Spicers' Individual Tax Return with Sole Proprietorship for 2015

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Homework Assignment
AI Summary
This assignment presents a detailed individual tax return for William and June Spicer for the 2015 tax year, incorporating the complexities of a sole proprietorship. The assignment includes the preparation of Form 1040 and various schedules and forms, such as Schedule C for the business income and expenses, Schedule D for capital gains and losses from asset sales and stock transactions, and Form 4797 for the sale of business property. The scenario involves William's gourmet market, Bill's Market, operating as an accrual-basis sole proprietorship, and June's partnership in The Bridal Shop. It covers a range of financial data including gross sales, merchandise purchases, various business expenses, interest and dividend income, itemized deductions, and tax credits. The assignment also addresses specific tax implications, such as depreciation recapture, self-employment tax, and the deduction for health insurance premiums, and childcare expenses. Furthermore, it provides insights into the calculation of adjusted gross income (AGI), itemized deductions, and tax liability. The solution considers the Spicers' estimated tax payments and the application of any refund towards the following year's taxes. The assignment highlights the correct placement of different items on the tax forms and schedules, providing a comprehensive guide to completing the individual tax return.
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INDIVIDUAL TAX RETURN WITH SOLE PROPRIETORSHIP
Note that this example is for tax year 2015 because the 2016 tax forms have not yet been
released by the IRS.
Facts
William and June Spicer have two dependent children, Sophie age 9 and Carl age 7, both of
whom live at home. (Additional personal data are provided directly on Form 1040.) William
operates a gourmet market in Raleigh, Bill’s Market, as an accrual-basis sole proprietorship.
The information on gross market sales, expenses, and property transactions is the same as
provided for the regular corporate tax return (Sample Tax Return 1) except that William
receives no salary and there is no related FICA tax. This information is as follows:
The Market sold a unique piece of equipment for $13,000. It had originally cost $5,000
when purchased on March 5, 2013; it had an adjusted basis of $3,000 when sold on August
15, 2015. The Market also sold a display case for $1,000 on December 12, 2015, that had cost
$12,000 when purchased on June 6, 2011; it had an adjusted basis of $4,000 when sold. The
gains or losses on these asset sales are the same for tax and financial accounting. The
business complies with all Form 1099 requirements.
William is also a 10 percent shareholder in Imagineers Corporation, an S corporation, but
takes no active role in the business. He received a Schedule K-1 from this S corporation
reporting $1,800 in ordinary business income. June is a general partner in The Bridal Shop
Partnership. She worked 3 days a week at the shop and received a Schedule K-1 reporting a
$12,000 guaranteed payment and $8,000 in ordinary business income. June paid $3,800 for
after-school and summer child care while she worked.
Gross sales ($1,300,000 from credit card sales) $2,700,000
Merchandise purchases 1,980,000
Expenses:
Advertising $40,000
Charitable contributions 2,000
Cleaning/maintenance 12,000
Depreciation (MACRS pre-2015 purchases) 3,000
Section 179 expense (2/1/15 display case) 5,000
Payroll taxes 18,000
Health insurance 15,000*
Insurance (excludes health) 18,000
Interest expense 1,000
Licenses/fees 4,000
Meals/entertainment 1,000
Office expenses 14,000
Rent 120,000
Salary/wages 210,000
Travel 8,000
Utilities 16,000
*Includes $3,000 for health insurance for William and his family.
The following information pertains to the completion of the Spicers’ personal tax return:
Interest income $ 500
Dividend income (all qualified) 1,300
Unreimbursed doctor’s bills 8,000
Unreimbursed hospital bills 9,000
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Dental bills 2,000
Mortgage interest 14,000
Real estate taxes 3,000
Contributions to their church 1,500
The Spicers sold 10,000 shares of ABC stock on February 2, 2015 for $4,000. They had
purchased the stock on August 1, 2008 for $18,000. During 2015, the Spicers paid $300 with
their 2014 North Carolina state income tax return and made $4,600 in estimated payments for
2015. This amount exceeds their alternate state sales tax deduction. June is a volunteer at the
children’s school two days a week tutoring at-risk students. Her total mileage for her trips to
and from the school was 1,200 miles. She also had unreimbursed out-of-pocket expenses for
teaching materials of $232. Additionally, the Spicers contribute $3,000 each to regular IRAs.
The Spicers made quarterly estimated tax payments of $17,500 each quarter. All payments
were made when due. Any refund that the Spicers have for 2015 is to be applied to their 2016
estimated taxes.
Form 1040 and Related Forms and Schedules
Form 1040: U.S. Individual Income Tax Return
Schedule A: Itemized Deductions
Schedule C: Profit or Loss from Business (Sole Proprietorship)
Schedule D: Capital Gains and Losses
Schedule E: Supplemental Income and Loss
Schedule SE: Self-Employment Tax (2)
Form 2441: Child and Dependent Care Expenses
Form 4562: Depreciation and Amortization
Form 4797: Sales of Business Property
Form 8582: Passive Activity Loss Limitations
Form 8949: Sales and Other Disposition of Capital Assets
The Spicers will prepare only one tax return, their Form 1040, along with all the required
schedules and forms including the Schedule C where the income and expenses for the
business are reported. A Form 4797 is completed for the business property dispositions; the
sale of the stock is entered on the Form 8949; the net gain on the equipment disposition and
the loss on the stock are both included on the Spicers’ Schedule D. The $2,000 depreciation
recapture is also entered on Form 4797 but is transferred directly to the Spicers’ Form 1040.
Two other items are not included on the Schedule C—the health insurance for William and
his family (which is deducted on page 1 of the Form 1040 as a deduction for AGI) and the
charitable contribution (which is included with the Spicers’ personal charitable deductions on
their Schedule A). June is allowed to deduct 14 cents per mile for the 1,200 miles driven
($168) for her volunteer work along with her out-of-pocket expenses of $232.
Their total itemized deductions are $23,800 and their exemptions are $16,000 (4
$4,000). They are not able to benefit from the child tax credit as their AGI exceeds the
allowable limit for claiming all or part of this credit, but they are allowed a $760 credit for
June’s child care expenses. Their dividend income is taxed at 15 percent while the rest of the
income is taxed at the regular rates.
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