has been approached by a young couple who wants to buy the lot in Grape Creek for $15,000. That is the same price that Mrs. Hopkins paid for the lot 2 years ago. If Mrs. Hopkins decides to accept their offer, because the couple is so sweet, will Mrs. Hopkins have to report anything on her tax return? If so, is it the full $15,000 or something else? Explain.

2. (2 points) Mrs. Hopkins watches Fox News. She saw that the government is going to be sending checks to everyone because of the Coronavirus. She wants to know how much money she can expect. You have filed Mrs. Hopkins tax return for tax year 2019. Mrs. Hopkins files single because Mr. Hopkins passed years ago. The amount of Economic Impact Payments is determined by filing status and ________________________________. (fill in the blank)

3. (2 points) On which line of the 2019 Form 1040 can you find that amount?

4. (8 points) Mrs. Hopkins is thinking about renting the house on the Lake from November to March to some people from Michigan who want to get out of the snow. Mrs. Hopkins goes out to the Lake some and lets her son use it when he wants, but she normally stays at her house in Santa Rita. What should Mrs. Hopkins consider about personal use of the Lake house if she is going to rent it? What are the factors that determine whether Mrs. Hopkins will have to declare the income and whether she can deduct some, or all of, the expenses associated with the rental of the house?

5. (No points) How much are you going to charge Mrs. Hopkins for answering her questions?

3. Dennis Mears dropped by your office to ask a couple of questions.
   1. (2 points) Dennis started a new business, DaringDo, on February 2, 2020. He plans to operate the DaringDo as a sole proprietorship and will operate the business on a calendar year basis. Dennis is filling out a loan application and needs to know what DaringDo’s initial tax year is. What will be DaringDo’s initial tax year?

2. (2 points) Dennis won the CZ-USA Super Scroll 20/28 Gauge Combo Shotgun at the Texas Dove Hunters Association raffle. The gun is valued at $3,300. Does Dennis have to include the value of the gun in taxable income?

3. (No points). How much are you going to charge Dennis Mears for answering his questions?

4. Peter Fleming just called. He was so excited.
   1. (8 points) Peter helped his former boss sell a truckload of old equipment and he just received a $5,000 check as a commission. He hasn’t worked there for over a year. Does he have to declare the money as income? Why or why not?

2. (8 points) Peter wants to keep his income level low, so that he will continue to qualify for certain government benefits. If the income has to be reported, can he give the check to his mother and have her report the income instead? Why or why not?

3. (8 points) Peter is thinking about using the $5,000 to start a side business selling Marijuana. He believes that it is only a short amount of time before Texas and the U.S. will change their minds and the law. He wants to be well positioned to take advantage of any changes in the law. Peter would start by using $1,000 to buy product, $200 for materials, $200 for advertising, and making a $500 contribution to the Marijuana Super PAC, a political action committee. Assuming that Peter could establish that the Marijuana business is not a Hobby, which of Peter’s expenses would be deductible?

Peter’s expenses that would be deductible would be

4. (No points) How much are you going to charge Peter for answering his questions?

5. Jessica Jones is the sole shareholder in Alias Detectives, Inc. (“Alias”). Alias just earned a big bonus for finding a lost shipment of gold. Jessica is thinking about how to handle the income.
   1. (2 points) Alias has been very profitable recently. If Jessica decides to distribute cash to herself out of Alias’s profits, will that distribution be taxed?

2. (2 points) If so, what kind of income is a distribution from a corporation?

3. (2 points) Jessica is thinking about what to do with the money. She could put the money from the distribution into an IRA, so that the IRA deduction would offset the income from the distribution. This way, she would not have to pay any extra tax. Which type of IRA should Jessica select in order to take a tax deduction for an IRA contribution, Traditional IRA or a Roth IRA?

4. (8 points) Jessica is also wondering about income for the future. If Jessica decided that it was more important to have income that she could draw out tax-free when she retires, which type of IRA would she choose, Traditional IRA or Roth IRA? Explain.

5. (8 points) Jessica accidently broke Susan’s arm while rescuing her. Jessica is trying to decide how much money to offer Susan to cover Susan’s pain, suffering and medical bills. If Jessica pays Susan for her pain, suffering, and reimburses her medical bills, will Susan have to pay tax on a payment from Jessica?   Explain

Answer 1

1) Since Dashers are Independent Contractors, they do not withhold any taxes from your pay and Dashers are responsible for their own tax obligations. In the United States, all Dashers that earn more than $600 within a calendar year will receive a 1099-MISC form to report the income you made with DoorDash.

2)

determination of whether they should consider their extra income as a hobby or business:

• Is there any intention of making profit.?
• Dependence on income from activity ?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does it make a profit in some years?
• Expectation of asset in use appreciation in future .?

• Basically, the IRS determines the hobby is operated as a business and should be taxed accordingly, if you have made a profit from the business in two (2) out of the past five (5) years, which includes the current tax year

3) Anything received from family is not related to taxability of income. Mother giving money to son is not income of son.