John Smith, age 31, is single and has no dependents. At the beginning of 2014, John started his own excavation business and named it Earth Movers. John lives at 1045 Center Street, Lindon, UT, and his business is located at 381 State Street, Lindon, UT. The ZIP Code for both addresses is 84042. John’s Social Security number is 111-11-1111, and the business identification number is 11-1111111. John is a cash basis taxpayer.
During 2014, John reports the following items in connection with his business.
Fee income for services rendered $460,000
Building rental expense 36,000
Office furniture and equipment rental expense 9,000
Office supplies 2,500
Utilities 4,000
Salary for secretary 34,000
Salary for equipment operators 42,000
Payroll taxes 7,000
Fuel and oil for the equipment 21,000
Purchase of three new front-end loaders on January 15, 2014, for $550,000.
Purchase of a new dump truck on January 18, 2014 80,000
During 2014, John recorded the following additional items.
Interest income from First National Bank $10,000
Dividends from ExxonMobil 9,500
Quarterly estimated tax payments 11,500
John does not claim any available additional first-year depreciation.
On October 8, 2014, John inherited IBM stock from his Aunt Mildred. John had been her favorite nephew. According to the data provided by the executor of Aunt Mildred’s estate, the stock was valued for estate tax purposes at $110,000. John is considering selling the IBM stock for $125,000 on December 29, 2014, and using $75,000 of the proceeds to purchase an Acura ZDX. He would use the car 100% for business. John wants to know what effect these transactions would have on his 2014 adjusted gross income.
Write a letter to John in which you present your calculations, and prepare a memo for the tax files. Ignore any Federal self-employment tax implications.