PROBLEM 1 Steven B. (age 42) and Debra S. (age 41) Marshall are married and live...

  

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PROBLEM 1 Steven B. (age 42) and Debra S. (age 41) Marshall are married and live at 426 East Twin Oaks Road, Sioux Falls, SD 57105. Steven is the regional manager for a restaurant chain (Moveable Feast), and Debra is a self-employed architect. They are calendar year, cash basis taxpayers. 1. Steven's annual salary from Moveable Feast is $82,000. He also earns an annual bonus. The amount is determined in late December, and Steven receives it in January of the next year. Steven's 2015 bonus was $6,000 (received in 2016), and his 2016 bonus was $7,000 (received in 2017). Steven is also paid a flat travel allow- ance of $16,000 per year. The allowance is to cover his expenses in visiting restau- rants in his region to conduct inspections, consult with the local managers, and recruit potential hires. Although Steven maintains substantiation of his travel, he is not required to account for these expenses to Moveable Feast. Steven participates in his employer's group health insurance plan to which he contributed $3,600 in 2016 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Steven, Debra, and their two dependent children. Moveable Feast does not provide any retirement benefits, but it has established a § 401(k) plan to enable its employees to save for retirement. Steven contributed $10,000 to the plan in 2016. The company provides an office for Steven's use that is located at 110 North Reid Street, Suite 217, Sioux Falls. 2. On March 5, 2015, Steven purchased a new Ford Focus for use in his job. The car cost $24,000 (including sales tax), with no trade-in involved. The car was driven 14,000 miles in 2015 and 18,000 in 2016 with usage as follows: 20% for his com- mute to the office and 80% for business trips. The mileage for 2016 was evenly dis- tributed throughout the year. Steven deducts actual operating costs for his vehicle, using the 200% declining-balance method with a half-year convention to compute MACRS depreciation. In addition, Steven did not claim any § 179 expensing or additional first-year depreciation last year when he bought the car. Steven's expenses related to operating the Focus for 2016 are as follows: Gasoline Oil change and lubrication $2,900 150 Auto insurance 1,800 Repairs 400 Auto club dues 160 License and registration 120 Interest on car loan 900 3. Steven also incurred the following out-of-pocket employment-related expenses during 2016: $2,600 3,200 Airfare Lodging Meals 3,400 Entertainment 800 Car rentals, limos, taxis 600 Parking and tolls 300 Subscriptions to trade journals 120 Dues to trade association 80 Business gifts 550 Speeding tickets 620 Steven made the business gifts in late December to managers of the top 11 restau- rants in his region, with each manager receiving a $50 gift card to a national retailer. While on business trips in his car, Steven was cited for speeding several times and paid related fines totaling $620. 4. Debra Marshall is a licensed architect who works part-time on a consulting basis. Her professional activity code is 541310. Her major clients are real estate develop- ers (both residential and commercial) for whom she prepares structural designs and construction plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Debra does her work at the cli- ent's location or in her office at home (sce item 5 below). Debra collected $52,000 in consulting fees during 2016. This total includes a $3,000 payment for work she performed in 2015 and does not include $5,000 she billed in December for work performed in late 2016. In addition, Debra has an unpaid invoice for $6,000 from a client for work done in 2014. This client was con- victed of arson in August 2013 and is now serving a five-year sentence in state prison. Debra is certain she will never collect the $6,000 she is owed. Her business expenses for 2016 are: Drafting supplies Reproduction materials (e.g, molds, models, photos, blueprints, copies) On-site work clothing (e.g., hip boots, safety glasses, safety helmet) $4,800 3,200 800 Professional license fee 400 Subscriptions to professional journals 250 Dues to professional organizations 240 In addition, Debra drove the family Acura (purchased on June 7, 2015) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2016, Debra drove the car a total of 10,000 miles. 