Question

1. ack, a geologist, opened a business organized as a C corporation called Geo-Jack (GJ) in January of this year. Jack is the sole shareholder. Assume GJ reports on a calendar year and uses the accrual method of accounting. For each item below, indicate its effect on Jack’s taxable income and you must clearly indicate whether it is positive or negative. (0.5 points each, 4 points total)

   1. In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $14,000, which represented a damage deposit of $6,000 plus rent for two years ($4,000 annually).

      ______________

   2. GJ earned and collected $300,000 performing geological-related services and selling its specialized digging tool.

      ______________

   3. GJ purchased some new equipment in February for $53,700. It claimed depreciation on these assets during the year in the amount of $4,510.

      ______________

   4. GJ paid Jack’s father $12,000 for services that would have cost no more than $7,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients.

      ______________

   5. In an attempt to get his name and new business recognized, GJ paid $9,000 for a one-page ad in the Geologic Survey. It also paid $11,000 in radio ads to be run through the end of December.

Section (circle one): 12:30 / 2:00 / 3:30

______________

6. In November, GJ’s office was broken into and equipment valued at $6,000 was stolen. The tax basis of the equipment was $6,500. GJ received $4,000 of insurance proceeds from the theft.

   ______________

7. GJ incurred a $5,000 fine from the state government for digging in an unauthorized digging zone.

   ______________

8. GJ reimbursed employee-salespersons $4,200 for meals involving substantial business discussion.

   ______________

Answer 1

1 - GJ paid $14,000, which represented a damage deposit of $6,000 plus rent for two years ($4,000 annually) - Deposit will have No impact on Jack's Taxable Income. Deposit is an Asset. Regarding Rent of $4000 annually, Jack will get his taxable Income reduced each year by $4000 i.e a negative impact.

2 - GJ earned and collected $300,000 performing geological-related services and selling its specialized digging tool - Income of $300000 will directly impact Jack's Taxable Income and hence will have a positive impact.

3 - GJ purchased some new equipment in February for $53,700. It claimed depreciation on these assets during the year in the amount of $4,510 - Due to claim of Depreciation on the equipments, Jack's income is reduced by $4510 and hence his income will be reduced i.e a negative impact.

4 - GJ paid Jack’s father $12,000 for services that would have cost no more than $7,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients - Excess amount paid by Jack to his father of $5000 i.e ($12000-$7000) will increase Jack's taxable income and hence will have a postive impact.

5 - In an attempt to get his name and new business recognized, GJ paid $9,000 for a one-page ad in the Geologic Survey. It also paid $11,000 in radio ads to be run through the end of December.Section (circle one): 12:30 / 2:00 / 3:30 - The amount paid by jack towards Advertisement and publicity of $20000 will be allowed as deduction towards business expenditure and will decrease Jack's taxable income. Hence the impact is negative.

6 - In November, GJ’s office was broken into and equipment valued at $6,000 was stolen. The tax basis of the equipment was $6,500. GJ received $4,000 of insurance proceeds from the theft - As per Tax Laws, jack suffered a loss of $2500 i.e ($6500-$4000) and hence will get deduction of the loss from revenue authorities in respect of his taxable Income. Hence the impact is negative.

7 - GJ incurred a $5,000 fine from the state government for digging in an unauthorized digging zone - Any amount paid towards fine, penalty or non compliance with laws will not be allowed as deduction. Hence Jack's taxable income will increase by $5000. Therefore, the impact if postive.

8 -  GJ reimbursed employee-salespersons $4,200 for meals involving substantial business discussion - Amount paid towards staff welfare expenses in the course of business is allowed as a business expenditure and therefore will reduce Jack's taable income. Hence the impact is negative.