Question: Melanie and Mike Franklin have one child, Emily, and one child Adleigh expected to be born in June 2017. Melanie works as a computer programmer for Iamwatchingyou Corp. Mike primarily stays at home to focus on raising Emily, who is 5. Prior to staying home Mike had worked as an art director running local specialized exhibits for museums in the immediate area. Mike is considering consulting with the local museums. In addition to asking you to aid them in preparing this year's tax return, Melanie and Mike have asked you to examine what the impact will be to them if Mike starts his own part-time business venture in consulting. The following financial information for 2016 is provided for you below.
1. Melanie's wages from Iamwatchingyou Corp.: $72,500.
a. Federal taxes withheld $4,914.
b. Social Security taxes withheld $5,546.
c. State taxes withheld $2,538.
d. Melanie paid $2,300 in interest on her student loans for 2016, and Mike paid $1,200 in interest on his student loans for 2016.
e. Melanie's employer provided healthcare coverage for the family. The healthcare coverage premiums cost Melanie $1,000 over the course of the year, while the employer incurred an additional $6,875 for the healthcare coverage premium for Melanie and her family. Melanie's healthcare coverage premiums were taken out of her check on a pre-tax basis.
f. Melanie incurred an additional $625 in premiums for dental and vision family plans. These amounts were also taken out of Melanie's gross pay on a pre-tax basis.
g. Melanie had an additional $3,625 taken out of her check for her contributions to an employer sponsored 401K plan. The $3,625 was taken out on a pre-tax basis. The employer contributed an additional $3,625 to Melanie's 401K plan.
2. Combined information.
a. Melanie and Mike own a home. They paid $4,500 in mortgage interest during the year.
b. Mike and Melanie paid $2,875 in dependent care expenses for care for Emily throughout the year.
c. Melanie and Mike incurred an additional $500 in out of pocket dental expenses this year, and an additional $1,000 in out of pocket medical expenses this year.
3. Proposed Business: Based on Mike's computations, he expects the following.
a. Gross receipts of $38,625 the first year.
b. Cost of Goods Sold $10,313.
c. Home Office Expense: $1,812. Mike has a room that he intends to use for his office.
d. Laptop Purchased 2 years ago for $3,500. Mike intends to convert this laptop to business use to keep track of accounting, handle internet orders, etc. The laptop is currently valued at $1,063.
e. Tablet Purchased for Christmas: $375. Mike has a hard time keeping Emily from finding it and running away with it, but assures you that he only uses it for the business.
f. Decorating supplies currently valued at: $13,500. While Mike uses some of it to continue for family birthday parties, he believes that 80 percent of the time, the equipment will be used to help display artwork in the shows. The decorating supplies were purchased last year for $16,250.
g. Transportation expenses used to deliver products both to the post service and to local customers: 3,000 miles per year. He intends to use his personal vehicle for now.
h. Miscellaneous expenses $1,500 per year.
i. Accounting software, office supplies, etc. $713
To Do: 1. Prepare the 2016 tax return without considering Mike's proposed business.
2. Prepare a second 2016 tax return assuming that Mike had conducted his consulting business venture in 2016. Assume the numbers supplied are accurate.
3. What is the after tax-profit that Mike can expect if he were to open the business?
4. Prepare a one page tax memo to Melanie and Mike discussing the pertinent information for the proposed business.