1. A corporation has a choice between two tax credits: Credit A, which is
refundable and worth 20% of the expenses incurred, and Credit B, which
is non-refundable but allows for a 30?duction of the expenses. If the
corporation incurred $100,000 in qualifying expenses, which credit option
minimizes the corporation's tax liability and why?
Answer: Credit B minimizes the tax liability because the 30?duction
on the expenses would result in a $30,000 reduction in taxable income,
which could result in a greater tax saving than the 20% refundable credit,
depending on the corporation's tax rate.
2. An individual taxpayer has the option to either itemize deductions or
take the standard deduction. Given that the taxpayer has $10,000 in
itemizable deductions, which is below the standard deduction amount for
the year, what should the taxpayer do to minimize tax liability, and what is
the rationale behind this?
Answer: The taxpayer should take the standard deduction because it will
provide a greater reduction in taxable income than the total of the
itemizable deductions, thus minimizing the tax liability.
3. A company is evaluating the tax implications of asset depreciation
under two different methods: straight-line and declining balance. If the
goal is to reduce taxable income as much as legally possible in the first
year of the asset's life, which method should the company choose and
why?
Answer: The company should choose the declining balance method
because it provides a higher depreciation expense in the first year,
reducing taxable income more than the straight-line method.
4. A taxpayer is considering converting a traditional IRA to a Roth IRA.
What are the immediate and long-term tax implications of this conversion,
and under what circumstances might this be advantageous?
Answer: The immediate implication is the payment of taxes on the
converted amount, but the long-term benefit is tax-free growth and
withdrawals. This might be advantageous if the taxpayer expects to be in a
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