202k views
0 votes
How does the tax benefit rule apply in the following cases? a. In 2017, the Orange Furniture Store, an accrual method sole proprietorship, sold furniture on credit for $1,000 to Sammy. The cost of the furniture was $600. In 2018, Orange took a bad debt deduction for the $1,000. In 2019, Sammy inherited some money and paid Orange the $1,000 he owed. Orange's owner was in the 35% marginal tax bracket in 2017, the 12% marginal tax bracket in 2018, and the 35% marginal tax bracket in 2019. Orange Furniture must include $ in gross income as the recovery of a prior deduction. The timing of the income and deductions cost Orange $. b. In 2018, Marvin, a cash basis taxpayer, took a $2,000 itemized deduction for state income taxes paid. This increased his itemized deductions to a total that was $800 more than the standard deduction. In 2018, Marvin received a $1,600 refund when he filed his 2018 state income tax return. Marvin was in the 12% marginal tax bracket in 2018, but was in the 35% marginal tax bracket in 2019. How much must Marvin include in his gross income for 2019? $

User Yuming Cao
by
6.8k points

1 Answer

1 vote

Answer:

Step-by-step explanation:

According to the tax benefit rule, the following situations would be recorded:

(A) The gross income would include the $1,000 which produces the tax benefit.

The timing of the income and deduction cost would equal to

= Sales revenue × (marginal tax bracket 2017 - marginal tax bracket 2018)

= $1,000 × (35% - 12%

= $1,000) × 23%

= $230

(B) In the given case, a $1,600 refund is received out of which $800 was included in the gross income as it increased the itemized deduction and the remaining amount of $1,600 - $800 = $800 would not have any treatment as it has no tax benefit.

User Cristian Rennella
by
8.6k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.