accounting-TAX 4001 Summer A 2015 Tax Return Assignment

TAX 4001 Summer A 2015 Tax Return

Assignment

 

Due date: Tuesday 11/24/2015at the School of Accounting

 

Facts:

Charles

F. and Heather M. Schneider are married and live at 9520 SW 18 Street Rockville,

MD 20847. They file a joint return and are calendar year, cash basis taxpayers.

 

1. Charles is a self-employed

accountant (professional activity code is 541213). He maintains an office at 8450

Old Georgetown Rd, Bethesda, MD 20810. He shares the suite with several other

professionals and has no employees. A receptionist handles all calls and is

provided by the landlord as part of the services offered to tenants. Charles’s

work-related expenses for 2014 are as follows:

 

Office rent $9,800

Utilities 3,000

Accounting services 1,200

Office expenses (supplies, use of copier, etc.) 1,100

Legal services (see item 9. below) 300

State and local license fees 900

Renter’s insurance (covers personal liability,

casualty, theft) 1,500

Replacement of reception room furnishings (6/5/2014) 2,200

Professional dues and subscriptions to trade

publications 600

Business lunches 1,400

Contribution to H.R. 10 (Keogh) plan

5,000

Medical insurance premiums 7,000

 

 

The business meals Charles paid

for were to entertain various visiting executives from the clients he does

business with. As is the case with all of Charles’s business transactions, the

lunches are properly documented and supported by receipts. Because the reception room furnishings were

looking shabby, Charles and his suite-mates had them replaced. The $2,200 Charles spent was his share (i.e.,

a sofa and coffee table) of the cost. Charles

follows a policy of avoiding depreciation by utilizing the Section 179 election

to expense assets. All of Charles’s

office equipment (e.g., desk, chairs, file cabinets, computer, etc.) has

previously been expensed. Of 16,000

total miles in 2014, Charles drives his car (a Ford Explorer purchased on

6/1/2012) 8,400 miles for business (not including commuting) and has business

parking and toll charges of $310. The Schneiders

use the automatic mileage method of claiming automobile expenses.

 

2. Heather is an occupational therapist employed

on a part-time basis by Thompson Consultants, Inc. Her employer does not

provide her with an office, and she has no separate office in her home. She does, however, maintain her business

records at home and lists it as her business address. After receiving her assignments by phone, she

drives her car Mazda 626 (purchased on

7/1/2009 directly to the residence of the patient. Therapy Consultants, Inc. requires all of its

therapists to wear uniforms while on duty.

As Heather is not a full-time employee, she is not covered by her

employer’s health or retirement plans. Heather’s

work-related expenses for 2014 appear below:

 

Mileage (total miles in 2014 = 12,000) 8,000 miles

Professional

dues and subscriptions $1,280

Continuing

education programs (required to

 

maintain license) 440

Annual

license fee 180

Therapy

supplies 260

Uniforms

purchased (including $240 for shoes) 410

Laundering

of uniforms 210

 

 

3.

At

a foreclosure sale on May 8, 2014, the Schneiders purchased a house to be held

as a rental investment. The property

cost $400,000 (of which $50,000 is allocated to the land) and is located at 1511

Rockville Rd, Rockville, MD 20850. After

making minor repairs and placing the property in service on June 1, the Schneiders

were fortunate in that they were able to rent it immediately for $2,650 a month

(payable on the first of each month).

Information regarding the rental property for 2014 is summarized below:

 

Rent received ($2,650 x 8 months) $21,200

Refundable

damage deposit 4,000

Property

taxes 1,800

Interest

on mortgage 1,500

Repairs 400

Insurance 2,500

Street

paving assessment 3,500

 

Although the property was rented

for only seven months, in late December 2014 the tenants prepaid the January 2015

rent because they were going to be out of town on New Year’s Day. The special assessment was levied by the city

of Bethesda to resurface the street in front of the house. The Schneiders plan to use MACRS

straight-line depreciation, assuming the mid-month convention.

 

 

4.

On

her birthday on June 27, 2004, Heather received as a gift from her father

unimproved land located in Dumas County (TN).

The land cost her father $80,000 in 1975 and had a value of $205,000 on

the date of the gift. No gift tax was

due as a result of the transfer. On July

15, 2014, Heather sold the land to an adjoining property owner for $320,000. She

incurred $28,200 in selling costs.

 

5.

When

Heather’s father died in 2010, he had a life insurance policy issued by John

Hancock Insurance Company with a maturity value of $1,000,000. As the designated beneficiary of the policy, Heather

picked a settlement option of $215,000 annually, payable over five years. In 2014, she received a check from John

Hancock for $215,000.

 

6.

Based

on a tip from a friend who is an investment adviser, on November 6, 2012, Charles

purchased 15,000 shares of common stock in Turner Corporation for $14,000, a

manufacturer of bicycle shocks, was experiencing financial difficulties and was

contemplating bankruptcy. Nevertheless,

the adviser was sure that its liquidation value would far exceed the cost of

the stock. Turner went into receivership

in early 2014. On August 15, 2014 the receiver indicated that investors could

expect to receive $.20 on the dollar in the following year.

 

7.

