ACC 407

TAX RETURN PROBLEM

A. John (age 49) and Ellen Brite (age 51) (SSN: 000-00-1111 and 000-00-2222,

respectively) are married and a file a joint return. They have one child, Britney Brite,

who is 14. John owns and operates an unincorporated specialty electrical lighting retail

store, Brite-On. Ellen spends all her waking hours trying to keep John and Britney

straight. Brite-On had the following assets on January 1, 2018:

Old Store building (acquired 4/1/2002)

$100,000

Equipment (7 year, acquired 1/10/2012)

$30,000

Inventory (FIFO method, 4,000 light bulbs @ $5/bulb)

B. Also, Brite-On purchased a competitors store on March 1, 2018, for $107,000. The

purchase price included the following:

New Store Building

$60,000 (FMV)

Land

$18,000 (FMV)

Equipment (7 year)

$11,000 (FMV)

Inventory (3,000 light bulbs @ $6 per bulb (cost)

C. On June 30, 2018, Brite-On sold the equipment acquired on 1/10/2012 for $12,000.

Brite-On leased equipment for $500 per month beginning on January 1, 2018.

D. 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, 2017, at a cost of $7/bulb.

E. Brite-On had the following revenues, in addition to the light bulb sales, and expenses:

Service Revenues

$64,000

Interest Expense on business loan

$ 4,000

Auto Expense (gas, oil, etc.)

$ 3,800

Taxes and licenses

$ 3,300

Utilities

$ 2,800

Salaries

$24,000

F. The Brites also had the following personal expenses:

Medical Bills

$10,500

Real Property Taxes

$ 4,800

State Income Taxes

$ 5,600

2

Home Mortgage Interest

$12,000

Charitable contributions to

public charities (cash)

$ 1,200

G. The Brites received interest income on a bank savings account of $275. John and Ellen

made four $4,500 federal quarterly estimated tax payments. Also, the Brites paid $2,000

with their 2018 federal tax return extension (Form 4868). For self-employment tax

purposes, assume John spent 100% of his time at the store, and Ellen spent no time at the

store.

H. The Brites sold the following stock this year:

a. 300 shares of Pear, Inc.; Purchased on 8/21/16 for $52 per share; Sold on 5/2/18

for $62 per share.

b. 1,000 shares of Nile, Inc.; Purchased on 8/24/17 for $176 per share; Sold on

6/31/18 for $166 per share.

I. The Brites do not elect Sec. 179 and always elect out of bonus depreciation.

J. The Brites would like to make the maximum deductible contribution to an IRA.

However, their neighbor, who is an engineer, told them it was too late for 2018. They

want you to check on that and make the appropriate recommendation to them.

Required: Prepare their 2018 Form 1040 (and appropriate schedules/forms) as if you are

preparing it in June, 2019, after they have filed a six month extension to file their tax

return.