Federal Taxation of Individuals
This year Ada received wages of $70,000, $3,000 of state unemployment compensation, $2,000 of interest on a city's general obligation bonds, a $10,000 cash gift from her aunt, and $100,000 of life insurance proceeds on her father's death. What is her gross income?
- A$75,000
- B$83,000
- C$73,000Correct
- D$70,000
Why: Wages are gross income under IRC 61, and unemployment compensation is included under IRC 85(a). Interest on state or local bonds is excluded by IRC 103(a), gifts by IRC 102(a), and life insurance proceeds paid by reason of death by IRC 101(a)(1). $70,000 + $3,000 = $73,000.
Federal Taxation of Entities (including tax preparation)
Axel Corp.'s book net income is $500,000. It includes: federal income tax expense of $105,000; tax-exempt municipal bond interest of $10,000; a $5,000 fine paid to a state agency for a safety violation; $8,000 of business meals, all expensed; and book depreciation that is $30,000 less than tax depreciation. What is Axel's taxable income on Schedule M-1?
- A$604,000
- B$570,000
- C$584,000
- D$574,000Correct
Why: Add back federal income tax ($105,000, nondeductible under IRC 275), the fine ($5,000, IRC 162(f)) and the nondeductible half of meals ($4,000, IRC 274(n)); subtract the tax-exempt interest ($10,000, IRC 103) and the extra tax depreciation ($30,000). $500,000 + $105,000 + $5,000 + $4,000 - $10,000 - $30,000 = $574,000. $570,000 forgets the meals, $584,000 forgets the municipal interest, and $604,000 forgets the depreciation.
