SOLUTIONS MANUAL
South-Western Federal Taxation 2027: Individual Income Taxes, 50th Edition
by James Young, Annette Nellen, Mark Persellin
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, Table of Content
Part 1. Introduction and Basic Tax Model
Chapter 1. An Introduction to Taxation and the Tax Environment
Chapter 2. Working with the Tax Law
Chapter 3. Tax Formula and Tax Determination
Part 2. Gross Income
Chapter 4. Gross Income: Concepts and Inclusions
Chapter 5. Gross Income: Exclusions
Part 3. Deductions
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Chapter 6. Deductions and Losses: In General
Chapter 7. Deductions and Losses: Certain Business Expenses and Losses
Chapter 8. Depreciation, Cost Recovery, Amortization, and Depletion
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Chapter 9. Deductions: Employee and Self-Employed-Related Expenses
Chapter 10. Deductions and Losses: Certain Itemized Deductions
Chapter 11. Investor Losses
Part 4. Special Tax Computation Methods, Tax Credits, and Payment Procedures
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Chapter 12. Alternative Minimum Tax
Chapter 13. Tax Credits and Payment Procedures
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Part 5. Property Transactions
Chapter 14. Property Transactions: Determination of Gain or Loss and Basis Considerations
Chapter 15. Property Transactions: Nontaxable Exchanges and Tax-Free Transactions
Chapter 16. Property Transactions: Capital Gains and Losses
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Chapter 17. Property Transactions: § 1231 and Recapture Provisions
Part 6. Accounting Periods, Accounting Methods, and Deferred Compensation
Chapter 18. Accounting Periods and Methods
Chapter 19. Deferred Compensation
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Part 7. Corporations and Partnerships
Chapter 20. Corporations and Partnerships
, Solution and Answer Guide: Young, Nellen, Persellin, Cuccia, Lassar, Cripe, Gill, SWFT Individual Income Taxes
2027, 9798214058085; Appendix F: Practice Set Assignments—Comprehensive Tax Return Problems
Solution and Answer Guide
YOUNG, NELLEN, PERSELLIN, CUCCIA, LASSAR, CRIPE, GILL, SWFT INDIVIDUAL INCOME TAXES
2027, 9798214058085; APPENDIX F: PRACTICE SET ASSIGNMENTS—COMPREHENSIVE TAX
RETURN PROBLEMS
TABLE OF CONTENTS
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Problem 1 Solutions ....................................................................................... 1
Problem 2 Solutions ...................................................................................... 4
PROBLEM 1 SOLUTIONS
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1. Christopher reports his taxable compensation of $85,000 on Line 1 of Form 1040. This
includes his salary of $105,200 and the $6,000 bonus he received in 2025 (because he
is a cash basis taxpayer). This sum is reduced by his $19,000 contribution to his
§ 401(k) plan (taxation is deferred until he takes distributions from the plan) and
$7,200 of health insurance premium payments. Because these premiums were paid
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with pre-tax dollars, these costs are not included on Schedule A as qualifying medical
expenses. The cost of commuting from home to work and back home again is a
personal expense, so Christopher is not permitted to claim a deduction for his
commuting mileage.
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2. Ashley reports her income from her sole proprietorship on Schedule C (Form 1040).
Her consulting income of $72,000 is reported on Part I of Schedule C. Since she uses
the cash method of accounting for tax purposes, she includes the $3,000 receipt for
work done in 2024 but not the $5,000 she billed for 2025 work that she has not yet
collected. The $6,400 uncollected receivable from 2023 cannot be deducted as a bad
debt because Ashley has no basis in the item. (She never recognized that income in a
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prior year.)
Her total deductible business expenses are $17,474:
• Line 9 Car expenses of $658 for mileage (940 miles × $0.70 standard business
mileage rate)
• Line 13 Depreciation of $800 on the fireproof safe (from Form 4562, see item 3)
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• Line 22 Supplies of $8,000 ($4,800 drafting supplies + $3,200 reproduction
materials)
• Line 23 Taxes and licenses of $500
• Line 27b Other expenses of $1,250 (detailed in Part V of Schedule C, page 2, as
Dues and subscriptions $390 and Uniforms $860)
• Line 30 Home office deduction of $6,266 (see item 3)
Net profit from the sole proprietorship is $54,526 on Line 31, Schedule C (Form 1040).
