6/9 PROBLEM 2 Samantha A. Cranston, age 37, is single and lives with her dependent mother at 426 Grouse Avenue, Allentown, PA 18105. Her Social Security number is 111-21-1113. Samantha is a licensed hairstylist. She owns and operates a salon called Turning Heads, located at 480 Laurel Street, Allentown, PA 18105. Samantha's business activity code is 812112. In addition to 10 work stations de stylist chairs) and a small reception area, the shop has display and storage areas for the products she sells (see item 2 below). During the year, Samantha leased nine of the stations to other hairstylists who are considered self-employed. The IRS sanctioned the self- employment classification for the stylists in an audit of one of Samantha's prior tax returns. Samantha collected $68,000 in rents from the stylists who leased the work stations. From her own station, Samantha earned $44,000 (including tips of $8,000) for the styling services she provided to her own clients. Turning Heads is the local distributor for several beauty products (eg, con- ditioners, shampoos) that cannot be purchased anywhere else. Samantha buys these items from the manufacturers and sells them to regular patrons, walk-in customers, and other beauticians (including those who lease chairs from her). Turning Heads is also known for the selection and quality of its hairpieces Cie., wigs, toupees). The shop made the following sales during 2018: Hairpieces and wigs $69,000 Beauty products 48,000 Although Samantha operates her business using the cash method of account ing, she maintains inventory accounts for the items she sells. Relevant informa tion about the inventories (based on lower of cost or market is summarized as follows: 12/31/18 Hairpieces and wigs Beauty products 12/31/17 $10,700 11,400 $12,600 9,900 Samantha's purchases for 2018 were $30,500 of hairpieces and wigs and $26.100 of beauty products. $12.900 $4,200 1 800 Turning Heads had the following operating expenses for 2018: Utilities (ie, gas, electric, telephone) Ad valorem property taxes: On realty leg, shop building and land) On personalty leg. equipment, inventory Styling supplies (e.g.rinses, dyes, gels, hair spray) Fire and casualty insurance Liability insurance Accounting services Janitorial services Sewer service, garbage pickup Water Occupation licenses (city and state) Waiting room supplies (eg. magazines, coffee) 6,000 5,700 4.100 4,000 3,800 2.400 2.300 2,200 1,500 1300 3 In early 2018, Samantha decided to renovate the waiting room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps, coffee bar, etc. Samantha follows a policy of claiming as much depreciation as soon as possible. The old furnishings were thrown away or given to customers. For tax purposes, the old furnishings had a zero basis. APPENDIX E Practice Set Assignments Comprehensive Tax Return Problems 4. Turning Heads is located in a building Samantha had constructed at 180 Laurel Street in March 2004. The shop was built for a cost of $300,000 on a lot she purchased earlier for $35,000. Except for a down payment from savings, the cost was financed by a 20-year mortgage. For tax purposes, MACRS depreciation is claimed on the building. During 2018, the following expenses were attributable to the property $8,000 1,900 Repainting (both exterior and interior) Repairs (plumbing and electrical) In May after her accident settlement discussed in item 10 below), Samantha paid the outstanding principal on the business mortgage. To do so, she incurred prepayment penalty of $4,400. Prior to paying off the mortgage she paid regular interest on the mortgage in 2018 of $6,000. In February 2018, Tuming Heads was cited by the city for improper disposal of certain waste chemicals. Samantha questioned the propriety of the proposed fine of $2,000 and retained an attorney to represent her at the hearing. By pleading Bolo contendere, the attorney was able to get the fine reduced to $500. Samantha paid both the fine of $500 and the attorney's fee of $600 in 2018 6. In August 2018, Samantha saw an ad in a trade publication that attracted her attention. The owner of a well-respected styling salon in Reading (PA) had died and his estate was offering the business for sale. Samantha traveled to Reading spent several days looking over the business (including books and financial results), and met with the executor Samantha treated the executor to dinner and a music concert. Immediately after the concert, Samantha made an offer for the business, but the executor ejected her offer. Her expenses in connection with this trip were