John Smith, age 31, is single and has no dependents. At the beginning of 2013, 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 2013, John had the following items in connection with his business:
Fees for services $912,000
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, 2013, for $550,000. John made the election under § 179. 550,000
Purchase of a new dump truck on January 18, 2013 80,000
During 2013, John had 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 take additional first-year depreciation.
On October 8, 2013, 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, 2013, 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 2013 adjusted gross income.
Write a letter to John in which you present your calculations. Also prepare a memo for the tax files
Notes:
The letter to John Smith should show the calculations of the AGI if the stock was not sold and car was not purchased AND compare it to the AGI if the stock was sold and car was purchased.
Calculation of no sale of stick and purchase of car: Take the Fees for Services and subtract total business expenses and this will give you your business income before Section 179 deduction. Then add interest income and dividend income.
Calculation of sale of stock and purchase of car: Take the Fee for Services and subtract total business expenses and this will give you the business income before the Section 179 deduction. Then add business income, dividend income and gain on the stock sale.
Note the Section 179 deduction is $500,000 in both cases.
Your business expenses for both options should be the same EXCEPT on the second option (sale of stock/purchase of car) you will also have cost recovery of car.
Let's work the cost recovery for the front end loaders: Additional first year depreciation {($550,000 - $500,000) x .50} equals $25,000. Plus MACRS Cost Recovery {($550,000-$500,000-25,000)x.20} equals $5,000. $25,000 + $5,000 = $30,000
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