5. When the Marshalls purchased their home on February 2, 2015, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Debra's office. As of January 1, 2016, the home had an adjusted basis of $240,000 for purposes of line 36 of Form 8829 (of which $40,000 is attributable to the land)-the fair market value of the property is in excess of this amount. Relevant information concerning the residence for all of 2016 appears below. Homeowner's insurance $3,200 Repairs and maintenance 1,800 Utilities 6,200 Painting (office area only) 2,500 The cost of Debra's office furniture and equipment was previously deducted under $ 179 in the years these assets were acquired. On June 29, 2016, she purchased a fireproof file cabinet for $800 to safeguard the blueprints of her structural designs and construction plans. If possible, Debra prefers to avoid depreciating capital expenditures. 6. One of Debra's clients was interested in building a shopping center on a tract of land Debra owned in Lincoln County. She inherited the property from her uncle when he died on June 6, 1996. At that time, the land was worth $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2016, Debra exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000. 7. On September 2, 2016, Debra sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1996, and it was worth $30,000 on June 6, 1996. Under the terms of the sale, Debra received cash of $20,000 and four notes to be received at one-year intervals. Each note calls for the payment of $25,000 plus simple interest of 8%. To the allowed by law, Debra wants to defer recognition of gain as long as possible. 8. In early 2015, Steven learned that one of his restaurant managers, Mindy Smith, was suffering domestic abuse at the hands of her husband, Billy. When Billy started to abuse their 5-year-old daughter too, Mindy decided it was time to get away. Before they left on April 14, 2015, Steven loaned Mindy $5,500 to help her and her daugh- ter relocate. Steven had her sign an interest-free note due in one year. Steven never heard from Mindy again. In late 2016, Steven learned that Billy had tracked down Mindy and their daughter and killed both of them before he committed suicide. Given these tragic circumstances, Steven has no expectation that the loan will ever be repaid. 9. On August 5, 2014, Steven purchased 1,000 shares of Farmer's Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corpo- ration was formed to establish and operate farmers' markets in midsize cities throughout the United States. Although some market locations were profitable, the venture as a whole proved to be a failure. In November 2016, FMA's remaining assets were seized by its creditors, and FMA stock became worthless. 10. In addition to the items previously noted, the Marshalls had the following receipts for 2016: Interest income: General Motors corporate bonds City of Sioux Falls, SD bonds Castle Bank certificate of deposit $1,900 1,400 210 $ 3,510 Qualified dividends from MG&E Inc. 3,100 Refund from HomeStuff 430 Loan repayment by Sarah Marshall-Caine 4,500 Cash gifts from Debra's parents 32,000 2015 Federal income tax refund 290 In December 2015, the Marshalls made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff (a discount big box store). They called the manager when they realized they did not receive the advertised sale price. Conse- quently, the store corrected the mistake and sent a $430 refund that the Marshalls received in January 2016. Four years ago when his sister Sarah married, Steven lent her $4,000 to help pay for her honeymoon. Steven was pleasantly surprised when Sarah paid him back (plus interest of $500) on December 20, 2016. On March 20 of cach year, Debra's parents send a generous gift of cash as a birthday present. Just as she has done for the past seven years, Debra immediately invested the cash in her children's § 529 college savings plans. 11. The Marshalls had the following expenditures for 2016: Debra's contribution to her traditional IRA $5,500 Net gambling loss Life insurance premiums Medical and dental expenses not covered by insurance 1,000 2,700 6,200 Taxes: Ad valorem taxes on personal residence $4,800 State and local sales taxes from receipts 3,200 8,000 Interest on home mortgage 4,000 Cash Contributions: Goodwill (Sloux Falls branch) 1,200 South Dakota governor's election campaign fund 300 1,500 The $1,000 net gambling loss for 2016 is the difference between the Marshalls' gam- bling winnir the universal life insurance policies that Steven and Debra own. The first benefici- ary on both policies is the other spouse, with the second beneficiaries being the children. Included in the medical expenses are $1,200 incurred in 2015, which were paid in carly February 2016. The Marshalls can substantiate the $3,200 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Sioux