Question

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? $

Answer 1

Answer:

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.