In

2013, a hit-and-run driver damaged Charles’s Ford while it was parked in front

of his office. Charles’s insurance

carrier, State Farm Insurance Company, paid the cost of repairing the vehicle,

but he was charged $2,000 under the deductible provision. In 2014, the authorities located the driver

who caused the accident, and State Farm recovered on the loss. As a result, in February 2014 Peregrine

reimbursed Charles for the $2,000 deductible.

The Schneiders itemized when they filed the 2013 income tax return, and

claimed a $1,400 deduction for this casualty loss.

 

8.

In

2014 Heather was involved in an auto accident and received physical injuries

due being hit by a drunk driver. She received $60,000 in damage payments which

included $35,000 in punitive damages)

 

9.

Charles

has a 25% ownership in Gessum Company EIN 13-333333, an 1120S corporation. In

2014 Gessum Company recorded gross receipts of $300,000, Cost of Goods sold of

$90,000 and other expenses of $140,000. Charles made cash withdrawals during

the year totaling $40,000.

 

10.Besides those previously noted,

the Schneider’s had the following receipts for 2014:

 

Payment for services

rendered as an accountant

(as supported on Forms 1099 issued by several

payor client companies) $80,000

 

Therapist wages

(Form W-2 issued by Therapy Consultant’s Inc.

$42,000

 

A vacation package $ 8,500

 

Income tax refunds

for tax year 2013

Federal tax $1,400

State tax 450

$1,850

 

Interest income–

City of Bethesda bonds $1,800

Interest on SunTrust Bank CD 3,600 $5,400

 

Estate sale

$13,600

 

Loan repayment

$20,000

 

The

vacation package was a Christmas surprise from a former client as a way of expressing

thanks for the accounting work Charles had done.

 

The estate sale (Note: an estate sale

is like an upscale garage sale) involved mostly items Heather inherited from

her father (e.g., boat and trailer, camper, hunting and fishing

equipment). Heather has no proof as to

the cost of these assets, nor does she know their value at the time of his death

(assume that all assets declined in value when comparing inherited value to

proceeds from sale of each item).

 

Three years ago, Charles had loaned a

friend, Michael, $15,000 to help start a business. No note was signed, no interest was provided

for, and no due date was specified. Much

to Charles’s surprise, Michael repaid the loan at $20,000 in late 2014.

 

10. In addition to any items previously noted,

the Schneiders had the following expenses for 2014:

 

Medical

and dental expenses not covered by

Insurance $8,000

 

Ad valorem property tax on personal

residence 3,800

 

Interest—

Home mortgage $3,800

Interest on home equity loan 1,400 5,200

 

Charitable contributions 4,000

 

Tax return preparation fee (60% relates to

Charles’s

business) 600

 

Of the $8,000 in medical expenses, $5,000

was used to pay for Nancy Schneider’s cosmetic surgery to smooth over her

facial wrinkes. Nancy is Charles’s

mother who lives with them and would otherwise qualify as their dependent

except for the gross income test.

During 2014, Heather borrowed

$20,000 under a home equity loan arrangement.

The money was used to help pay family credit card debt and to purchase

jet skis for the family to enjoy on weekends.

 

11.Besides Nancy, the Schneider’s’

household includes their three children:

Bo (age 17), Judy (age 16), and John (age 14). All are full-time students. Bo is very proficient with the bagpipes and

during the year earned $4,400 playing at special occasions (i.e., mainly

funerals). Bo is saving his earnings for

college.

 

 

12.

Heather’s

Form W-2 from Tompson Consultants, Inc. shows $2,000 withheld for Federal

income tax and $941 for state income tax.

Charles made equal quarterly payments of $2,600 (Federal) and $500

(state). Relevant Social Security

numbers are noted below.

 

Social Security

Name Number Birth

Date

 

Charles

L. Schneider 123-45-6789 07/01/1967

Heather

S. Schneider 123-45-6782 02/20/1968

 

Bo

Schneider 123-45-6788 04/09/1997

Judy

Schneider 123-45-6783 12/06/1998

John

Schneider 123-45-6781 07/29/2000

Nancy

Schneider 111-11-1111 01/03/1939

 

REQUIREMENTS

 

Prepare

an income tax return by hand in blue

pen (no tax software) with appropriate schedules that can be found at the IRS

website (irs.gov) for the Schneiders for 2014.

In doing this, use the following guidelines:

 

·

Make

necessary assumptions for information not given in the problem but needed to

complete the return. Be aware of the

possible application of certain tax credits.

·

The

taxpayers have the necessary substantiation (e.g., records, receipts) to

support the transactions involved.

·

If

a refund results, the taxpayers want it sent to them.

·

The

Schneiders do not wish to contribute to the Presidential Election Campaign

fund.

·

In

the past several years, the Schneiders have itemized their deductions from AGI (have not claimed the standard

deduction option).

 

Due date: The Tax Return

Assignment Due on Tuesday 11/24/2015 by 4:30PM to be turned in to the

School of Accounting and given to secretary.

·

Please

make sure that you sign the log in sheet there.

·

Don’t

forget to use a cover page and put your name on the assignment.

·

Staple

all pages including how you reached an amount if not obvious with backup

supporting calculations referenced to the Tax Schedule and information # (i.e.1-12)

on the assignment.

·

Maintain

a copy of the project for yourself