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SIGNATURE PROJECT ACC432A June 2014 WARDENS' 2013 TAX RETURN CCH BOOKLET TITLED: 2014 Edition Individuals', Corporation, partnership, and Fiduciary Fact Patterns and Blank Forms Up-loaded Doc Sharing folder. Due Friday Midnight 27th of June, 2014 Bottom of page 5 \"FORM 1040 - U.S. INDIVIDUAL INCOME TAX RETURN for taxpayers, George A. Warden and Mary S. Warden continues till 80% of page 9 including Schedule F. Information for Form 1040 - page 5 through page 9 Includes Schedule A page 6 Form 4684 page 7 Form 2106 page 7 Schedule B page 7 Schedule D page 7 - 8 Schedule E page 8 Form 2441 page 8 Schedule C page 8 Form 4562 page 8 - 9 Form 4684 page 9 Form 4797 page 9 Schedule F page 9 2014 Edition Individuals', Corporation, Partnership, and Fiduciary Fact Patterns and Blank Forms CCH Editorial Staff Publication Managing Editors: Michael Henaghan, J.D., LL.M., Kurt Diefenbach, J.D. Editors: Mary Jo Gagnon, C.P.A. Design: Kaitlyn Bitner Production: Jennifer Schencker FACSIMILE TAX RETURN PROBLEMS AND FORMS This publication contains typical taxpayer scenarios and the necessary IRS forms and schedules along with pertinent worksheets that would be necessary for return filing purposes. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. 2014 CCH Incorporated. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 800-248-3248 CCHGroup.com No claim is made to original government works; however, within this Product or Publication, the following are subject to CCH Incorporated's copyright: (1) the gathering, compilation, and arrangement of such government materials; (2) the magnetic translation and digital conversion of data, if applicable; (3) the historical, statutory and other notes and references; and (4) the commentary and other materials. 2 2014 CCH Incorporated. All Rights Reserved. Table Of Contents Page Problems....................................................................................5 Form 1040EZ..........................................................................22 Income Tax Return for Single and Joint Filers With No Dependents Form 1040A.............................................................................24 U.S. Individual Income Tax Return Child Tax Credit Worksheet............................................26 Schedule B.......................................................................28 Interest and Ordinary Dividends Schedule EIC and related worksheet................................30 Earned Income Credit Form 8867.......................................................................35 Paid Preparer's Earned Income Credit Checklist Form 1040A (related to Form 8615)........................................39 U.S. Individual Income Tax Return Schedule B.......................................................................41 Interest and Ordinary Dividends Form 8615........................................................................43 Tax for Certain Children Who Have Unearned Income Form 1040 (related to Form 8814)...........................................44 U.S. Individual Income Tax Return Form 8814.......................................................................46 Parents' Election to Report Child's Interest and Dividends Form 1040...............................................................................50 U.S. Individual Income Tax Return Child Tax Credit Worksheet............................................52 Schedule A.......................................................................54 Itemized Deductions Schedule B.......................................................................55 Interest and Ordinary Dividends Schedule C......................................................................57 Profit or Loss From Business Schedule D......................................................................59 Capital Gains and Losses Form 8949.......................................................................61 Sales and Other Dispositions of Capital Assets Qualified Dividends and Capital Gains Tax Worksheet....63 Schedule E.......................................................................64 Supplemental Income and Loss Schedule F.......................................................................66 Profit or Loss From Farming Schedule SE.....................................................................68 Self-Employment Tax Form 2441.......................................................................70 Child and Dependent Care Expenses Form 4684.......................................................................72 Casualties and Thefts Form 4797.......................................................................75 Sales of Business Property Form 6251.......................................................................77 Alternative Minimum TaxIndividuals Form 8863.......................................................................79 Education Credits (American Opportunity and Lifetime Learning Credits) Form 2120.......................................................................81 Multiple Support Declaration 2014 CCH Incorporated. 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Page Form 2106.......................................................................82 Employee Business Expenses Form 4562.......................................................................84 Depreciation and Amortization Form 1040 (related to Schedule R)...........................................86 U.S. Individual Income Tax Return Schedule R.......................................................................88 Credit for the Elderly or the Disabled EIC Worksheet................................................................90 Schedule EIC...................................................................93 Earned Income Credit Form 8867.......................................................................95 Paid Preparer's Earned Income Credit Checklist Form Form 1040 (related to Form 2210)...........................................99 U.S. Individual Income Tax