as follows: Car rental Motel (August 6-7) Entertainment of executor concert) Dinner with the executor Personal meals while traveling 5140 220 160 Joan Myers, one of Samantha's best stylists, left town in March 2017 to get away from a troublesome ex-husband. In order to help Joan establish a business else- where, Samantha leaned her $7,000. Joan signed a note dated March 2017 heim 9/9 In addition to the items already noted. Samantha had the following expenditures for 2018 $10,000 Contribution to pension plan Medical Premiums on medical insurance $4,800 Dental bills 1400 6,200 Property taxes on personal residence 5,500 Interest on home mortgage 3,200 Cash donations to qualified charities 4,500 Professional expenses Subscriptions to trade journals Dues to beautician groups The $10,000 contribution to the pension plan is to a $ 401(k) type of plan she established in 2018. Previously, she had contributed to an H.R. 10 (Keogh) plan but found that the $ 401(k) retirement arrangement provides more flexibility and is less complex. The medical insurance policy covers Samantha and her depen. dent mom and was issued in the name of the business (ies, Turning Heads). It does not cover dental work or capital modifications to a residence (see item 15 above). 19. During 2018, Samantha made total estimated tax payments with respect to her 2018 tax returns as follows: Federal estimated income tax payments Pennsylvania estimated income tax payments Allentown City estimated Income tax payments $16,000 4,800 800 Requirements Prepare a 2018 Federal income tax return with appropriate supporting forms and sched ules for Samantha. In doing this, follow these guidelines Make necessary assumptions for information not given but needed to complete the return Samantha is preparing her own return Samantha has the necessary written substantiation (e.g., records, receipts) to sup: port the transactions reported in her tax retum. Samantha has itemized deductions ever since she became a homeowner many years ago. The sales tax option was not chosen in 2017. and Samantha had no major purchases that qualify for the sales tax deduction in 2018 If Samantha has an overpayment of tax, she wants it refunded to her. Samantha does not wish to contribute to the Presidential Election Campaign Fund, 6/9 PROBLEM 2 Samantha A. Cranston, age 37, is single and lives with her dependent mother at 426 Grouse Avenue, Allentown, PA 18105. Her Social Security number is 111-21-1113. Samantha is a licensed hairstylist. She owns and operates a salon called Turning Heads, located at 480 Laurel Street, Allentown, PA 18105. Samantha's business activity code is 812112. In addition to 10 work stations de stylist chairs) and a small reception area, the shop has display and storage areas for the products she sells (see item 2 below). During the year, Samantha leased nine of the stations to other hairstylists who are considered self-employed. The IRS sanctioned the self- employment classification for the stylists in an audit of one of Samantha's prior tax returns. Samantha collected $68,000 in rents from the stylists who leased the work stations. From her own station, Samantha earned $44,000 (including tips of $8,000) for the styling services she provided to her own clients. Turning Heads is the local distributor for several beauty products (eg, con- ditioners, shampoos) that cannot be purchased anywhere else. Samantha buys these items from the manufacturers and sells them to regular patrons, walk-in customers, and other beauticians (including those who lease chairs from her). Turning Heads is also known for the selection and quality of its hairpieces Cie., wigs, toupees). The shop made the following sales during 2018: Hairpieces and wigs $69,000 Beauty products 48,000 Although Samantha operates her business using the cash method of account ing, she maintains inventory accounts for the items she sells. Relevant informa tion about the inventories (based on lower of cost or market is summarized as follows: 12/31/18 Hairpieces and wigs Beauty products 12/31/17 $10,700 11,400 $12,600 9,900 Samantha's purchases for 2018 were $30,500 of hairpieces and wigs and $26.100 of beauty products. $12.900 $4,200 1 800 Turning Heads had the following operating expenses for 2018: Utilities (ie, gas, electric, telephone) Ad valorem property taxes: On realty leg, shop building and land) On personalty leg. equipment, inventory Styling supplies (e.g.rinses, dyes, gels, hair spray) Fire and casualty insurance Liability insurance Accounting services Janitorial services Sewer service, garbage