Because Ashley is self-employed, she computes self-employment tax of $7,704 using
Schedule SE (Form 1040). This tax is reported on Line 4 of Schedule 2 (Form 1040).
© 2027 Cengage. All Rights Reserved
, Solution and Answer Guide: Young, Nellen, Persellin, Cuccia, Lassar, Cripe, Gill, SWFT Individual Income Taxes
2027, 9798214058085; Appendix F: Practice Set Assignments—Comprehensive Tax Return Problems
Half of the self-employment tax of $3,852 is deductible on Line 15 of Schedule 1 (Form
1040). Ashley has a qualified business income deduction of $10,135 [(net profit of
$54,526 – deductible half of self-employment tax of $3,852) × 20%], which is
computed on Form 8995 and reported on Line 13a of Form 1040.
3. Ashley computes the deduction for her home office on Form 8829. Computations in
Part I show that 12.50% of the home’s living area is devoted to business use (300
square feet of office space compared to 2,400 total square feet in the home).
Computations in Part II differentiate between direct costs (painting expense of $1,250
reported on Line 20) and indirect costs associated with the home which need to be
prorated. Indirect costs include mortgage interest ($9,700 on Line 10), real estate taxes
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($14,100 on Line 11), insurance ($3,200 on Line 18), repairs and maintenance ($1,800 on
Line 20), and utilities ($6,200 on Line 21). Depreciation on the home of $641 is
computed in Part III on the prorated business-use adjusted basis for the house of
$25,000 ($200,000 × 12.50%) multiplied by 2.564% (the MACRS depreciation rate for
39-year nonresidential real property for the recovery period of 2–39 years). The total
home office deduction of $6,266 is reported on Line 36 of Form 8829 as well as on
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Line 30 of Schedule C (Form 1040). Because Ashley prefers to avoid depreciating
capital expenditures over time, she can deduct the $800 spent on the file cabinet via
§ 179 expensing by completing Form 4562 Part I for this acquisition. Alternatively,
Ashley can deduct the cost of the file cabinet via bonus depreciation by completing
Form 4562 Part II for this acquisition. The former tax treatment is illustrated in the
completed tax return, with the resulting deduction reported on Line 13 of Schedule C
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(Form 1040).
4. Ashley’s exchange of the Travis County property for the Tarrant County property
qualifies as a like-kind exchange. She reports this transaction on Form 8824.
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Information about the exchange is reported in Part I of the form. The realized gain,
recognized gain, and basis in the like-kind property received are reported in Part III.
Ashley’s basis in the Travis County property is its fair market value when her uncle
passed away. Ashley must recognize gain of $10,000 on the exchange, the lesser of the
cash received or the realized gain of $160,000. This recognized gain is reported on Line
23 of Form 8824.
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5. The installment sale method of accounting generally applies to gains on dispositions of
property if the seller receives at least one part of the purchase price in a year
following the year of sale. Under this method of accounting, recognition of the realized
gain occurs when installment payments are received. Installment sales are reported on
Form 6252. The gross profit from the sale is computed in Part I. Ashley’s $30,000 basis
in the Blanco County land was the fair market value of the property when her uncle
died. Ashley’s gross profit percentage from the sale is computed in Part II to be 75.00%
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($90,000 ÷ $120,000), which translates into a gain of $15,000 on the $20,000
installment collected this year. This recognized gain is reported on Line 24 of Form
6252. The gain of $15,000 from the installment sale is combined with the $10,000 gain
from the like-kind exchange (see item 4) to be reported as a long-term capital gain of
$25,000 on Line 11 of Part II of Schedule D (Form 1040).
