COMPREHENSIVE TAX RETURN PROBLEM You can only ask questions in class, so be prepared for class. You may NOT use tax preparation software of any kind on this return. All group members will sign an ethics statement to this effect upon completion of the return, which must be included with the final return when submitted. Please use the 2018 forms. To complete this Tax Return Problem, you will need some/all of the following 2018 forms and schedules: Form 1040 U.S. Individual Income Tax Return Schedule A Itemized Deductions Schedule B Interest and Dividend Income Schedule C Profit or Loss from Business Schedule D Capital Gains and Losses Schedule E Supplemental Income and Loss Schedule SE Self Employment Tax Form 4562 Depreciation Form 4684 Casualty and Theft Find all of the forms at: www.irs.gov Checklist.(following these rules counts for part of your grade): Round all numbers on tax forms to the nearest whole dollar (normal rounding rules apply unless the form instructs you otherwise). Do NOT put anything in the "cents" column (this includes "0" or "-"). Do NOT put any zeros or dashes on lines for which there is not any amount. just leave them blank, unless the form instructs you to enter a "0" Be SURE that the headings on each form/schedule are completed. Compile your return according to the attachment sequence that is in the upper right hand corner of the form and/or schedule (worksheets belong at the very end of all documents) Include a cover page with each group member's name Use a pocket folder (one pocket on each side of the folder when opened), not a 3 ring binder. Do not hole punch your return or workpapers. Include your return in the left-hand pocket of the folder and the workpapers in the right-hand pocket of the folder. Each workpaper should be uniquely labeled. Each number that refers back to information on a workpaper should be referenced to the appropriate workpaper. Each number on a workpaper that appears on a tax form should have a cross-reference to the tax form on the workpaper. Include a Schedule of Supporting Computations & Explanations: Provide a separate written explanation of any computations that are not described in the forms i.e. medical expense calculation). If you are able to show the calculation directly on the workpaper related to the tax form, that is sufficient. i.e. if you use the PBC pages in D2L, and have room to legibly show calculations on those pages, that is sufficient. Individual Information Klaus Mikaelson (SS# 333-99-8888) lives at 555 Harrison Street, New Orleans, LA 70112. His birthday is April 25, 1979 and lives with his wife Caroline (SS# 444-77-2222) who was born November 5, 1981. Klaus' sister Rebecca (SS# 223-44-5567) lived with them the entire year (with the exception of when Rebecca was away for college). Rebecca's birthday is May 30, 1990. Rebecca goes to school full time at LSU, which on average costs $23,110 for full-time students living off campus. She received scholarships for tuition and fees totaling $11,000. On nights and weekends she works in a sandwich shop and made $5,000 in the current year. Klaus pays for the rest of her education and living expenses. Her total support for the year is $45,000. Klaus and Caroline have one daughter, Elise, born 3/1/2013. Caroline was previously married to Alaric. They have 3-year-old twin daughters, Lizzie and Josie. Caroline receives alimony of 8,000 per year from Alaric. Klaus was previously married to Haley. Klaus and Haley have a 3-year-old daughter, Hope. Klaus pays Haley alimony of $10,000 per year and $20,000 per year in child support Klaus and Caroline own a very successful restaurant in Caroline's hometown of Mystic Falls, VA. Caroline accepted a job January 1, 2017 as a senior vice president for The WB Network. Her offer letter was provided by the client. You will need to calculate her W-2 information and fill out her 2017 form W-2. Business Information Klaus owns and operates a premier sports bar & grille called Mystic Grille since 2001, located at 777 Main Street, New Orleans, LA 70112. Klaus's Employer ID number is 72-111111, he uses the cash method of accounting and materially participated in the business. Please see his Income Statement for financial information. Personal Deductions Klaus & Caroline had the following personal costs during the year that he would like to deduct: Medical Expenses: Doctor visit co-pays $400 Hospital visit $3,500 Prescription Drugs $200 Over-the-counter drugs $50 Dentist $500 Acupuncturist $1,500 Therapist for Elijah $2,000 Occupational Therapist for Elijah $1,500 General property taxes $3,700 Louisiana Estimated Income Tax $4,000 Virginia Estimated Income Tax $8,000 Gave $65/week for 52 weeks to charity Donated clothes worth $200 that he purchased for $600 Also, assume that Klaus paid 15% of the "total tax" as estimated federal income tax payments in addition to any self-employment taxes owed. Ms. Caroline Mikaelson 555 Harrison Street New Orleans, LA 70112 Dear Ms. Mikaelson, The WB Television Network (The WB) is pleased to offer you the position of film editor. We were very impressed with your ability to control a room, and are excited to see what you can do with the company in the future. As discussed, the terms of your offer are listed below: Your starting date will be January 1, 2018. Starting salary is $125,000 plus a 5% bonus, depending on company performance. The WB matches employee contributions to its qualified pension plan up to 10% of an employee's annual salary before bonuses. In addition, you will receive the following benefits from The WB during the year: A. The WB has a cafeteria plan that allows all employees to select tax-free benefits or the cash equivalent on part of their annual salary before any bonus or pension plan payments. B. The WB pays the employee's share of Social Security taxes on all executive employees' regular salaries. C. Employees are provided with covered parking at company headquarters. D. The WB will pay professional organization dues up to $500. In addition, The WB pays the dues for all executive officers at one social club. The WB also provides a $7,200 country club membership E. Employees have access to eat lunch in a private dining room at company headquarters. The purpose of the dining room is to encourage the employees to interact in an informal setting. They often discuss business but are not required to follow an agenda. The WB also offers a generous paid-time off plan to include four weeks of vacation, five personal days, and forty hours of sick leave. Time off accrues at a rate per month for your first year, then increases based on your tenure with the company. Eligibility for full benefits begins 90 days after your start date. We look forward to you joining our team. Please contact me with any questions. Sincerely, Elena Gilbert CEO The WB Television Network Caroline's elections in 2018: A. Caroline contributes the maximum amount matched by her employer to the qualified pension plan. B. Caroline uses the cafeteria plan to purchase health and accident insurance for her daughter at a cost of $2,400, group term life insurance coverage of $200,000 at a cost of $200, and child care at a cost of $5,000 (taken out of her paycheck pretax). She takes the remaining $5600 in cash. C. Caroline is fully reimbursed for $1,600 in medical expenses (the same expenses are also reported with her personal information). D. Caroline's free parking is worth $5,180 this year. E. Caroline belongs to several professional organizations, but does not spend more than the company pays. F. The value of the meals Caroline ate in the private dining room in 2018 is estimated at $600. Compute Caroline's gross income from The WB for the tax year 2018. Complete the form W-2 Caroline would receive from The WB, and include it as a workpaper. Include the research used to determine how amounts listed in the offer letter are treated for tax purposes. This includes either code sections or tax analysis that determines whether a benefit to be excluded or partially excluded from income. Income Statement Mystic Grille 12/31/2018 Financial Statements in U.S. Dollars Revenue Gross Sales Less: Sales Returns and Allowances Net Sales 3,100,000 3,100,000 Cost of Goods Sold Beginning Inventory Add: Purchases Inventory Available Less: Ending Inventory Cost of Goods Sold 1,200,000 1,200,000 1,200,000 Gross Profit (Loss) 1,900,000 Expenses Advertising Bank Charges Charitable Contributions Depreciation Dues and Subscriptions Legal and Professional Fees Meals & Entertainment Office Expense Payroll Taxes Postage Supplies Telephone Travel Utilities Wages Total Expenses 15,000 400 10,000 121,609 200 8,000 12,000 3,000 38,250 150 22.000 1,200 5,000 67,000 500,000 803,809 Net Operating Income 1,096,191 Other Adjustments Add Back: Charitable Contributions Add Back: Book Depreciation Less: Tax Depreciations Add Back: 50% Meals & Entertainment Total Other Income 0 Net Income (Loss) 1,096,191 