ACCOUNTING 308 TAX RETURN PROJECT #3 John Smith, age 31, is unmarried with one dependent child. John owns and operates his own excavation business, Earth Movers (taxed as a Sole Proprietorship). John lives at 1045 Center Street, Lindon, UT, and his business is located at 381 State Street, Lindon, UT. The zip code for both addresses is 84042. John is a cash basis taxpayer. John's dependent child is named Ashley Smith, she is 14 years old. Self Employed Information (Schedule C): Fee income for services rendered Building rental expense Office Supplies Utilities Salary for secretary Salary for equipment operators Wages for John Payroll taxes Fuel and Oil for equipment Computers and other office equipment Purchase of a new front-end loader 322,000 36,000 2,475 4,000 34,000 42,000 40,000 7,000 21,000 9,000 Placed in service on Dec 15, 2020 150,000 Placed in service on Jan 15, 2020 IL 1 - TO John elects to take $50,000 in $179 deprecation and no additional first-year (i.e. bonus) depreciation on the front-end loader. Additionally, John elects to take bonus depreciation on the office furniture. Five years ago Earth Movers purchased an office building for $300,000, this year Earth Movers sold the office building for $290,000 and started leasing office space in a more desirable area. For depreciation purposes the land was assessed a $100,000 value and not depreciated. The total depreciation expense was $20,516 ($2,782 in year 2016, $5,128 in years 2017 through 2019, and $2,350 in year 2020). Personal items: (1) John has $40,000 of wages (same $40,000 as above). Usually, a sole proprietor doesn't pay the owners a wage, but I needed to do it to make QBID easier. Make sure to deduct his wage from the business, and pick it up as income on form 1040, line 1. (2) John sold a painting on 3/15/2020 for $5,000 (originally purchased for $2,000 on 6/15/2017). (3) Sale of ABC publically traded stock on 8/15/2020 for $15,000 (originally purchased for $10,000 on 1/15/2016) (4) Sale of DEF publically traded stock on 10/15/2020 for $2,000 (originally purchased for $17,000 on 2/15/2020) (5) John make estimated tax payments totaling $7,000 (line 26) (6) John had $10,000 of federal income tax withholding on his W-2 (line 25a) (7) John incurred $5,000 in child care expenses related to his daughter Ashley. Prepare the 2020 Federal income tax return for John. You may work in groups no larger than 3 (i.e. 1, 2, 3). Only submit one project per group. It is required that you submit both the (1) tax return and a (2) brief explanation for each line item on the return. Explain your numbers. Just stating that line 16 was from the "tax tables" is insufficient. Show your calculations, and make sure to explain all personal items #1 through #7, even if that items doesn't affect the tax return. Please submit the following forms: (1) Cover page with your names (2) 1040, (3) Schedule 1, (4) Schedule 2, (5) Schedule 3 (if needed), (6) Schedule C page 1, (7) explanation (including calculations) for each line item on each form and schedule. For some lines a very simple explanation is sufficient, but if there is a calculation, I want to see the formula (e.g. show me the formula for the calculation of tax, etc.). The capital gains/losses calculation must break out capital gains into the four categories. Normally, this tax return would require additional forms including schedule D, SE and form 4797, and 6198, etc. However, I do not require them. Instead, the required calculations / explanations will be sufficient. Hints. Hints: 1) The Net Income from the Schedule C (Earth Movers) will go on Schedule 1, line 3 2) There should be something in line 14 of schedule 1. 3) Schedule 2, line 4 is for the self-employment tax. SE tax is separate from and in addition to the tax calculated on form 1040 line 16. 4) Enter the total of all depreciation ($179, bonus, and MACRS) on Schedule C line 13. Make sure to show your depreciation calculations in the explanation page, and make sure you've broken out the types of depreciation and explain your calculation. There are 3 asset groups, (1) computers and other office equipment, (2) front-end loaders, and (3) a building that was sold. All 3 assets have depreciation. The depreciation for the building is explicitly told to you, but don't forget to include it. 5) The front-end loaders have a 7 year asset life. 6) I'd suggest starting with the depreciation, the sale of the building, and then the rest of Schedule C. 7) Enter "unrecaptured $1250 gains and net $1231 gains on Form 1040 line 7 (if any). Enter 1245 gains and net $1231 losses" on Schedule 1, line 4 (if any). There will not be a $1250 recapture." 8) The taxpayer has a refund. Form 1040 line 34. 9) The FICA cap for 2020 is 137,700. 10) Do not forget the Qualified Business Income Deduction (new in 2018), line 13 form 1040. Assume John qualifies for this deduction. In Chapter 15, we can discuss the rules in more detail. Assume that the QBID is a deduction equal to 20% of Qualified Business Income (QBI). With QBI being equal to net total of Schedule 1 line 3, 5, and 14. That is line 3 + line 5 - line 14. 11) Net capital gains/losses goes on form 1040 line 7. It might be helpful to review the Chapter 3 video #5. There will be a Net Capital Gain on this return. 12) Don't forget to check the box for filing status (single, MFJ, HOH, or MFS). 