Falls is 2%. (HINT: Check to see if the Optional Sales Tax Tables provide the Marshalls with a greater deduction.) Debra contributed to the governor's campaign fund because she thinks his influence was key in getting the Lincoln County land rezoned for commercial use (see item 6 above). of $1,200 and losses of $2,200. The life insurance premiu relate to 12. The Marshalls maintain a houschold that includes their two children, Nickolas (age 16) and Kaleigh (age 19). Nickolas, a junior in high school, is a talented wrestler. In hopes of competing at the state tournament, he spends all of his free time on weight training when he's not at wrestling practice. Kaleigh graduated from high school on June 7, 2016, and is undecided about college. She is an accomplished vo- calist and during 2016 earned $7,200 performing at various events (e.g., weddings, funerals). Kaleigh placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself. 13. Steven's Form W-2 from Moveable Feast shows $13,800 withheld for Federal income tax. The Marshalls have made total quarterly income tax payments of $4,000. 14. Relevant Social Security numbers are noted below: Soclal Security Number Name Steven B. Marshall 123-45-6786 Debra S. Marshall 123-45-6787 Kaleigh J. Marshall Nickolas W. Marshall 123-45-6788 123-45-6789 APPENDIX E Practice Set Assignments Comprehensive Tax Retum Pro Requirements Prepare an income tax return (with appropriate schedules) for the Marshalls for 2016, using the following guidelines: • The Marshalls choose to file a joint income tax return. • The Marshalls do not want to contribute to the Presidential Election Campaign Fund. • The Marshalls do not own any foreign bank accounts or other investments. • The Marshalls prefer to receive any refund of overpaid taxes. • The taxpayers are preparing their own return (i.e., no preparer is involved). • For the past several years, the Marshalls have itemized their deductions from AGI. • The taxpayers have the necessary substantiation (e.g., records, receipts) to sup- port all transactions reported in their tax return. • Make necessary assumptions for information not given in the problem but needed to complete the return. PROBLEM 1 Steven B. (age 42) and Debra S. (age 41) Marshall are married and live at 426 East Twin Oaks Road, Sioux Falls, SD 57105. Steven is the regional manager for a restaurant chain (Moveable Feast), and Debra is a self-employed architect. They are calendar year, cash basis taxpayers. 1. Steven's annual salary from Moveable Feast is $82,000. He also earns an annual bonus. The amount is determined in late December, and Steven receives it in January of the next year. Steven's 2015 bonus was $6,000 (received in 2016), and his 2016 bonus was $7,000 (received in 2017). Steven is also paid a flat travel allow- ance of $16,000 per year. The allowance is to cover his expenses in visiting restau- rants in his region to conduct inspections, consult with the local managers, and recruit potential hires. Although Steven maintains substantiation of his travel, he is not required to account for these expenses to Moveable Feast. Steven participates in his employer's group health insurance plan to which he contributed $3,600 in 2016 for medical coverage. These contributions are made with after-tax dollars. The health plan covers Steven, Debra, and their two dependent children. Moveable Feast does not provide any retirement benefits, but it has established a § 401(k) plan to enable its employees to save for retirement. Steven contributed $10,000 to the plan in 2016. The company provides an office for Steven's use that is located at 110 North Reid Street, Suite 217, Sioux Falls. 2. On March 5, 2015, Steven purchased a new Ford Focus for use in his job. The car cost $24,000 (including sales tax), with no trade-in involved. The car was driven 14,000 miles in 2015 and 18,000 in 2016 with usage as follows: 20% for his com- mute to the office and 80% for business trips. The mileage for 2016 was evenly dis- tributed throughout the year. Steven deducts actual operating costs for his vehicle, using the 200% declining-balance method with a half-year convention to compute MACRS depreciation. In addition, Steven did not claim any § 179 expensing or additional first-year depreciation last year when he bought the car. Steven's expenses related to operating the Focus for 2016 are as follows: Gasoline Oil change and lubrication $2,900 150 Auto insurance 1,800 Repairs 400 Auto club dues 160 License and registration 120 Interest on car loan 900 3. Steven also incurred the following out-of-pocket employment-related expenses during 2016: $2,600 3,200 Airfare Lodging Meals 3,400 Entertainment 800 Car rentals, limos, taxis 600 Parking and tolls 300 Subscriptions to trade journals 120 Dues to trade association 80 Business gifts 550 Speeding tickets 620 Steven made the business gifts in late December to managers of the top 11 restau- rants in his region, with each manager receiving a $50 gift card to a national retailer. While on business trips in his car, Steven was cited for speeding several times and paid related fines totaling $620. 