Question

1. On November 15, 2018, X Corp., an accrual basis taxpayer, enters into a contract which will provide the corporation with the use of manufacturing equipment for the 5 year period beginning on December 1, 2018. X Corp. paid $100,000 for the 5-year period on December 1, 2018. How much, if any of the payment can X Corp. deduct in 2018?

	a.	$20,000
	b.	$0
	c.	$100,000
	d.	$1,667.67

2. Fran is a CPA who has a small tax practice in addition to working as the controller for a local manufacturing business. Fran runs her tax practice out of a 150 square foot office in her home where she meets clients and works on their tax returns and researches their tax issues. She meets the exclusive use test for this space. The gross income from her tax practice amounts to $7,500 for the year. Business expenses amount to $1,000. Based on square footage, $4,000 of Fran’s mortgage interest and real estate taxes are allocable to the home office. The allocable portion of maintenance, utilities, and depreciation is $4,500. Assuming no other expenses related to the business were incurred, what amount of the maintenance, utilities, and depreciation is deductible by Fran?

	a.	$2,500
	b.	$0
	c.	$3,500
	d.	$4,500

Answer 1

Answer 1 : d. $1,667.67.

Explanation : Since X Corp enters into a leasing agreement for using manufacturing equipment. Thus X Corp is allowed deduct expenditure on the contract occurs ratably over the period staring from December 1, 2018 to November 30 , 2023.

Thus  X Corp. deduction in 2018 =  ($100,000 / 5 years) * 1 / 12 = $1,667.67.

Answer 2 . a. $2,500.

Explanation : As per the rules home office expenses are not allowed to generate loss . Thus maximum deduction maintenance, utilities, and depreciation can be the amount of imcome left after deducting business expenses & interest & taxes .

Amount of the maintenance, utilities, and depreciation is deductible by Fran = $7,500 - $1,000 - $4,000 = $2,500.

The excess amount of maintenance, utilities, and depreciation left ie $2,000 ($4,500 - $2,500) is allowed carried over.