13) Make sure to consider the 4 credits that we discussed in chapter 12. Child tax credit goes on form 1040 line 19, Child and Dependent Care Credit, and Education credits go on Schedule 3 line 2 and 3 respectively. There will be no EITC on John's tax return. CM 12:55 PM ACCOUNTING 308 TAX RETURN PROJECT #3 John Smith, age 31, is unmarried with one dependent child. John owns and operates his own excavation business, Earth Movers (taxed as a Sole Proprietorship). John lives at 1045 Center Street, Lindon, UT, and his business is located at 381 State Street, Lindon, UT. The zip code for both addresses is 84042. John is a cash basis taxpayer. John's dependent child is named Ashley Smith, she is 14 years old. Self Employed Information (Schedule C): Fee income for services rendered Building rental expense Office Supplies Utilities Salary for secretary Salary for equipment operators Wages for John Payroll taxes Fuel and Oil for equipment Computers and other office equipment Purchase of a new front-end loader 322,000 36,000 2,475 4,000 34,000 42,000 40,000 7,000 21,000 9,000 Placed in service on Dec 15, 2020 150,000 Placed in service on Jan 15, 2020 IL 1 - TO John elects to take $50,000 in $179 deprecation and no additional first-year (i.e. bonus) depreciation on the front-end loader. Additionally, John elects to take bonus depreciation on the office furniture. Five years ago Earth Movers purchased an office building for $300,000, this year Earth Movers sold the office building for $290,000 and started leasing office space in a more desirable area. For depreciation purposes the land was assessed a $100,000 value and not depreciated. The total depreciation expense was $20,516 ($2,782 in year 2016, $5,128 in years 2017 through 2019, and $2,350 in year 2020). Personal items: (1) John has $40,000 of wages (same $40,000 as above). Usually, a sole proprietor doesn't pay the owners a wage, but I needed to do it to make QBID easier. Make sure to deduct his wage from the business, and pick it up as income on form 1040, line 1. (2) John sold a painting on 3/15/2020 for $5,000 (originally purchased for $2,000 on 6/15/2017). (3) Sale of ABC publically traded stock on 8/15/2020 for $15,000 (originally purchased for $10,000 on 1/15/2016) (4) Sale of DEF publically traded stock on 10/15/2020 for $2,000 (originally purchased for $17,000 on 2/15/2020) (5) John make estimated tax payments totaling $7,000 (line 26) (6) John had $10,000 of federal income tax withholding on his W-2 (line 25a) (7) John incurred $5,000 in child care expenses related to his daughter Ashley. Prepare the 2020 Federal income tax return for John. You may work in groups no larger than 3 (i.e. 1, 2, 3). Only submit one project per group. It is required that you submit both the (1) tax return and a (2) brief explanation for each line item on the return. Explain your numbers. Just stating that line 16 was from the "tax tables" is insufficient. Show your calculations, and make sure to explain all personal items #1 through #7, even if that items doesn't affect the tax return. Please submit the following forms: (1) Cover page with your names (2) 1040, (3) Schedule 1, (4) Schedule 2, (5) Schedule 3 (if needed), (6) Schedule C page 1, (7) explanation (including calculations) for each line item on each form and schedule. For some lines a very simple explanation is sufficient, but if there is a calculation, I want to see the formula (e.g. show me the formula for the calculation of tax, etc.). The capital gains/losses calculation must break out capital gains into the four categories. Normally, this tax return would require additional forms including schedule D, SE and form 4797, and 6198, etc. However, I do not require them. Instead, the required calculations / explanations will be sufficient. Hints. Hints: 1) The Net Income from the Schedule C (Earth Movers) will go on Schedule 1, line 3 2) There should be something in line 14 of schedule 1. 3) Schedule 2, line 4 is for the self-employment tax. SE tax is separate from and in addition to the tax calculated on form 1040 line 16. 4) Enter the total of all depreciation ($179, bonus, and MACRS) on Schedule C line 13. Make sure to show your depreciation calculations in the explanation page, and make sure you've broken out the types of depreciation and explain your calculation. There are 3 asset groups, (1) computers and other office equipment, (2) front-end loaders, and (3) a building that was sold. All 3 assets have depreciation. The depreciation for the building is explicitly told to you, but don't forget to include it. 5) The front-end loaders have a 7 year asset life. 6) I'd suggest starting with the depreciation, the sale of the building, and then the rest of Schedule C. 7) Enter "unrecaptured $1250 gains and net $1231 gains on Form 1040 line 7 (if any). Enter 1245 gains and net $1231 losses" on Schedule 1, line 4 (if any). There will not be a $1250 recapture." 8) The taxpayer has a refund. Form 1040 line 34. 9) The FICA cap for 2020 is 137,700. 10) Do not forget the Qualified Business Income Deduction (new in 2018), line 13 form 1040. Assume John qualifies for this deduction. In Chapter 15, we can discuss the rules in more detail. Assume that the QBID is a deduction equal to 20% of Qualified Business Income (QBI). With QBI being equal to net total of Schedule 1 line 3, 5, and 14. That is line 3 + line 5 - line 14. 11) Net capital gains/losses goes on form 1040 line 7. It might be helpful to review the Chapter 3 video #5. There will be a Net Capital Gain on this return. 12) Don't forget to check the box for filing status (single, MFJ, HOH, or MFS). 13) Make sure to consider the 4 credits that we discussed in chapter 12. Child tax credit goes on form 1040 line 19, Child and Dependent Care Credit, and Education credits go on Schedule 3 line 2 and 3 respectively. There will be no EITC on John's tax return. CM 12:55 PM