4. Debra Marshall is a licensed architect who works part-time on a consulting basis. Her professional activity code is 541310. Her major clients are real estate develop- ers (both residential and commercial) for whom she prepares structural designs and construction plans. She also advises on building code requirements regarding the renovation and remodeling of existing structures. Debra does her work at the cli- ent's location or in her office at home (sce item 5 below). Debra collected $52,000 in consulting fees during 2016. This total includes a $3,000 payment for work she performed in 2015 and does not include $5,000 she billed in December for work performed in late 2016. In addition, Debra has an unpaid invoice for $6,000 from a client for work done in 2014. This client was con- victed of arson in August 2013 and is now serving a five-year sentence in state prison. Debra is certain she will never collect the $6,000 she is owed. Her business expenses for 2016 are: Drafting supplies Reproduction materials (e.g, molds, models, photos, blueprints, copies) On-site work clothing (e.g., hip boots, safety glasses, safety helmet) $4,800 3,200 800 Professional license fee 400 Subscriptions to professional journals 250 Dues to professional organizations 240 In addition, Debra drove the family Acura (purchased on June 7, 2015) 940 miles on her job assignments. She uses the standard mileage method to deduct business costs related to the Acura. During 2016, Debra drove the car a total of 10,000 miles. 5. When the Marshalls purchased their home on February 2, 2015, they set aside 300 square feet (out of a total of 2,400 square feet) of living space for Debra's office. As of January 1, 2016, the home had an adjusted basis of $240,000 for purposes of line 36 of Form 8829 (of which $40,000 is attributable to the land)-the fair market value of the property is in excess of this amount. Relevant information concerning the residence for all of 2016 appears below. Homeowner's insurance $3,200 Repairs and maintenance 1,800 Utilities 6,200 Painting (office area only) 2,500 The cost of Debra's office furniture and equipment was previously deducted under $ 179 in the years these assets were acquired. On June 29, 2016, she purchased a fireproof file cabinet for $800 to safeguard the blueprints of her structural designs and construction plans. If possible, Debra prefers to avoid depreciating capital expenditures. 6. One of Debra's clients was interested in building a shopping center on a tract of land Debra owned in Lincoln County. She inherited the property from her uncle when he died on June 6, 1996. At that time, the land was worth $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2016, Debra exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000. 7. On September 2, 2016, Debra sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1996, and it was worth $30,000 on June 6, 1996. Under the terms of the sale, Debra received cash of $20,000 and four notes to be received at one-year intervals. Each note calls for the payment of $25,000 plus simple interest of 8%. To the allowed by law, Debra wants to defer recognition of gain as long as possible. 8. In early 2015, Steven learned that one of his restaurant managers, Mindy Smith, was suffering domestic abuse at the hands of her husband, Billy. When Billy started to abuse their 5-year-old daughter too, Mindy decided it was time to get away. Before they left on April 14, 2015, Steven loaned Mindy $5,500 to help her and her daugh- ter relocate. Steven had her sign an interest-free note due in one year. Steven never heard from Mindy again. In late 2016, Steven learned that Billy had tracked down Mindy and their daughter and killed both of them before he committed suicide. Given these tragic circumstances, Steven has no expectation that the loan will ever be repaid. 9. On August 5, 2014, Steven purchased 1,000 shares of Farmer's Markets America (FMA) common stock for $16 a share as part of its initial public offering. The corpo- ration was formed to establish and operate farmers' markets in midsize cities throughout the United States. Although some market locations were profitable, the venture as a whole proved to be a failure. In November 2016, FMA's remaining assets were seized by its creditors, and FMA stock became worthless. 