COMPREHENSIVE TAX RETURN PROBLEM You can only ask questions in class, so be prepared for class. You may NOT use tax preparation software of any kind on this return. All group members will sign an ethics statement to this effect upon completion of the return, which must be included with the final return when submitted. Please use the 2018 forms. To complete this Tax Return Problem, you will need some/all of the following 2018 forms and schedules: Form 1040 U.S. Individual Income Tax Return Schedule A Itemized Deductions Schedule B Interest and Dividend Income Schedule C Profit or Loss from Business Schedule D Capital Gains and Losses Schedule E Supplemental Income and Loss Schedule SE Self Employment Tax Form 4562 Depreciation Form 4684 Casualty and Theft Find all of the forms at: www.irs.gov Checklist.(following these rules counts for part of your grade): Round all numbers on tax forms to the nearest whole dollar (normal rounding rules apply unless the form instructs you otherwise). Do NOT put anything in the "cents" column (this includes "0" or "-"). Do NOT put any zeros or dashes on lines for which there is not any amount. just leave them blank, unless the form instructs you to enter a "0" Be SURE that the headings on each form/schedule are completed. Compile your return according to the attachment sequence that is in the upper right hand corner of the form and/or schedule (worksheets belong at the very end of all documents) Include a cover page with each group member's name Use a pocket folder (one pocket on each side of the folder when opened), not a 3 ring binder. Do not hole punch your return or workpapers. Include your return in the left-hand pocket of the folder and the workpapers in the right-hand pocket of the folder. Each workpaper should be uniquely labeled. Each number that refers back to information on a workpaper should be referenced to the appropriate workpaper. Each number on a workpaper that appears on a tax form should have a cross-reference to the tax form on the workpaper. Include a Schedule of Supporting Computations & Explanations: Provide a separate written explanation of any computations that are not described in the forms i.e. medical expense calculation). If you are able to show the calculation directly on the workpaper related to the tax form, that is sufficient. i.e. if you use the PBC pages in D2L, and have room to legibly show calculations on those pages, that is sufficient. Individual Information Klaus Mikaelson (SS# 333-99-8888) lives at 555 Harrison Street, New Orleans, LA 70112. His birthday is April 25, 1979 and lives with his wife Caroline (SS# 444-77-2222) who was born November 5, 1981. Klaus' sister Rebecca (SS# 223-44-5567) lived with them the entire year (with the exception of when Rebecca was away for college). Rebecca's birthday is May 30, 1990. Rebecca goes to school full time at LSU, which on average costs $23,110 for full-time students living off campus. She received scholarships for tuition and fees totaling $11,000. On nights and weekends she works in a sandwich shop and made $5,000 in the current year. Klaus pays for the rest of her education and living expenses. Her total support for the year is $45,000. Klaus and Caroline have one daughter, Elise, born 3/1/2013. Caroline was previously married to Alaric. They have 3-year-old twin daughters, Lizzie and Josie. Caroline receives alimony of 8,000 per year from Alaric. Klaus was previously married to Haley. Klaus and Haley have a 3-year-old daughter, Hope. Klaus pays Haley alimony of $10,000 per year and $20,000 per year in child support Klaus and Caroline own a very successful restaurant in Caroline's hometown of Mystic Falls, VA. Caroline accepted a job January 1, 2017 as a senior vice president for The WB Network. Her offer letter was provided by the client. You will need to calculate her W-2 information and fill out her 2017 form W-2. Business Information Klaus owns and operates a premier sports bar & grille called Mystic Grille since 2001, located at 777 Main Street, New Orleans, LA 70112. Klaus's Employer ID number is 72-111111, he uses the cash method of accounting and materially participated in the business. Please see his Income Statement for financial information. Personal Deductions Klaus & Caroline had the following personal costs during the year that he would like to deduct: Medical Expenses: Doctor visit co-pays $400 Hospital visit $3,500 Prescription Drugs $200 Over-the-counter drugs $50 Dentist $500 Acupuncturist $1,500 Therapist for Elijah $2,000 Occupational Therapist for Elijah $1,500 General property taxes $3,700 Louisiana Estimated Income Tax $4,000 Virginia Estimated Income Tax $8,000 Gave $65/week for 52 weeks to charity Donated clothes worth $200 that he purchased for $600 Also, assume that Klaus paid 15% of the "total tax" as estimated federal income tax payments in addition to any self-employment taxes owed. Ms. Caroline Mikaelson 555 Harrison Street New Orleans, LA 70112 Dear Ms. Mikaelson, The WB Television Network (The WB) is pleased to offer you the position of film editor. We were very impressed with your ability to control a room, and are excited to see what you can do with the company in the future. As discussed, the terms of your offer are listed below: Your starting date will be January 1, 2018. Starting salary is $125,000 plus a 5% bonus, depending on company performance. The WB matches employee contributions to its qualified pension plan up to 10% of an employee's annual salary before bonuses. In addition, you will receive the following benefits from The WB during the year: A. The WB has a cafeteria plan that allows all employees to select tax-free benefits or the cash equivalent on part of their annual salary before any bonus or pension plan payments. B. The WB pays the employee's share of Social Security taxes on all executive employees' regular salaries. C. Employees are provided with covered parking at company headquarters. D. The WB will pay professional organization dues up to $500. In addition, The WB pays the dues for all executive officers at one social club. The WB also provides a $7,200 country club membership E. Employees have access to eat lunch in a private dining room at company headquarters. The purpose of the dining room is to encourage the employees to interact in an informal setting. They often discuss business but are not required to follow an agenda. The WB also offers a generous paid-time off plan to include four weeks of vacation, five personal days, and forty hours of sick leave. Time off accrues at a rate per month for your first year, then increases based on your tenure with the company. Eligibility for full benefits begins 90 days after your start date. We look forward to you joining our team. Please contact me with any questions. Sincerely, Elena Gilbert CEO The WB Television Network Caroline's elections in 2018: A. Caroline contributes the maximum amount matched by her employer to the qualified pension plan. B. Caroline uses the cafeteria plan to purchase health and accident insurance for her daughter at a cost of $2,400, group term life insurance coverage of $200,000 at a cost of $200, and child care at a cost of $5,000 (taken out of her paycheck pretax). She takes the remaining $5600 in cash. C. Caroline is fully reimbursed for $1,600 in medical expenses (the same expenses are also reported with her personal information). D. Caroline's free parking is worth $5,180 this year. E. Caroline belongs to several professional organizations, but does not spend more than the company pays. F. The value of the meals Caroline ate in the private dining room in 2018 is estimated at $600. Compute Caroline's gross income from The WB for the tax year 2018. Complete the form W-2 Caroline would receive from The WB, and include it as a workpaper. Include the research used to determine how amounts listed in the offer letter are treated for tax purposes. This includes either code sections or tax analysis that determines whether a benefit to be excluded or partially excluded from income. Income Statement Mystic Grille 12/31/2018 Financial Statements in U.S. Dollars Revenue Gross Sales Less: Sales Returns and Allowances Net Sales 3,100,000 3,100,000 Cost of Goods Sold Beginning Inventory Add: Purchases Inventory Available Less: Ending Inventory Cost of Goods Sold 1,200,000 1,200,000 1,200,000 Gross Profit (Loss) 1,900,000 Expenses Advertising Bank Charges Charitable Contributions Depreciation Dues and Subscriptions Legal and Professional Fees Meals & Entertainment Office Expense Payroll Taxes Postage Supplies Telephone Travel Utilities Wages Total Expenses 15,000 400 10,000 121,609 200 8,000 12,000 3,000 38,250 150 22.000 1,200 5,000 67,000 500,000 803,809 Net Operating Income 1,096,191 Other Adjustments Add Back: Charitable Contributions Add Back: Book Depreciation Less: Tax Depreciations Add Back: 50% Meals & Entertainment Total Other Income 0 Net Income (Loss) 1,096,191