Return Form 2210.....................................................................101 Underpayment of Estimated Tax by Individuals, Estates, and Trusts Form 3903.............................................................................105 Moving Expenses Form 1040 (related to Form 6251).........................................109 U.S. Individual Income Tax Return Schedule A.....................................................................111 Itemized Deductions Form 6251.....................................................................112 Alternative Minimum Tax-Individuals Form 2106.....................................................................114 Employee Business Expenses Form 1040 (related to Form 8829).........................................116 U.S. Individual Income Tax Return Schedule A.....................................................................118 Itemized Deductions Schedule C ...................................................................119 Profit or Loss From Business Schedule SE...................................................................121 Self-Employment Tax Form 8829.....................................................................123 Expenses for Business Use of Your Home Form 1065.............................................................................124 U.S. Return of Partnership Income Form 1125-A.................................................................129 Cost of Goods Sold Schedule B-1.................................................................132 Information on Partners Owning 50% or More of the Partnership Schedule D (Form 1065)...............................................134 Capital Gains and Losses Form 4562.....................................................................135 Depreciation and Amortization Form 8949.....................................................................137 Sales and Other Dispositions of Capital Assets Schedule K-1 (Form 1065)............................................139 Partner's Share of Income, Deductions, Credits, etc. Form 1120.............................................................................141 U.S. Corporation Income Tax Return Schedule D (Form 1120)...............................................146 Capital Gains and Losses 3 Page Page Schedule K-1 (Form 1041)............................................168 Beneficiary's Share of Income, Deductions, Credits, etc. Schedule E (Form 1040)................................................170 Supplemental Income and Loss Form 8960.....................................................................172 Net Investment Income Tax Individuals, Estates and Trusts Form 1120S...........................................................................173 U.S. Income Tax Return for an S Corporation Form 1125-A.................................................................178 Cost of Goods Sold Schedule D (Form 1120S).............................................182 Capital Gains and Losses and Built-in Gains Form 1125-E.................................................................181 Compensation of Officers Form 4562.....................................................................184 Depreciation and Amortization Form 4797.....................................................................186 Sales of Business Property Form 8949.....................................................................188 Sales and Other Dispostions of Capital Assets Schedule K-1 (Form 1120S)..........................................190 Shareholder's Share of Income, Deductions, Credits, etc. Form 4626.....................................................................147 Alternative Minimum TaxCorporations Form 1125-A.................................................................148 Cost of Goods Sold Form 1125-E.................................................................151 Compensation of Officers Form 4562.....................................................................152 Depreciation and Amortization Form 4684.....................................................................154 Casualties and Thefts Form 4797.....................................................................157 Sale of Business Property Form 8903.....................................................................159 Domestic Production Activities Deduction Form 8949.....................................................................160 Sales and Other Dispositions of Capital Assets Form 1041.............................................................................162 U.S. Income Tax Return for Estates and Trusts Schedule D (Form 1041)...............................................164 Capital Gains and Losses Form 8949.....................................................................166 Sales and Other Dispositions of Capital Assets 4 2014 CCH Incorporated. All Rights Reserved. PROBLEMS FORM 1040EZ: INCOME TAX RETURN FOR SINGLE AND JOINT FILERS WITH NO DEPENDENTS Alexander M. Jones, age 28, is single, not blind and claims no dependents. Alexander may not be claimed as a dependent on another person's tax return. During 2013, he earned $52,000 as a police officer, from which $8,240 was withheld in federal income tax and $1,430 was withheld in Illinois income tax. Alexander received $300 in interest income from State Bank, a U.S. financial institution. He wants $3 of his tax to go to the Presidential Election Campaign Fund. Alexander resides at 1330 W. Fargo, Chicago, Illinois 60626, his social security number is 405-64-8098, and his daytime telephone number is 312-555-3232. He elects to have any refund directly deposited to his checking account. His bank's routing number is 071000013 and his account number is 00900800. FORM 1040A: U.S. INDIVIDUAL INCOME TAX RETURN Henry R. and Karen S. Carter are married and will file a joint return for 2013. Neither Henry nor Karen are blind, and both are under age 65. They live at 4500 W. Montrose Drive, Chicago, Illinois 60635. Their home telephone number is 773-555-7373. Their seven year old daughter, Ellen