6. Although Alexis was one of Christopher’s best servers at the restaurant, the loan to
her was a nonbusiness debt since the money was not loaned in connection with
business. A nonbusiness bad debt is treated as a short-term capital loss if it is
uncollectible. To be deductible, however, nonbusiness bad debts must be completely
South-Western Federal Taxation 2027: Individual Income Taxes, 50th Edition
by James Young, Annette Nellen, Mark Persellin
LU
XE
LI
BR
AR
Y
, Table of Content
Part 1. Introduction and Basic Tax Model
Chapter 1. An Introduction to Taxation and the Tax Environment
Chapter 2. Working with the Tax Law
Chapter 3. Tax Formula and Tax Determination
Part 2. Gross Income
Chapter 4. Gross Income: Concepts and Inclusions
Chapter 5. Gross Income: Exclusions
Part 3. Deductions
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Chapter 6. Deductions and Losses: In General
Chapter 7. Deductions and Losses: Certain Business Expenses and Losses
Chapter 8. Depreciation, Cost Recovery, Amortization, and Depletion
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Chapter 9. Deductions: Employee and Self-Employed-Related Expenses
Chapter 10. Deductions and Losses: Certain Itemized Deductions
Chapter 11. Investor Losses
Part 4. Special Tax Computation Methods, Tax Credits, and Payment Procedures
LI
Chapter 12. Alternative Minimum Tax
Chapter 13. Tax Credits and Payment Procedures
BR
Part 5. Property Transactions
Chapter 14. Property Transactions: Determination of Gain or Loss and Basis Considerations
Chapter 15. Property Transactions: Nontaxable Exchanges and Tax-Free Transactions
Chapter 16. Property Transactions: Capital Gains and Losses
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Chapter 17. Property Transactions: § 1231 and Recapture Provisions
Part 6. Accounting Periods, Accounting Methods, and Deferred Compensation
Chapter 18. Accounting Periods and Methods
Chapter 19. Deferred Compensation
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Part 7. Corporations and Partnerships
Chapter 20. Corporations and Partnerships
, Solution and Answer Guide: Young, Nellen, Persellin, Cuccia, Lassar, Cripe, Gill, SWFT Individual Income Taxes
2027, 9798214058085; Appendix F: Practice Set Assignments—Comprehensive Tax Return Problems
Solution and Answer Guide
YOUNG, NELLEN, PERSELLIN, CUCCIA, LASSAR, CRIPE, GILL, SWFT INDIVIDUAL INCOME TAXES
2027, 9798214058085; APPENDIX F: PRACTICE SET ASSIGNMENTS—COMPREHENSIVE TAX
RETURN PROBLEMS
TABLE OF CONTENTS
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Problem 1 Solutions ....................................................................................... 1
Problem 2 Solutions ...................................................................................... 4
PROBLEM 1 SOLUTIONS
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1. Christopher reports his taxable compensation of $85,000 on Line 1 of Form 1040. This
includes his salary of $105,200 and the $6,000 bonus he received in 2025 (because he
is a cash basis taxpayer). This sum is reduced by his $19,000 contribution to his
§ 401(k) plan (taxation is deferred until he takes distributions from the plan) and
$7,200 of health insurance premium payments. Because these premiums were paid
LI
with pre-tax dollars, these costs are not included on Schedule A as qualifying medical
expenses. The cost of commuting from home to work and back home again is a
personal expense, so Christopher is not permitted to claim a deduction for his
commuting mileage.
BR
2. Ashley reports her income from her sole proprietorship on Schedule C (Form 1040).
Her consulting income of $72,000 is reported on Part I of Schedule C. Since she uses
the cash method of accounting for tax purposes, she includes the $3,000 receipt for
work done in 2024 but not the $5,000 she billed for 2025 work that she has not yet
collected. The $6,400 uncollected receivable from 2023 cannot be deducted as a bad
debt because Ashley has no basis in the item. (She never recognized that income in a
AR
prior year.)
Her total deductible business expenses are $17,474:
• Line 9 Car expenses of $658 for mileage (940 miles × $0.70 standard business
mileage rate)
• Line 13 Depreciation of $800 on the fireproof safe (from Form 4562, see item 3)
Y
• Line 22 Supplies of $8,000 ($4,800 drafting supplies + $3,200 reproduction
materials)
• Line 23 Taxes and licenses of $500
• Line 27b Other expenses of $1,250 (detailed in Part V of Schedule C, page 2, as
Dues and subscriptions $390 and Uniforms $860)
• Line 30 Home office deduction of $6,266 (see item 3)
Net profit from the sole proprietorship is $54,526 on Line 31, Schedule C (Form 1040).
