ACC 3410 Principles of Taxation Assignment- Northeastern University
INDIVIDUAL TAX RETURN WITH SOLE PROPRIETORSHIP.
Facts
William Spicer (123-45-5789) and June Spicer (937-65-4321) have two dependent children, Sophie (236-52-6587) age 9 and Carl (236-52-6588) age 7, both of whom live at home. William operates a gourmet market in Raleigh, NC Bill's Market, as an accrual-basis sole proprietorship. The information on gross sales, expenses, and property transactions is shown below. William receives no salary and therefore, there is no related FICA tax for him.
The Market sold a unique piece of equipment for $13,000. It had originally cost $5,000 when purchased on March 5, 2014; it had an adjusted basis of $3,000 when sold on August 15, 2018. The Market also sold a display case for $1,000 on December 12, 2018, that had cost $12,000 when purchased on June 6, 2012; it had an adjusted basis of $4,000 when sold. The gains or losses on these asset sales are the same for tax and financial accounting. The business complies with all Form 1099 requirements.
William is also a 10 percent shareholder in Imagineers Corporation, an S corporation, but takes no active role in the business. He received a Schedule K-1 from this S corporation reporting $18,000 in ordinary business income.
June is a general partner in The Bridal Shop Partnership. She worked 3 days a week at the shop and received a Schedule K-1 reporting a $12,000 guaranteed payment and $8,000 in ordinary business income. June paid $3,800 for after-school and summer child care while she worked.
2018 financial results for Bill's Market is as follows:
Gross sales ($1,300,000 from credit card sales) 3,700,000
Merchandise purchases 2,480,000
Expenses:
Advertising 40,000
Charitable contributions 20,000
Cleaning/maintenance 12,000
Depreciation (MACRS pre-2018 purchases) 3,000
Section 179 expense (2/1/18 display case) 5,000
Payroll taxes 18,000
Health insurance 15,000*
Insurance (excludes health) 18,000
Interest expense 1,000
Licenses/fees 4,000
Meals/entertainment 10,000
Office expenses 14,000
Rent 120,000
Salary/wages 210,000
Travel 8,000
Utilities 32,000
*Includes $3,000 for health insurance for William and his family.
The following information pertains to the completion of the Spicers' personal tax return:
Interest income $ 500
Dividend income (all qualified) 1,300
Unreimbursed doctor's bills 8,000
Unreimbursed hospital bills 9,000
Dental bills 2,000
Mortgage interest 14,000
Real estate taxes 3,000
Contributions to their church 1,500
The Spicers sold 10,000 shares of ABC stock on February 2, 2018 for $4,000. They had purchased the stock on August 1, 2009 for $18,000. During 2018, the Spicers paid $300 with their 2017 North Carolina state income tax return and made $4,600 in estimated payments for 2018 to NC. This amount exceeds their alternate state sales tax deduction. June is a volunteer at the children's school two days a week tutoring at-risk students. Her total mileage for her trips to and from the school was 1,200 miles. She also had unreimbursed out-of-pocket expenses for teaching materials of $232. Additionally, the Spicers contribute $3,000 each to regular IRAs.
The Spicers made Federal quarterly estimated tax payments of $17,500 each quarter. All payments were made when due. Any refund that the Spicers have for 2018 is to be applied to their 2019 estimated taxes.
Form 1040 and Related Forms and Schedules
Form 1040: U.S. Individual Income Tax Return & Schedules 1-5
Schedule A: Itemized Deductions
Schedule C: Profit or Loss from Business (Sole Proprietorship)
Schedule D: Capital Gains and Losses
Schedule E: Supplemental Income and Loss
Schedule SE: Self-Employment Tax (2)
Form 2441: Child and Dependent Care Expenses
Form 4562: Depreciation and Amortization
Form 4797: Sales of Business Property
Form 8582: Passive Activity Loss Limitations
Form 8949: Sales and Other Disposition of Capital Assets
The Spicers will prepare only one joint tax return, their Form 1040, along with all the required schedules and forms including the Schedule C where the income and expenses for the business are reported. A Form 4797 is completed for the business property dispositions; the sale of the stock is entered on the Form 8949; the net gain on the equipment disposition and the loss on the stock are both included on the Spicer's Schedule D. The $2,000 depreciation recapture, if any, is also entered on Form 4797 but is transferred directly to the Spicers' Form 1040.
Two other items are not included on the Schedule C-the health insurance for William and his family (which is deducted on page 1 of the Form 1040 as a deduction for AGI) and the charitable contribution (which is included with the Spicers' personal charitable deductions on their Schedule A). June is allowed to deduct 14 cents per mile for the 1,200 miles driven ($168) for her volunteer work along with her out-of-pocket expenses of $232.
Their other itemized deductions are $23,800 for mortgage interest, $7,800 for Real Estate taxes, and $680 for Personal Property taxes. Their dividend income is taxed at the Capital Gain rate, while the rest of their income is taxed at the regular rates.
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