Chapter 4 1. Your brother is short on cash and cannot pay his rent this month. Y

Question

Chapter 4

1.  Your brother is short on cash and cannot pay his rent this month.  You pay his rent for him. Is this taxable income to your brother? Do you get a deduction?  (2 pts)

2.  Which of the following items would be excluded from income? (a) $100 bill found under the sugar caddy at the restaurant (b) Inheritance of a car from your grandmother valued at $5,000. (c) Loan from your father-in-law to start your business, (d) Child Support received totaling $16,500. (4 pts)

Chapter 5

3.  Shaun & Kayla earned the following in 2013:  Interest on a Savings account of $36, Interest on a U.S. Series EE Savings Bond of $25, Interest on a CD that has not matured yet of $20. How much taxable interest income must they report on their 2013 tax return? (4 pts)

4.  Explain what a Cafeteria Plan is (hint: it has nothing to do with what you eat between classes :-) ). (5 pts)

Chapter 6

5.  Explain the limitations placed on the deductibility of Business Gifts? What code section dictates this treatment? (5 pts)

Your brother is short on cash and cannot pay his rent this month. You pay his rent for him. Is this taxable income to your brother? Do you get a deduction? Which of the following items would be excluded from income? (a) $100 bill found under the sugar caddy at the restaurant (b) Inheritance of a car from your grandmother valued at $5,000. (c) Loan from your father-in-law to start your business, (d) Child Support received totaling $16,500. Shaun & Kayla earned the following in 2013: Interest on a Savings account of $36, Interest on a U.S. Series EE Savings Bond of $25, Interest on a CD that has not matured yet of $20. How much taxable interest income must they report on their 2013 tax return? Explain what a Cafeteria Plan is (hint: it has nothing to do with what you eat between classes :-) ). Explain the limitations placed on the deductibility of Business Gifts? What code section dictates this treatment?

Explanation / Answer

Proper accounting methods are found in section 446(c)(1) to (4) which permits cash, accrual, and other methods approved by the IRS including combinations.

After choosing a tax accounting method, under section 446(b) the Secretary of the Treasury has wide discretion to re-compute the taxable income of the taxpayer by changing the accounting method to be used by the taxpayer in order to clearly reflect the taxpayer's income.

If the taxpayer engages in more than one business then it may use a different method for each business according to section 446(d).

If the taxpayer wants to change their tax accounting method, section 446(e) requires the taxpayer to acquire the consent of the Secretary of the Treasury. There are two kinds of changes, one where you must receive a letter of approval from the Secretary of the Treasury. Another type of change comes from a series of more routine changes each of which is an automatic change. To get the automatic change the taxpayer must fill out a form and return it to the Secretary of the Treasury.

The taxpayer can adopt another method if the taxpayer files a tax return using that method for two consecutive years. This is different from changing a tax accounting method under the release of the Secretary of the Treasury because in the case of adopting another method the IRS may assess fines and reallocate taxable income. If the taxpayer wants to return to the previous method the taxpayer must ask for permission from the Secretary following the 446(e) procedure.

If the taxpayer fails to request a change of method of accounting then according to section 446(f) the taxpayer does so at their own peril by exposure to penalties.

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