Accounting Discussion


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Simon just received a 30-Day letter from the IRS indicating a proposed assessment. Does he
have to pay the additional tax? What are his options?
After receiving a 30-day letter from IRS, Simon doesn’t have to pay the additional taxes right
away because it is a proposed assessment not a final decision. He has a few options to choose
from. First option is he can agree to the proposed assessment and pay the additional taxes.
Second, he can disagree with the assessment and appeal for a conference with an appeal officer
to discuss the issue. If he decides to appeal, he will receive a 90-day statutory notice from IRS. If
Simon and IRS come to an agreement, 870 form will be filled for wavier of restriction.

Montel argues that a flat income tax rate system is vertically equitable. Rene argues that a
progressive tax rate structure is vertically equitable. How do their arguments differ? Who is
Flat income tax means everyone pays the same tax rate regardless of their earned income. On
the other hand, progressive tax rate means tax rate and earned income are vertically
proportional, as the income goes up, the tax rate goes up. Vertically equitable means people with
more income should pay more in taxes. In the case of Montel vs Rene, Rene is correct.
Progressive tax rate structure is vertically equitable. This system makes sure that the higher
earning individuals pay more taxes as compared to lower earning individual. Also, it is a fair
taxing system and it supports the economy.
Below are the four questions you will have to choose to answer for this week. Answer two of the
questions and respond to two students.

Distinguish earned income from unearned income and provide an example of each.
As the name suggest, earned income is the amount of money that has been earned after
providing the service or fulfilling the business obligations. All the money an individual earns from
working for example wages, salaries, and tips, are earned income. On the other hand, unearned
income is the money an individual earns other than employment. Some examples of unearned
income can be capital gain, taxable interest, and taxable social security benefit.

Describe in general how the cash method of accounting differs from the accrual method of
The main difference in cash basis and accrual basis accounting is that in cash basis revenue is
recorded when the cash is received, and expenses are recorded when the cash is paid. On the
accrual basis both revenue and expenses are recorded when they are occurred. Accrual based
accounting is more complex, but it provides a detailed picture of financial statements. It is mostly
used with big corporations and publicly traded companies. Cash based accounting is easy to
record and easy to follow however, it doesn’t give a detailed explanation of accounts. It is mostly
used by small business owners.
Below are the four questions you be able to choose from to answer for this week.

Explain why Congress allows self-employed taxpayers to deduct the employer portion of their
self-employment tax.
Congress allows self-employed taxpayers to deduct the social security and medicare to give them
the same benefit as employed taxpayers. For employed individuals, their employer pays a portion
of the the social security and medicare. If an individual is employed, they pay 6.2% for social
security tax and 1.45% for medicare tax, and the employer pays the other half. If an individual is
self-employed, he must pay 12.4% for social security tax and 2.9% for medicare tax. To make it
fair, self-employed individuals are allowed to deduct the employer portion.

Describe the tax benefits from “bunching” itemized deductions in one year. Describe the
characteristics of the taxpayers who are most likely to benefit from using bunching and explain
why this is so.
To take the advantage of itemized deduction, taxpayers combine their itemized deduction for
several years, mostly two years, into one year. It called bunching. If a taxpayer doesn’t have
enough itemized deductions in one year to exceed standard deduction, they can use bunching to
get tax benefit.
1. Question 1

Why does the tax law provide preferential rates on certain capital gains?
Describe three basic tax planning strategies available to taxpayers investing in capital assets.
2. Question 2

What are the two depreciation conventions that apply to tangible personal property under
MACRS? Explain why Congress provides two methods.
Explain the two limitations placed on the Sec 179 deduction. How are they similar? How are they
3. Question 3

Explain the difference between ordinary, capital and Sec 1231.
Compare and contrast Sec 1245 and Sec 1250 recapture.
4. Question 4

What nontax reasons explain why a corporation may choose to cap its executives’ salaries at $1
million? What tax reasons explain why a corporation may choose to cap its executives’ salaries at
$1 million?
Explain the differences and similarities between fringe benefits and salary as forms of
Why might it be good advice from a tax perspective to think hard before deciding to quickly pay
down mortgage debt?
Compare and contrast the characteristics of a deductible point from a nondeductible point on a
first home mortgage.
5. Question 5

Assume Congress increases the dividend tax rate to the ordinary tax rate while leaving all other
tax rates unchanged. How would this change affect the overall tax rate on corporate taxable
Why are S Corporations less favorable than C Corporations and entities taxed as partnerships in
terms of owner related limitations?

Compare and contrast the different year-ends to sole-proprietorships, flow-through entities and C
Explain when an expenditure should be “capitalized” based upon accounting principles. Crom
time to time, it is suggested that all business expenditures should be deducted when incurred for
tax purposes. Do you agree with this position? Please explain your position.
7. Question 7

What are common book-tax differences relating to accounting for capital gains and losses? Do
these differences create favorable or unfavorable book-to-tax adjustments?
Describe the annualized income method for determining a corporation’s required estimated tax
payments. What advantages does this method have over other methods?
8. Question 8

What is the difference between recognition and realization in the recording of a deferred tax asset
on a balance sheet?
Briefly describe the four sources of taxable income a company evaluates in determining if a
valuation allowance is necessary?
9. Question 9

What is the difference between recognition and realization in the recording of a deferred tax asset
on a balance sheet?
Briefly describe the four sources of taxable income a company evaluates in determining if a
valuation allowance is necessary?
10. Question 10

How do hot assets affect the character of the gain or loss on the sale of a partnership interest?
How does a partner determine his basis in distributed assets when the partnership distributes
other property in addition to money and hot assets?
Describe the circumstances in which an S election may be involuntarily terminated.
Compare and contrast the methods of allocating income or loss to owners for partnerships and
for S Corporations.

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Explanation & Answer:
10 questions




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