Carter, whose social security number is 642-24-9792, has lived at home all year. Mr. Carter works as a printer, and received wages of $25,000, from which $1,450 in federal income taxes and $375 in state income taxes was withheld. His social security number is 123-45-6789. Mrs. Carter works as a clerk and received wages of $11,000, from which $300 in federal income taxes and $100 in state income taxes was withheld. Her social security number is 321-54-9876. The Carters also received $200 of interest income from a U.S. financial institution, State Bank. The Carters elect not to have any of their income tax go to the Presidential Election Campaign Fund. Further, the Carters elect to have any refund directly deposited to their checking account. Their bank's routing number is 071000013 and their account number is 001002003. The Carters may be able to claim the child tax credit. They must fill out a worksheet accompanying Form 1040A to determine their eligibility and any credit amount. The Carters may also be eligible for the earned income credit (EIC). They must complete a questionnaire, worksheet and Schedule EIC to determine their eligibility and any credit amount. Trish Ford (PTIN # P98765432) prepares Form 8867, Paid Preparer's Earned Income Credit Checklist. FORM 8615 - TAX FOR CERTAIN CHILDREN WHO HAVE UNEARNED INCOME Judy L. Small is 16 years old, and she can be claimed as a dependent on her parents' tax return. During 2013, Judy earned $6,500 from her part-time job at The Burger Joint, and interest income of $5,200 from her savings account at The American Bank. Judy had $500 in federal taxes and $175 in Illinois taxes withheld from her W-2 earnings. Because Judy is under the age of 18 and has investment income over $2,000, she computes her tax on Form 8615. Since Judy does not have enough deductions to itemize, she may use Form 1040A. Judy's parents, Fred J. and Ann Small, file a joint return for 2013. They have one other six year-old child, James F. Small, who has no income. The Smalls' taxable income for 2013 is $56,000, and their tax as reported on Line 44 of their Form 1040 is $7,511. None of this tax is calculated using Form 8814 or Form 4972. Judy's parents also did not use the Qualified Dividends and Capital Gain Tax Worksheet, Schedule D Tax Worksheet, or Schedule J to compute their tax liability. Judy and her parents reside at 46 Main Street, Glen Ellyn, Illinois 60137. Judy's social security number is 401-89-0034, and her father's social security number is 564-73-9689. FORM 8814 - PARENTS' ELECTION TO REPORT CHILD'S INTEREST AND DIVIDENDS John M. Reed is 13 years old and may be claimed as a dependent on his parents' return. John's social security number is 759-42-1134. In 2013, John received taxable interest of $1,100 and ordinary dividends of $300. He had no earned income. John's parents are James Reed, whose social security number is 801-77-5432, and Elaine Reed, whose social security number is 801-77-9876. The Reeds reside at 400 Pheasant Drive, Walworth, WI 53184. For 2013, James and Elaine file a joint return and elect to report John's income on their return. FORM 1040 - U.S. INDIVIDUAL INCOME TAX RETURN Assume that the taxpayers, George A. Warden (social security number 333-33-3330) and Mary S. Warden (social security number 444-444440) file a joint return. Both are 50-years old, have good eyesight, and live with their three children, Edward, John and Ruth, at 789 N. Code Drive, Chicago, Illinois 60699. The Warden's home phone number is 312-555-9999. Mr. Warden elects to have $3 of his income tax go to the Presidential Election Campaign Fund. Mrs. Warden elects not to contribute. The Wardens' oldest son, Edward, is 20 years old and a student at the University of Finance and Accounting. He worked during the summer and earned $4,000. Their other son, John, is 17 and a high school student. He earned $3,600 working full-time during the summer and part-time during the remainder of the year. Neither son had any additional income. Their daughter, Ruth, is eight years old and an elementary school student. She had no earned or unearned income during the year. Edward's social security number is 300-11-0001, John's social security number is 300-22-0002, and Ruth's social security number is 300-33-0003. 2014 CCH Incorporated. All Rights Reserved. 5 In August, the Wardens paid $4,000 in tuition for their son, Edward, for the academic period that started in September. They received a Form 1098-T for 2013 showing the payment received in Box 1. Box 8 is checked indicating Edward was at least a half-time student. Edward had not claimed the American Opportunity Credit or Hope Scholarship Credit in any four prior tax years, did not complete the first four years of post-secondary education before 2013, and he had not been convicted of any felony. The Wardens claim Mrs. Warden's mother, Grace D. Taylor, as a dependent under a multiple-support agreement. The total support of Mrs. Taylor is $6,000, received from the following three sources: (1) $3,000 from Mary Warden, (2) $1,000 from another daughter, Thelma Taylor, and (3) $2,000 in social security benefits. Mrs. Grace D. Taylor lived with the Wardens during all of 2013. Her social security number is 400-44-0004. Thelma Taylor provides the Warden's with a written, signed statement, that she will not claim her mother as a dependent in 2013. Thelma Taylor lives at 1425 S. 62nd Street, Chicago, IL 60699, and her social security number is 500-55-0005. The Wardens use Trish Ford, a professional tax preparer, to prepare their income tax return. Trish Ford's PTIN is P98765432, and she works for E&Z Tax Preparation (EIN #36-0987654), which is located in a nearby suburb of Middle America (telephone number 312-555-1040). However, the Warden's do not authorize her to discuss their return with the IRS. INCOME AND EXPENSES GENERALLY During 2013, Mrs. Warden was employed as a salesperson by XPert Publishing Inc. Her Form W-2 for 2013 reports the following: Box 1. Wages, tips and other compensation $75,000 Box 2. Federal income tax withheld $4,950 Box 4. FICA tax withheld $4,650 Box 6. Medicare tax withheld $1,088 Box 17. State income tax $2,250 Mrs. Warden is not covered by her employer's retirement plan. In addition, Mr. Warden is a self-employed individual who does not maintain a Keogh or a SEP plan. Mrs. Warden made a $1,500 contribution to a traditional IRA and a $2,000 contribution to a Roth IRA in 2013. Mr. Warden decided against making a contribution to any IRA. The Wardens received a $30 state income tax refund. They itemized in the prior year and elected to take their $2,000 state income tax payment as a deduction. The Wardens also received a $20 federal income tax refund. Form 1040, Schedule A The Wardens made federal estimated tax payments of $2,000 for 2013. The Wardens incurred the following medical expenses during 2013: prescription drugs, $1,000; doctor bills, $3,550; hospital bills, $1,750; transportation, $100; and eyeglasses, $500. In addition, Mr. Warden, who is self-employed, paid $3,750 in premiums for health insurance coverage for himself and his family. The Wardens paid their 2012 real estate taxes of $1,810 on July 1, 2013. In addition, they sold their residence on September 13, 2013. They allowed the buyer a credit equal to 70% of the estimated real estate taxes of $2,000 for 2013. The real estate taxes on the new property they purchased on May 1, 2013, are not payable until 2014. There was no taxable gain on the sale of their prior residence. Mr. and Mrs. Warden paid $3,878 in deductible home mortgage interest to a bank. They also paid $3,000 in points when they purchased their new home. They paid the following personal interest in 2013: $600 to finance Mrs. Warden's car, and $400 in credit card interest. 6 2014 CCH Incorporated. All Rights Reserved. The Wardens gave $1,500 in cash to various recognized charities; no individual gift was $250 or more; all charities sent an acknowledgment of the contribution. Form 4684, Section A During 2013, a burglar entered their home and stole a ring and a coin collection. The ring had been purchased in May 15, 1993 at a cost of $3,000. Mrs. Warden had purchased the coin collection in July 15, 1994 at a cost of $1,100. An insurance company appraised the ring at a fair market value of $5,000, but limited its loss coverage on jewelry under a homeowners' policy to $1,500. The insurance company excluded the coin collection from the insurance policy because of its policy restrictions on such items. At the time of the theft, the fair market value of the coin collection was $2,000. Form 2106 Mrs. Warden incurred employee business expenses in connection with her occupation as salesperson for the publishing company. On January 3, 2013, she purchased a new car that was used primarily for business reasons. The car cost $20,000. During 2013, the car was driven a total of 20,000 miles by Mrs. Warden. Of those miles, 16,600 were business related. Mrs. Warden drove 1,250 miles while commuting (five-mile daily roundtrip commute), and 2,150 miles for personal purposes. Mrs. Warden depreciates the car using a five-year MACRS recovery period, the 200% declining-balance method, and the half-year convention. However, it should be noted that depreciation on the car is limited because of the \"listed property\" rules. Mrs. Warden's gasoline, oil and insurance expenses on the car amounted to $4,750. She paid $600 in interest on the installment loan incurred to purchase the car. She also paid $50 for business parking fees and $75 for a car rental while away from home. Mrs. Warden elects to claim the actual automobile-related expenses. Assume the answers for Form 2106, Lines 18, 19, 20 and 21 are \"Yes.\" Mrs. Warden elected not to claim any Code Sec. 179 deduction or additional bonus depreciation on the car in 2013. Mrs. Warden incurred the following other business expenses: meals and entertainment, $1,500; airfare, $233; gifts to customers, $150; and business seminar, $60. Mrs. Warden received $5,000 as a car expense reimbursement from her employer under a plan that required her to account for the expenses. The $5,000 was not reported on her Form W-2. Mrs. Warden was not reimbursed for her other business expenses. The Wardens paid $500 for the preparation of their 2012 tax return (including $200 for the preparation of Schedule C, Profit or Loss from Business for George Warden's furniture business), $50 for the rental of a safe deposit box where they stored their securities, and $350 for investment publications. Form 1040, Schedule B During 2013, the Wardens received $500 in interest from the Heartland National Bank and $150 as nominees from the Third National Savings and Loan. They received $200 in interest from tax-exempt bonds issued by the state of Illinois. The Warden's received the following qualified dividends: $400 from E&Z Tax Preparation, Inc., $300 from Secure Fund, and $250 from Rapid Growth Mutual Fund. They also received a $100 capital gain distribution from Rapid Growth. In addition, the Warden's received $700 in nonqualified foreign corporation dividends from Consolidated Tapioca, and paid foreign taxes of $10 to various countries in connection with this investment. The responses to the questions on Part III of Schedule B are \"No.\" Form 1040, Schedule D During 2013, the Wardens sold the following capital assets: (1) On February 2, 100 shares of Ahab Inc. were sold for $1,000. They had been purchased on November 12, 2012 for $2,500. (2) On November 5, 200 shares of Pequod Inc. were sold for $5,000. They had been purchased on January 5, 2013 for $2,000. (3) On December 4, 100 shares of Squall Inc. were sold for $10,000. They had been purchased on January 4, 2003 for $4,000. (4) On December 10, 200 shares of Kismet Inc. were sold for $5,000. They had been purchased on September 5, 2007 for $2,000. (5) On December 15, a number of gold coins were sold for $2,000. The coins had been purchased on October 15, 2006 for $3,000. 2014 CCH Incorporated. All Rights Reserved. 