pickup Water Occupation licenses (city and state) Waiting room supplies (eg. magazines, coffee) 6,000 5,700 4.100 4,000 3,800 2.400 2.300 2,200 1,500 1300 3 In early 2018, Samantha decided to renovate the waiting room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps, coffee bar, etc. Samantha follows a policy of claiming as much depreciation as soon as possible. The old furnishings were thrown away or given to customers. For tax purposes, the old furnishings had a zero basis. APPENDIX E Practice Set Assignments Comprehensive Tax Return Problems 4. Turning Heads is located in a building Samantha had constructed at 180 Laurel Street in March 2004. The shop was built for a cost of $300,000 on a lot she purchased earlier for $35,000. Except for a down payment from savings, the cost was financed by a 20-year mortgage. For tax purposes, MACRS depreciation is claimed on the building. During 2018, the following expenses were attributable to the property $8,000 1,900 Repainting (both exterior and interior) Repairs (plumbing and electrical) In May after her accident settlement discussed in item 10 below), Samantha paid the outstanding principal on the business mortgage. To do so, she incurred prepayment penalty of $4,400. Prior to paying off the mortgage she paid regular interest on the mortgage in 2018 of $6,000. In February 2018, Tuming Heads was cited by the city for improper disposal of certain waste chemicals. Samantha questioned the propriety of the proposed fine of $2,000 and retained an attorney to represent her at the hearing. By pleading Bolo contendere, the attorney was able to get the fine reduced to $500. Samantha paid both the fine of $500 and the attorney's fee of $600 in 2018 6. In August 2018, Samantha saw an ad in a trade publication that attracted her attention. The owner of a well-respected styling salon in Reading (PA) had died and his estate was offering the business for sale. Samantha traveled to Reading spent several days looking over the business (including books and financial results), and met with the executor Samantha treated the executor to dinner and a music concert. Immediately after the concert, Samantha made an offer for the business, but the executor ejected her offer. Her expenses in connection with this trip were as follows: Car rental Motel (August 6-7) Entertainment of executor concert) Dinner with the executor Personal meals while traveling 5140 220 160 Joan Myers, one of Samantha's best stylists, left town in March 2017 to get away from a troublesome ex-husband. In order to help Joan establish a business else- where, Samantha leaned her $7,000. Joan signed a note dated March 2017 heim 9/9 In addition to the items already noted. Samantha had the following expenditures for 2018 $10,000 Contribution to pension plan Medical Premiums on medical insurance $4,800 Dental bills 1400 6,200 Property taxes on personal residence 5,500 Interest on home mortgage 3,200 Cash donations to qualified charities 4,500 Professional expenses Subscriptions to trade journals Dues to beautician groups The $10,000 contribution to the pension plan is to a $ 401(k) type of plan she established in 2018. Previously, she had contributed to an H.R. 10 (Keogh) plan but found that the $ 401(k) retirement arrangement provides more flexibility and is less complex. The medical insurance policy covers Samantha and her depen. dent mom and was issued in the name of the business (ies, Turning Heads). It does not cover dental work or capital modifications to a residence (see item 15 above). 19. During 2018, Samantha made total estimated tax payments with respect to her 2018 tax returns as follows: Federal estimated income tax payments Pennsylvania estimated income tax payments Allentown City estimated Income tax payments $16,000 4,800 800 Requirements Prepare a 2018 Federal income tax return with appropriate supporting forms and sched ules for Samantha. In doing this, follow these guidelines Make necessary assumptions for information not given but needed to complete the return Samantha is preparing her own return Samantha has the necessary written substantiation (e.g., records, receipts) to sup: port the transactions reported in her tax retum. Samantha has itemized deductions ever since she became a homeowner many years ago. The sales tax option was not chosen in 2017. and Samantha had no major purchases that qualify for the sales tax deduction in 2018 If Samantha has an overpayment of tax, she wants it refunded to her. Samantha does not wish to contribute to the Presidential Election Campaign Fund