Question

Jack, 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.

1. 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.

______________

2. 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.

______________

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

______________

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

______________

Answer 1

Answer.

a)The $9,000 paid for one page ad and $11,000 paid in radio for ad are advertising expense incurred and the benifits of these expenses are expected to be received through the end of December. On acrual basis, these are expense of current year and it will minimize GJ's taxable income and have negative impact.

b) The tax basis of equipment is $6,500 and the proceeds from insurance is only $4,000. So there is Capital loss of $2,500. The taxable income will be less by $2,500 and it will have negative impact.

c)GJ paid a fine of $5,000 for digging in unauthorized zone, Fines and penalties for illegal activities are not allowed to be dedcuted as expense. Thus, taxable income will be increased by $5,000 and it will have positive impact on taxable income.

d) Reimbursement to employees-salepersons $4,200 for meals involving substantial business discussion are business expense allowed to be deducted from business income. This will minimize taxable incom of GJ and will have negative impact on taxable income.