Question:
It has been three years since you have seen your client, Tim Smith (SSN: XXX-YY-ZZZZ), and he has made an appointment today to have his tax return prepared. During the appointment, he informed you that he started his self-service car wash a few years ago, and his business is a success. During the conversation, you gather the following information about the business:
. Business Name: The Car Wash
. Business address: 1046 Broadway Street, Huntington Beach, CA 92605
. Business description: Self-Service Car Wash
. Employer identification number: 99-8877665
. Date the business started: January 1, 2008
When you ask for the financial records of the business, he provides you with an income statement that he generated. You also ask for the general ledger so you can see the detail that was recorded in each of his accounts. Mr. Smith informs you that he uses the cash basis of accounting for his business.
Income Statement
December 31, 20XX
Revenue
Service Revenue $254,603
Expenses:
Advertising $2,520
Depreciation $31,250
Insurance $7,260
Interest expense $36,204
Licenses and fees $7,260
Miscellaneous $4,074
Office expense $8,911
Salaries and wages $67,460
Payroll taxes $9,444
Employee benefits $1,349
Professional fees $1,210
Repairs and maintenance $20,674
Telephone $900
Travel $1,500
Utilities $27,752
Net Income Before Taxes $26,835
The general ledger detail provides you with the following information about what is recorded under Miscellaneous expenses.
Miscellaneous Expenses
Meals and entertainment $2,074
Lease payments $2,000
Total miscellaneous expenses $4,074
When you ask the client about the lease payment, he tells you that he takes care of his mother and pays for her car lease payment with cash from the business. You confirm with Mr. Smith that his mother is not involved with his business in any way.
The depreciable property is the car wash building that cost $555,000. In your research, you learn that car wash buildings are depreciated over 15 years under the half-year convention using the Modified Accelerated Cost Recovery System (MACRS). This building is in its third year of service.
Additional Information:
To properly prepare the tax return, please use your textbook, the Internal Revenue Code, and the Treasury Regulations to review the following tax law commonly referred to in preparing tax returns for sole proprietorships:
. 61(a), § 1.61-1(a)
. 162(a), § 1.162-1(a)
. 167(a), § 1.167-1(a)
. 168(a), § 1.168-1(a)
. 262(a), § 1.262-1(a)
. 274(n)(1)
Mr. Smith operates the Car Wash as a Sole Proprietorship. Prepare the tax return for your client's business on Form 1040 Schedule C. Complete Form 1040 Schedule SE.
Obtain the appropriate tax forms at the following Web site (this is the search page, so enter the name of each form you need), and save them to your computer: https://apps.irs.gov/app/picklist/list/formsPublications.html
Instructions for how to prepare the applicable forms are available at the same Web site. You may directly input text and numbers on to these forms through your computer using Reader. The forms do not self-calculate. Once complete, submit the following:
. Form 1040 (Schedule C)
. Form 1040 (Schedule SE)
Please submit your assignment.
For assistance with your assignment, please use your text, Web resources, and all course materials.
Other Information
Instructions:
You are completing a Sole Proprietorship tax return; 1040 Schedule C and 1040 Schedule SE
You may NOT use Tax preparation software! Use of software is considered a violation of CTU's Academic Dishonesty Policy and will result in an F for the assignment
Hints;
$36,204 interest is business mortgage interest!
Nonbusiness expenses should not be utilized and should not find their way onto tax forms
There are some expenses in the income statement that should not be utilized on the tax form
There are a couple items that qualify to be listed on Taxes and Licenses: these can be simply added together
Telephone is not considered a utility (water and power) but rather an "other expense" Meals and entertainment listed are considered business expenses but subject to the limitation discussed in chat!
Travel is 100% business travel.
The building is depreciated using Table A1 of Pub 946 (MACRS) over 15 years. It is now in its 3rd year of service.
The building is in its third year of service and you are to use the half year convention when calculating depreciation. We discussed this in chat
Instructor''s Comments:
Submitting your 1040 Schedule C and SE
It is your responsibility to ensure you submit ALL portions of each assignment!
You need to ensure all forms are submitted for grading. If you're missing one or more forms, your grade will be impacted and you will not have the opportunity to submit additional portions of your assignment after it has been graded.
WARNING! If your Tax Forms are blank after you submit then, they will yield zero points. You're responsible for ensuring that your forms retain their data when you upload them to the CTU web site; data has been known to vanish into cyberspace! This applies to ALL SUBMITTED FORMS IN THIS COURSE!
I HIGHLY SUGGEST that you download your tax forms immediately after uploading them to CTU to ensure that data has been retained.
To eliminate the risk of this occurring, you may PRINT and SCAN your tax forms and submit the scan in lieu of the fillable PDF.
You may also take screenshots of your Tax Forms using the Windows Snipping Tool and paste them into a Word Document.