10. In addition to the items previously noted, the Marshalls had the following receipts for 2016: Interest income: General Motors corporate bonds City of Sioux Falls, SD bonds Castle Bank certificate of deposit $1,900 1,400 210 $ 3,510 Qualified dividends from MG&E Inc. 3,100 Refund from HomeStuff 430 Loan repayment by Sarah Marshall-Caine 4,500 Cash gifts from Debra's parents 32,000 2015 Federal income tax refund 290 In December 2015, the Marshalls made a major purchase of household items (e.g., appliances, furniture, etc.) at HomeStuff (a discount big box store). They called the manager when they realized they did not receive the advertised sale price. Conse- quently, the store corrected the mistake and sent a $430 refund that the Marshalls received in January 2016. Four years ago when his sister Sarah married, Steven lent her $4,000 to help pay for her honeymoon. Steven was pleasantly surprised when Sarah paid him back (plus interest of $500) on December 20, 2016. On March 20 of cach year, Debra's parents send a generous gift of cash as a birthday present. Just as she has done for the past seven years, Debra immediately invested the cash in her children's § 529 college savings plans. 11. The Marshalls had the following expenditures for 2016: Debra's contribution to her traditional IRA $5,500 Net gambling loss Life insurance premiums Medical and dental expenses not covered by insurance 1,000 2,700 6,200 Taxes: Ad valorem taxes on personal residence $4,800 State and local sales taxes from receipts 3,200 8,000 Interest on home mortgage 4,000 Cash Contributions: Goodwill (Sloux Falls branch) 1,200 South Dakota governor's election campaign fund 300 1,500 The $1,000 net gambling loss for 2016 is the difference between the Marshalls' gam- bling winnir the universal life insurance policies that Steven and Debra own. The first benefici- ary on both policies is the other spouse, with the second beneficiaries being the children. Included in the medical expenses are $1,200 incurred in 2015, which were paid in carly February 2016. The Marshalls can substantiate the $3,200 in sales taxes paid based on their purchase receipts for the year. The local sales tax rate in Sioux Falls is 2%. (HINT: Check to see if the Optional Sales Tax Tables provide the Marshalls with a greater deduction.) Debra contributed to the governor's campaign fund because she thinks his influence was key in getting the Lincoln County land rezoned for commercial use (see item 6 above). of $1,200 and losses of $2,200. The life insurance premiu relate to 12. The Marshalls maintain a houschold that includes their two children, Nickolas (age 16) and Kaleigh (age 19). Nickolas, a junior in high school, is a talented wrestler. In hopes of competing at the state tournament, he spends all of his free time on weight training when he's not at wrestling practice. Kaleigh graduated from high school on June 7, 2016, and is undecided about college. She is an accomplished vo- calist and during 2016 earned $7,200 performing at various events (e.g., weddings, funerals). Kaleigh placed most of her earnings in a savings account for future use and kept only a small amount to spend on herself. 13. Steven's Form W-2 from Moveable Feast shows $13,800 withheld for Federal income tax. The Marshalls have made total quarterly income tax payments of $4,000. 14. Relevant Social Security numbers are noted below: Soclal Security Number Name Steven B. Marshall 123-45-6786 Debra S. Marshall 123-45-6787 Kaleigh J. Marshall Nickolas W. Marshall 123-45-6788 123-45-6789 APPENDIX E Practice Set Assignments Comprehensive Tax Retum Pro Requirements Prepare an income tax return (with appropriate schedules) for the Marshalls for 2016, using the following guidelines: • The Marshalls choose to file a joint income tax return. • The Marshalls do not want to contribute to the Presidential Election Campaign Fund. • The Marshalls do not own any foreign bank accounts or other investments. • The Marshalls prefer to receive any refund of overpaid taxes. • The taxpayers are preparing their own return (i.e., no preparer is involved). • For the past several years, the Marshalls have itemized their deductions from AGI. • The taxpayers have the necessary substantiation (e.g., records, receipts) to sup- port all transactions reported in their tax return. • Make necessary assumptions for information not given in the problem but needed to complete the return.