Frank Jones is a licensed hair stylist. He is single, 46 years old and leaves at 235 Maple Street in Cincinnati, OH 45221. Frank operates his own salon under the business name of Franks Creations. Franks Creations as well known for its selection and quality of mens hairpieces and women s wigs. The business also sells a considerable quantity of beauty products (e.g., conditioners, shampoos, curling irons).

Franks business consists of five to nine stations operated by himself and other licensed beauticians. The beauticians who work in the salon are treated as independent contractors. Each pays Frank a monthly rental.

Franks Creations is located at 15 Tahoe Street, Cincinnati, OH 45221. The employer identification number is 94-1122556.

The building in which the business is located is rented under a long-term lease for $1,600 each month. Frank pays his own utilities. The only employee Frank has is a shampoo person, who also performs light janitorial duties. Likewise, a local accounting group is on retainer to keep the financial records for the business.

Franks Creations had the following receipts for 2019:

Sales of cosmetics $ 19,800

Sales of hairpieces, wigs 38,500

Fees received from customers by Frank

(including tips) 42,390

Rent charged from other beauticians 33,750

The amounts shown for the retail sales of cosmetics, hairpieces, and wigs, include state sales taxes.

Franks Creations had the following expenses for 2019:

Purchases of cosmetics $ 9,545

Purchases of hairpieces, wigs 14,600

Operating supplies (shampoo,

color, permanent, etc.) 8,155

Rent for building 19,200

Utilities and telephone 10,800

Payroll expenses 7,300

Payroll taxes (FICA, FUTA,

State unemployment) 815

Sales taxes remitted to state 3,860

Health insurance coverage for

employee 650

City of Cincinnati occupation permit 550

State beautician license fee 480

Business insurance 1,950

Janitorial services 3,500

Accounting services 4,800

Advertising 825

Fine paid to City of Cincinnati 300

Waiting room furniture 4,500

Air Conditioning Unit installed 5/1/2019 8,000 - "Qualified Leasehold Improvement"

Frank decided completely renovate the furnishings in his waiting room. Consequently, he spent $4,500 for chairs, sofa, lamps, tables, etc., all placed in service on April 25, 2019. In addition, in a preparation for a hot summer, Frank spent $8,000 (including installation) on a new air conditioning unit placed in service on 5/1/2019. Frank has always followed a policy of claiming as much depreciation as soon as possible. All of his other business assets (e.g., hair dryers, work-stations chairs) have been fully depreciated by 2019.

The fine paid to the city was assessed by the Sanitation Department. Frank had failed, in accordance with a city ordinance, to separate the trash of the business into recyclable and non-recyclable bins.

On 01/02/2019 Frank purchased a Lincoln Navigator for $78,000***. Frank used it 40% of the time in his business. Frank spent $620 on gas, $500 on maintenance and $1,200 on insurance during 2019. In 2019 Frank drove 12,000 miles. Frank wants to minimize his 2019 taxable income.

In late 2018, a transient customer visiting the city had purchased a hairpiece from the business for $290. The customers check was not deposited until early 2019 and ultimately proved fraudulent. The sale was reported on 2018 tax return. Frank has no doubt that he will never collect the $290 due him.

Frank maintains an inventory as to the merchandise he sells. The business inventories (based on the lower of cost or market) are as follows:

12/31/2018 12/31/2019

Hairpieces and wigs $ 3,500 $ 3,700

Cosmetics 2,100 2,500

5,600 6,200

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Except for the inventory and purchase accounts, Frank operates the business on a cash method. Customers pay for services as rendered. Sales income is recorded when merchandise is sold.

***Lincoln Navigator

Gross Vehicle Weight (GVW): 7,350 lb