7 The Wardens received a Form 1099-B from their broker for 2013 that showed the proceeds and basis for Items 1 - 4. The gold coins were sold to an acquaintance who did not provide a Form 1099-B. Form 1040, Schedule E Mr. and Mrs. Warden own and rent a brick two-flat apartment building located at 12 West 5th Ave., Chicago, Illinois 60626. The apartment building is not used for personal purposes by either the Wardens or members of their family and was rented at fair rental value for the entire year. Mr. Warden actively participates in the operation of the building. The Wardens received rents of $12,000 in 2013. Their expenses are as follows: cleaning and maintenance, $2,500; mortgage interest, $4,000; repairs, $750; advertising, $500; insurance, $1,000 and real estate taxes, $1,250. The current depreciation figure, taken from the Wardens' work papers (not reproduced), is $3,000. The Wardens did not make any payments that required them to file Form(s) 1099. Form 2441 During 2013, the Wardens' daughter, Ruth, attended two child care centers. They were: Happy Day Care, 4210 W. Maple, Chicago, Illinois 60699, whose identification number is 36-0987654; and Greenfields Day Care, 901 N. Ash, Chicago, Illinois 60699, whose identification number is 36-1234567. The Wardens paid $3,720 to Happy Day Care and $1,860 to Greenfields Day Care. The Wardens did not receive employer-provided dependent care benefits. BUSINESS INCOME Form 1040, Schedule C Mr. Warden operated Interiors Unlimited, selling home furnishings at retail, as a sole proprietor during the entire year. The business address is 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identification number is 36-3456789. The business code is 442200. Mr. Warden filed all of the appropriate payroll tax forms and Form(s) 1099 for 2013. In order to clearly show business income, Mr. Warden maintains an inventory at cost and he uses the accrual method of accounting for his sales and purchases. Total gross receipts of the business were $127,247 and returns and allowances amounted to $1,500. The business books showed the following information: Inventory at beginning of year (valued at cost) . . . . . . . . . . . . . . . $35,000 Merchandise purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 Inventory at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 Truck expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550 . . Other interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Rent (property). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800 Repairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,541 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450 Utilities and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240 Legal and accounting (includes $200 of tax preparation fees). . . . . . . . . . . . . . . . . . . . . . . . . 400 Office expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,058 Travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Meals and entertainment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .330 Form 4562 On January 10, 2013, Mr. Warden purchased office furniture at a cost of $5,000. The furniture is used 100% for business. It is seven-year MACRS property. Mr. Warden elects to expense $1,000 of the cost under Code Sec. 179. Mr. Warden elected not to claim the bonus depreciation available for any business property placed in service during 2013. 8 2014 CCH Incorporated. All Rights Reserved. On July 15, 2013, Mr. Warden purchased a pickup truck for use in his business. It was driven 8,000 miles. The truck, used 100% for business, cost $47,000 and sales tax was $3,000, for a basis of $50,000. The truck is considered five-year MACRS property. Also, it falls in the classification of a light, general-purpose truck, subject to depreciation limits. On June 15, 2009, Mr. Warden purchased fixtures for the store for $6,000. The current depreciation deduction for the fixtures is $536. Mr. Warden bought a brick building on July 1, 2001, $75,000 of the price being allocable to the building for depreciation purposes. No capital improvements were made. Depreciation on the building is computed by using the MACRS method. The allowable MACRS deduction for 2013 would be calculated at the rate of 2.564%. Form 4684 On September 1, 2013, a garage that had been purchased for $25,000 on July 1, 2004 and used exclusively for Mr. Warden's business was damaged by fire. In order to repair the garage after the fire, Mr. Warden spent $7,905. The repairs are considered to be an improvement to the property, which, prior to the casualty, was being depreciated under the MARCS method for nonresidential property. The amount of depreciation claimed prior to 2013 was $5,422. Mr. Warden uses Form 4684, Section B, to determine the recognized casualty gain or loss from the fire damage to the garage. Assume that the fair market value of the garage was $24,650 before the fire and it had a fair market value immediately after the fire of $14,760. Assume, in completing Form 4684, that the total amount of depreciation that Mr. Warden had claimed for the garage up to the date of the fire was $5,876 and that he had received $5,000 from a fire insurance policy he had on the garage. After the fire, and taking into account the allowable loss deduction, the cost of repair and the insurance recovery, the new adjusted basis of the garage for depreciation purposes is $22,029. Since the basis had to be adjusted, the garage will be depreciated on a straight-line method for the remainder of the original depreciation period. The allowable MACRS deduction for 2013 would be calculated based on a rate of 3.33% per year using a mid-month convention. Form 4797 On January 3, 2013, Mr. Warden sold a business truck for $550. He had purchased the truck for $5,000 on March 12, 2004. Total depreciation allowed or allowable on the truck prior to 2013 was $5,000. FARM INCOME AND EXPENSES Form 1040, Schedule F Mr. Warden owned and operated a farm in Illinois. The Principal Agricultural Activity Code for this farm is 112111, and the principal product raised is beef cattle. Mr. Warden utilizes the cash basis to report farm income and expenses. His books and records show the following information: Farm