Due date: Tuesday 11/24/2015 at the School of Accounting
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.
- 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
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
- 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
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.
- 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.
- 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.
- 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.
- 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.
- 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)
- 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.
- 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.
A vacation package $ 8,500
Income tax refunds for tax year 2013
Federal tax $1,400
State tax 450 $1,850
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
Ad valorem property tax on personal residence 3,800
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.
- 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.
- 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.
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
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