2: Research Problems Federal Taxation - Essay Example

Federal Taxation Research Problem John Hunter is the president and sole shareholder of Hunter Incl. Due to technological renovation in the company, 36 numbers of computers, which are 2 years old, would be replaced by new one. John Plans to donate these computers to a qualified chartable society so that he can get a better exemption in tax. Though an individuals charitable deduction for any year is limited to 50%, 30%, or 20% of his adjusted gross income, depending on the property contributed and the donee but here, Hunter can get a deduction up to 10% of its taxable income because the computers are part of his company and corporation tax deduction rules will be applied.

But the point to be noted here is that the excess amount of contribution can be carried over for up to five years. This can be more clarified by the following example:A corporations taxable income, charitable gifts, charitable deductions are: Taxable Amount Year Contribution Income Deductible Carryover 1 $15,000 $100,000 $10,000 $5,000 2 30,000 300,000 30,000 5,000 3 6,000 100,000 10,000 1,000 A qualified contribution didnt include a contribution if it was for the establishment of a new, or maintenance in an existing, segregated fund or account for which the donor (or any person appointed or designated by the donor) had, or reasonably expected to have, advisory privileges with respect to distributions or investments by reason of the donors status as donor.

It means John cant take any advantage out of the materials after doing charity. A corporation’s tax deduction for qualified contributions is subject to the following limit. Any qualified contribution is allowed only to the extent that total qualified contributions dont exceed the excess of: (a) the corporations taxable income, over (b) the amount of all “other” contributions (i.e., contributions that arent “qualified contributions”) allowed for the year (Code Sec. 2400S(a)(2)(B)(i)).

So, a corp.s deduction for qualified contributions is allowed up to the amount by which the corp.s taxable income exceeds the deduction for other charitable contributions (Tech Expln of the Gulf Opportunity Zone Act of 2005).Hence it is seen that, if John donates the computer on behalf of his company then his net tax exemption will be pretty less. The best idea here is to donate to any qualified institution in his name. In that case:If the contributions are all to “50% charities”, the deduction ceiling is 50% of the contribution base, except a 30% ceiling applies for contributions of appreciated capital gain property ( Code Sec. 170(b)(1)(A) ).

If the contributions are all to “30% charities” or are “for the use of” any charities, the deduction ceiling is 30% of the contribution base (Code Sec. 170(b)(1)). To qualify for the 50% ceiling on an individuals charitable deduction, the contribution must be made directly to the 50% charity, and not just “for the use of” the charity. A gift to an organization that is not a 50% charity wont qualify even if it makes the gift available to a 50% charity (Reg §1.170A 8(b)). “50% charities” where he can think to donate include: (1) Churches or conventions or associations of churches (Code Sec. 170(b)(1)(A)(i)). (2) Tax-exempt educational organizations having a regular faculty and curriculum and a regular student body attending resident classes (Code Sec. 170(b)(1)(A)(ii)). (3) Tax-exempt hospitals (including cooperative hospital service organizations) and certain organizations directly engaged in continuous medical research in conjunction with those hospitals. (4) Certain publicly supported organizations (at least 1/3 of the total amount of support is from governmental units and/or from the general public) operated exclusively to receive, hold, invest and administer property, and to make expenditures to or for, state and local colleges and universities. (5) A U.S.

state or possession (or any political subdivision of any of them), the U.S. or the District of Columbia, if the contribution is made for exclusively public purposes. (6) An organization organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes or for the prevention of cruelty to children or animals or to foster national or international amateur sports competition if it also normally receives a substantial part of its support (aside from income from its charitable, etc.

, activities) from a governmental unit described in (5), or from contributions from the general public. This includes museums, libraries, community centers to promote the arts, organizations providing facilities to support the arts or for some other direct service to the general public, and organizations like the American Red Cross. (7) Organizations described in Code Sec. 509(a)(2) and Code Sec. 509(a)(3). These are generally organizations (including membership organizations) normally receiving not more than 1/3 of their support each year from gross investment income, if more than 1/3 of their support comes from the public (admission, membership fees, and gifts). (8) Most organizations operated or controlled by, and operated for the benefit of, organizations described in (1) through (7). (9) A private foundation thats an operating foundation. (10) A private nonoperating foundation which, not later than the 15th day of the third month after the close of its tax year in which contributions are received, makes “qualifying distributions” (generally, a payment or amount set aside for a charitable purpose) treated as distributions out of corpus in an amount equal to 100% of the contributions.

(The donor must get adequate records from the foundation showing it made those distributions). Research Problem 2:Number of new businesses organized in the United States in 2005 was approximately 6.2 million. In 2004, there were approximately 24.7 million businesses in the United States, according to Office of Advocacy estimates. The Internal Revenue Service (IRS) estimates there were 29.3 million non-farm business tax returns in 2004; however, this number may overestimate the number of firms, as one business can operate more than one taxable entity.

Census data show there were 5.7 million firms with employees and 17.6 million without employees in 2002 (and 18.6 million without employees in 2003). Applying the sole proprietorship growth rates to the nonemployer figures and similar Department of Labor growth rates to the employer figures produces the 24.7 million figure. Small firms with fewer than 500 employees represent 99.9 percent of the 24.7 million businesses, as the most recent data show there are 17,000 large businesses. Estimates for businesses with employees indicate there were 580,900 new firms and 576,200 closures (both about 10 percent of the total) in 2004.

Starts and Closures of Employer Firms, 2000-2004Category20002001200220032004New Firms574,300585,140569,750553,500e580,900eFirm Closures542,831553,291586,890572,300e576,200eBankruptcies35,47240,09938,54035,03734,317Reference:Joint Comm Staff, Tech Expln of the Gulf Opportunity Zone Act of 2005 (JCX-88-05), 12/16/2005, p. 53 .Code Sec. 170(b)(1)(A)< http://checkpoint.riag.com/getDoc?DocID=T0TCODE:5272.1&pinpnt=TCODE:5279.3> Reg §1.170A 8(b)