Case Study Of Piratephernalia

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Cost of goods sold is a deduction on a taxpayer’s taxable income. For tax purposes, Piratephernalia Corporation must capitalize a portion of their overhead expenses into the annual inventory calculation. Additionally, cost of goods sold includes only the inventory sold throughout the fiscal year. Unsold purchased inventory will not be deducted from the taxable income.

Generally, state bond interest is exempt from taxation. Further, interest income from loans with rates below the market rate will be recognized and taxed at the market rate. In the case of Piratephernalia’s employee loan, tax law requires the corporation to report interest income at the market rate rather than the stated rate in the loan
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Thus, rent paid in advance will only be deductible from the corporation’s taxable income during the fiscal year in which the funds were utilized. Additionally, tax law states paid rent will not be deductible until the business is fully operational. Without any former business involvement, Piratephernalia’s rent expenses prior to the start of operations will not be included in start-up expenses of the business.

The salaries and wages earned by the Piratephernalia officers and employees throughout the first fiscal year are fully deductible from the corporation’s taxable income. The funds paid as Federal Insurance Contributions Act (FICA) contributions are also deductible. The wage base limit for social security was not reached for the first fiscal year.

Interest expense paid on loans used to purchase a tax-exempt bonds is nondeductible under federal tax law. As a result of this law, the loan used to purchase tax-exempt Florida state bonds will not result in an interest expense deduction for Piratephernalia Corporation.This requirement is in place to prevent taxpayers from double-benefiting from tax
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If Piratephernalia’s adjusted taxable income is negative, a charitable contribution in the current year will not be elected for a deduction in the year of loss. Rather, the deduction must be carried over to benefit future years. Assuming Piratephernalia shows a positive adjusted taxable income, the corporation may elect to deduct a portion of their charitable contributions paid out during the year. The remaining amount may be carried forward to deduct against adjusted taxable income in future years. In this case, the 2014 charitable contribution deduction is limited to a portion of Piratephernalia’s adjusted taxable income. The remaining amount may be carried forward provided there is a positive adjusted taxable income in the following years.

To avoid discrepancies between taxpayers, IRS code standardizes depreciation based on asset classes and by allowing no salvage value for any asset. Schedules are provided for each type of asset for systematic depreciation length. Additionally, when assets purchased late in the fiscal year account for a large portion of all assets placed into service that year, a depreciation penalty occurs.


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