John and Ellen Brite (SSN 000-00-1111 and 000-00-2222, respectively) are married and file a joint return. They have no dependents. John owns an unincorporated specialty electrical lighting retail store, Brite-On. Brite-On had the following assets on January 1, 2014:
Assets Cost
Old store building purchased April 1, 1999 ……………………………. $100,000
Equipment (7-year recovery) purchased January 10, 2009 ……………. 30,000
Inventory valued using FIFO method: 4,000 light bulbs ……………… $5/bulb
Brite-On purchased a competitor’s store on March 1, 2014, for $107,000. The purchase price included the following:
New store building ……………………………… $60,000 (FMV)
Land …………………………………………….. 18,000 (FMV)
Equipment (5-year recovery) ……………………. 11,000 (FMV)
Inventory: 3,000 light bulbs ……………………… $ 6/bulb (cost)
On June 30, 2014, Brite-On sold the 7-year recovery period equipment for $12,000. Brite-On leased a $30,500 car for $500/month beginning on January 1, 2014. The car is used 100% for business and was driven 14,000 miles during the year.
Brite-On sold 8,000 light bulbs at a price of $15/bulb during the year. Also, Brite-On made additional purchases of 4,000 light bulbs in August 2014 at a cost of $7/bulb. Brite-On had the following revenues (in addition to the sales of light bulbs) and additional expenses:
Service revenues ……………………………………… $64,000
Interest expense on business loans …………………… 4,000
Auto expenses (gas, oil, etc.) …………………………. 3,800
Taxes and licenses ……………………………………. 3,300
Utilities ……………………………………………….. 2,800
Salaries ……………………………………………….. 24,000
John and Ellen also had some personal expenses:
Medical bills ………………………………………….. $4,500
Real property taxes …………………………………... 3,800
State income taxes ……………………………………. 4,000
Home mortgage interest ……………………………… 5,000
Charitable contributions (cash) ………………………. 600
The Brites received interest income on a bank savings account of $275. John and Ellen made four $5,000 quarterly estimated tax payments. For self-employment tax purposes, assume John spent 100% of his time at the store while Ellen spends no time at the store.
Additional Facts:
• Equipment acquired in 2009: The Brites elected out of bonus depreciation and did not elect Sec. 179.
• Equipment acquired in 2014: The Brites elected Sec. 179 to expense the cost of the 5-year equipment but elected out of bonus depreciation.
• Assume that the lease inclusion rules require that Brite-On reduce its deductible lease expense by $8.
Compute the Brite’s taxable income and balance due or refund for 2014.