Because Ashley is self-employed, she computes self-employment tax of $7,704 using
Schedule SE (Form 1040). This tax is reported on Line 4 of Schedule 2 (Form 1040).
© 2027 Cengage. All Rights Reserved
, Solution and Answer Guide: Young, Nellen, Persellin, Cuccia, Lassar, Cripe, Gill, SWFT Individual Income Taxes
2027, 9798214058085; Appendix F: Practice Set Assignments—Comprehensive Tax Return Problems
Half of the self-employment tax of $3,852 is deductible on Line 15 of Schedule 1 (Form
1040). Ashley has a qualified business income deduction of $10,135 [(net profit of
$54,526 – deductible half of self-employment tax of $3,852) × 20%], which is
computed on Form 8995 and reported on Line 13a of Form 1040.
3. Ashley computes the deduction for her home office on Form 8829. Computations in
Part I show that 12.50% of the home’s living area is devoted to business use (300
square feet of office space compared to 2,400 total square feet in the home).
Computations in Part II differentiate between direct costs (painting expense of $1,250
reported on Line 20) and indirect costs associated with the home which need to be
prorated. Indirect costs include mortgage interest ($9,700 on Line 10), real estate taxes
LU
($14,100 on Line 11), insurance ($3,200 on Line 18), repairs and maintenance ($1,800 on
Line 20), and utilities ($6,200 on Line 21). Depreciation on the home of $641 is
computed in Part III on the prorated business-use adjusted basis for the house of
$25,000 ($200,000 × 12.50%) multiplied by 2.564% (the MACRS depreciation rate for
39-year nonresidential real property for the recovery period of 2–39 years). The total
home office deduction of $6,266 is reported on Line 36 of Form 8829 as well as on
XE
Line 30 of Schedule C (Form 1040). Because Ashley prefers to avoid depreciating
capital expenditures over time, she can deduct the $800 spent on the file cabinet via
§ 179 expensing by completing Form 4562 Part I for this acquisition. Alternatively,
Ashley can deduct the cost of the file cabinet via bonus depreciation by completing
Form 4562 Part II for this acquisition. The former tax treatment is illustrated in the
completed tax return, with the resulting deduction reported on Line 13 of Schedule C
LI
(Form 1040).
4. Ashley’s exchange of the Travis County property for the Tarrant County property
qualifies as a like-kind exchange. She reports this transaction on Form 8824.
BR
Information about the exchange is reported in Part I of the form. The realized gain,
recognized gain, and basis in the like-kind property received are reported in Part III.
Ashley’s basis in the Travis County property is its fair market value when her uncle
passed away. Ashley must recognize gain of $10,000 on the exchange, the lesser of the
cash received or the realized gain of $160,000. This recognized gain is reported on Line
23 of Form 8824.
AR
5. The installment sale method of accounting generally applies to gains on dispositions of
property if the seller receives at least one part of the purchase price in a year
following the year of sale. Under this method of accounting, recognition of the realized
gain occurs when installment payments are received. Installment sales are reported on
Form 6252. The gross profit from the sale is computed in Part I. Ashley’s $30,000 basis
in the Blanco County land was the fair market value of the property when her uncle
died. Ashley’s gross profit percentage from the sale is computed in Part II to be 75.00%
Y
($90,000 ÷ $120,000), which translates into a gain of $15,000 on the $20,000
installment collected this year. This recognized gain is reported on Line 24 of Form
6252. The gain of $15,000 from the installment sale is combined with the $10,000 gain
from the like-kind exchange (see item 4) to be reported as a long-term capital gain of
$25,000 on Line 11 of Part II of Schedule D (Form 1040).
6. Although Alexis was one of Christopher’s best servers at the restaurant, the loan to
her was a nonbusiness debt since the money was not loaned in connection with
business. A nonbusiness bad debt is treated as a short-term capital loss if it is
uncollectible. To be deductible, however, nonbusiness bad debts must be completely