income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount Livestock sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,500 Cooperative distributions ($30 nontaxable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Farm expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Livestock purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Feed purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 Farm expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount Freight and trucking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Labor hired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Other interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Pasture rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 Veterinary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 Assume that Mr. Warden's basis in the livestock sold during 2013 was $19,500. Mr. Warden did not receive a subsidy in 2013. SCHEDULE R - CREDIT FOR THE ELDERLY OR THE DISABLED Martin (SSN 245-16-9950) and Carol Smith (SSN 245-00-9900) reside at 1234 N. School Street, Batavia, IL 60510. The Smiths are both under age 65 and file a joint 2013 tax return. Martin is permanently and totally disabled because of a fall from scaffolding, and retired from his construction job on May 21, 2013. He obtained the required statement from his physician certifying his permanent and total disability in 2013. The statement is not filed with the tax return. During 2013, Martin received $10,000 in taxable disability benefits, $5,000 in wages 2014 CCH Incorporated. All Rights Reserved. 9 from Evergreen Construction Company before his fall, and $2,000 in nontaxable social security benefits. The Smiths' adjusted gross income was $15,000 (Line 37, Form 1040). Because the Smiths are both under age 65 and only Mr. Smith is retired on permanent and total disability, they check Box 4 of Part I of Schedule R. FORM 2210 - UNDERPAYMENT OF ESTIMATED TAX BY INDIVIDUALS, ESTATES, AND TRUSTS John Jackson, a single individual, (SSN 321-65-4987) is self-employed. Jackson resides at 1425 Champaign Drive, Lake St. Louis, MO 63367. For the 2013 tax year he made three estimated tax payments of $5,000 each, on April 15, 2013, June 15, 2013, and September 15, 2013. On January 3, 2014, there was a major fire at Jackson's place of business (Jackson Enterprises). Because of the fire, his accounting records were destroyed and Jackson could not accurately determine his January estimated tax payment. From the sketchy information available to him, he decided that a $5,000 estimated tax payment would be sufficient. The payment was made on January 15, 2014. In completing his 2013 return, Jackson determined that his income tax liability is $17,110 and his self-employment tax liability is $11,993. His adjusted gross income for 2013 was $94,702. Based upon these facts, Jackson determines that he is liable for a penalty for the underpayment of his 2013 estimated tax. However, he reached the conclusion that if he had access to his accounting records, he would have increased his January 15, 2014, estimated tax payment in order to account for an unanticipated increase in his net profit during the last quarter of 2013. Therefore, Jackson decides to ask the IRS for a waiver of the penalty because his underpayment is due to a casualty. . Jackson checks box A of Part II of Form 2210 to indicate that he is asking for a waiver for the entire penalty. He determines that the maximum required annual payment based on prior year's tax is $43,435 and he reports that on Line 8. He submits a statement explaining the reasons why he was unable to meet the estimated tax requirements and the time period for which he is requesting the waiver. Because his request for a waiver is due to a casualty, he must also submit documentation such as fire department and insurance reports. The IRS will review the information and determine whether to grant his waiver request. FORM 3903 - MOVING EXPENSES Ms. Deborah Debit (social security number 100-00-0000) has been employed as a Certified Public Accountant in the Chicago, Illinois area. In February 2013, Ms. Debit accepts a position with a public accounting firm located in Albuquerque, New Mexico. The number of miles from her old home to her new workplace is 1,335 miles, and the number of miles from her old home to her old workplace is 5 miles. During 2013, Ms. Debit incurred the following expenses associated with her move from Chicago to Albuquerque: cost of moving household goods, $1,800; and travel and lodging in moving to Albuquerque, $350. Her new employer reimbursed her for $1,000 of the cost of the move, and properly reflected the reimbursement in box 12 of Ms. Debit's 2013 W-2. FORM 6251 - ALTERNATIVE MINIMUM TAX - INDIVIDUALS Martin Worth (SSN 211-11-1112) is a 66-year-old single taxpayer who resides at 1325 Wisconsin Avenue, Milwaukee, WI 53201. In 2013, his adjusted gross income (as shown on Line 37 of his Form 1040) was $73,000. Worth claimed the following itemized deductions on Schedule A: Medical ($9,725 less $5,475 [7.5% of AGI]).............. $ 4,250 State sales tax................................................................ 732 Real estate taxes............................................................ 5,000 Home mortgage interest.............................................. 9,350 Contributions.................................................................. 2,324 Unreimbursed employee business expenses ($6,900 less $1,460 [2% of AGI])........... 5,440 Allowable itemized deductions................................... $ 27,096 For the purposes of this example, it is assumed that Worth's mortgage interest relates to the purchase of his home. Worth exercised an incentive stock option. At the time of exercise the fair market value of his company's stock was $100. His option was for 1000 shares, and the option price was $50 per share. The $50,000 of \"phantom income\" is entered on Line 14 of Form 6251. Worth's 2013 regular income tax is computed as follows: Adjusted gross income................................. $73,000 Less: Allowable itemized deductions........ $ 27,096 Personal exemption...................................... $ 3,900 Total deductions........................................... $ 30,996 Taxable income............................................. $ 42,004 10 2014 CCH Incorporated. All Rights Reserved. Based on his taxable income of $42,004, Worth's regular tax for 2013 is $6,435, and this amount is entered on Line 44 of Form 1040. In completing Part I of Form 6251, Worth enters $45,904 on Line 1 because this is the amount from Form 1040, Line 41. Worth determines that the medical expense adjustment to be entered on Line 2 is $1,825. He also enters his itemized deduction for taxes of $5,732 on Line 3. Since his home mortgage interest relates to the purchase of his home, no adjustment is entered on Line 4. The amount of miscellaneous itemized deductions is $5,440. With the addition of the $50,000 adjustment from the exercise of the incentive stock option, Worth's alternative minimum taxable income (AMTI) is $108,901 which is entered on Line 28. In completing Part II of Form 6251, Worth determines that his exemption amount for AMT purposes is $51,900. Thus, his tentative AMT on Line 33 is $14,820. However, his regular tax liability of $6,435 is subtracted from this amount. Thus, his alternative minimum tax of $8,385 is entered on Line 35 of Part II and is also carried to Line 45 of Form 1040. FORM 8829: EXPENSES FOR BUSINESS USE OF YOUR HOME Myra Loy is a self-employed accountant who resides at 1028 Blanchard Road, Wheaton, IL 60188. Ms. Loy, whose social security number is 333-22-1111, is single and has no dependents. She has operated her business from her home since April 30, 1999, and she uses one room on an exclusive and regular basis to meet with clients. She determines that her home has a total area of 3,000 square feet and that the room she uses for business has an area of 300 square feet. Loy's tentative net profit from Line 29 of Schedule C is $39,500. Myra does not elect to use the simplified method. Ms. Loy determines that she incurred the following expenses during 2013: home mortgage interest, $5,000; real estate taxes, $3,500; home insurance, $400; insurance on contents of business office, $100; electricity, $600; gas, $800; and painting of the home office, $125. With regard to expenses for electricity ($600) and gas ($800), Ms. Loy determines that only $80 of these utility expenses pertain to the business use of her home and not $140 (10% of $1,400). Ms. Loy's residence has an adjusted basis of $140,000 and a fair market value of $163,000 on the date first used as a business. The basis of the land on which the residence is located is $15,000. Assume that Loy enters 3.175% as the depreciation percentage on Line 40 of Form 8829. Ms. Loy made four equal, timely payments of 2013 Federal estimated taxes totaling $8,000. She also paid Illinois estimated taxes of $800 in 2013. FORM 1065 - U.S. RETURN OF PARTNERSHIP INCOME Two individuals are engaged in business as partners under the firm name of Bilco Products. The address of the partnership is 131 Mill St., Chicago, Illinois 60600. The partners are George A. Morgan, 789 N. Code Drive, Chicago, Illinois 60600, and Malcolm Williams, 58 Forest Drive, Chicago, Illinois 60600. Williams devotes all his time to the partnership. Morgan, who is also the tax matters partner, devotes one-fourth of his time, but his capital account is larger. At the beginning of the 2013 tax year it was $63,674; Williams' was $23,674. The partners share all income and losses equally after guaranteed payments and the interest on Morgan's excess capital investment. During 2013, Mr. Williams contributed land to the partnership worth $120,000, for which he had an adjusted basis of $70,000. The partners have agreed that Mr. Williams will be taxed on the first $50,000 of gain if the land is sold. Mr. Morgan contributed $120,000 in cash to the partnership during 2013. The partnership has no nonrecourse loan. The partnership is on the calendar-year, accrual basis. It was formed on January 2, 1985. It is engaged in the manufacture of toys. The partnership's business code number is 339900. Mr. Morgan and Mr. Williams are both general partners and they are not related. The partnership employed Robert A. Landers, 1212 Lenix, Chicago, Illinois 60600, to prepare its return, which is filed on April 11, 2014. The preparer's tax identification number is P00330124. The partnership's employer identification number is 21-8253431. Mr. Morgan's social security number is 360-92-4501, and Mr. Williams' number is 364-02-4752. All applicable Form(s) 1099 were filed for 2013. 2014 CCH Incorporated. All Rights Reserved. 11 Trial Balance Following is the partnership's trial balance as of the close of business on December 31, 2013: Dr. Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales allowances......................................... Closing inventory........................................ Purchases...................................................... Factory wages.............................................. Factory material and supplies.................. Office and sales salaries............................ Guaranteed payment - Morgan............... Guaranteed payment - Williams............. Interest on excess capital.......................... Rent............................................................... Interest on business loans......................... Taxes: Unincorporated business tax.................. Business license and inspection fees........ Social security and employment taxes..... Bad debts...................................................... Repairs.......................................................... Depreciation1............................................... Insurance on manufacturing .................... operations Utility costs related to manufacturing...... Utilities2........................................................ Postage2........................................................ Office expense2........................................... Insurance2..................................................... Miscellaneous2............................................. Meals and entertainment2........................ Patent royalties received3......................... Dividends3.................................................... Gain on sale of investments4.................... Interest on U. S. obligations3.................... Contributions to XYZ Charity................... Cash............................................................... Notes and accounts receivable................ InvestmentsGovernment obligations.. Land5.............................................................. Truck.............................................................. Office furniture........................................... Machinery and equipment........................ Patent............................................................ Copier............................................................ Accumulated depreciation........................ Accumulated amortization....................... Accounts payable........................................ Notes payable to bank (short-term)....... Mortgage payable to individual (long-term)................................................ MorganCapital account 1/1/13............. WilliamsCapital account 1/1/13........... MorganCash contributed5...................... WilliamsLand contributed5.................... Inventory adjustment6............................... MorganWithdrawals............................... WilliamsWithdrawals............................. Totals 12 Cr. $350,466 5,400 61,000 46,300 103,000 2,126 26,000 6,000 16,800 2,400 9,771 1,050 188 200 10,222 2,000 4,836 51,720 2,470 2,430 340 550 40 500 50 4,500 886 250 6,000 520 210 78,172 23,500 5,000 120,000 20,000 10,000 170,000 40,000 2,500 88,291 22,750 6,337 7,277 10,150 63,674 23,674 120,000 120,000 11,000 1,000 1,000 $831,275 $831,275 2014 CCH Incorporated. All Rights Reserved. Depreciation: On June 14, 2012, the partnership purchased machinery that is seven-year MACRS property for $170,000. On March 2, 2011, the partnership acquired a truck for $20,000 that is five-year MACRS property. It is not subject to the annual depreciation limitations. On August 2, 2002, the partnership acquired a patent for $40,000 that is being amortized over a 20-year life. On January 2, 2011, the partnership acquired used office furniture for $10,000. The furniture is seven-year MACRS property. The furniture did not qualify for bonus depreciation because it is used. On April 8, 2013, the partnership acquired a photocopier for $2,500. The photocopier has a five-year recovery period. 1 The depreciation on the machinery is reflected on Schedule A and is to be included in the total of \"other costs,\" including insurance and utility costs attributable to manufacturing and materials and supplies. The depreciation deduction for the patent is treated as a deduction related to portfolio income. As such, the depreciation for the patent is reported on Schedules K and K-1 and is not reflected in the computation of trade or business income on page 1. No Code Sec. 179 expensing or bonus depreciation was taken on assets acquired in years prior to 2013. However, the partners elect Code Sec. 179 expensing for the photocopier. Utilities; Postage; Office expense; Insurance; Miscellaneous; Meals and entertainment: These items should be listed on a separate schedule and attached to Form 1065 and the total entered on Line 20, page 1, \"Other deductions.\" The meals and entertainment figure of $4,500 reflects the total of such expenses incurred by the partnership for the year. 2 Patent royalties; Dividends; U.S. obligations interest: The patent royalty income of $886, the dividend income of $250, and the interest earned on the U.S. obligations of $520 represent portfolio income and, accordingly, are reported on Schedules K and K-1. All of the dividend income is qualified dividend income. 3 Securities sales: The partnership made two sales of securities in 2013. Bonds of Moran Specialty Co. were sold on January 9, 2013, for $49,000. They had been purchased on June 5, 2010, for $40,000. The partnership also sold 50 shares of Harper Lumber Co. stock for $47,000 on January 24, 2013. This stock had been purchased on September 5, 2010, for $50,000. These are portfolio income transactions. The transactions were reported on Form(s) 1099-B showing basis was reported to the IRS. Bilco Products reports the details of the transactions on Form 8949. 4 Land and cash contributed: Mr. Williams' land contribution is to be listed in the ending balance sheet (Schedule L) and in Schedule M-2 of Form 1065 at its fair market value of $120,000. 5 Inventory adjustment: This amount represents the decrease in cost of goods sold by reason of the increase in the inventory at the close of the year over that at the beginning of the year. The amount of $11,000 itself should not appear on Form 1065. The inventory valuation method used is lower of cost or market, and there was no change in the manner of valuing the inventories in 2013. 6 Self-employment net earnings: The combined net earnings from self-employment for both partners must be computed and entered on Schedule K of Form 1065. The individual partner's net earnings are reported on Schedule K-1. A 1099-INT was issued to Mr. Morgan for $2,400. * BALANCE SHEET The firm's balance sheet, as of January 1, 2013, was as follows: ASSETS Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade notes and accounts receivable. . . . . . . . . . . . . . . . . . . . . Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in government obligations . . . . . . . . . . . . . . . . . . Investments in corporate stocks and bonds. . . . . . . . . . . . . . . . . . Depreciable assets................................................ $200,000 Less: Accumulated depreciation......................... 38,571 $7,274 21,000 50,000 5,000 90,000 161,429 Intangible assets................................................... Less: Accumulated amortization........................ $40,000 20,750 19,250 $353,953 Total assets LIABILITIES AND CAPITAL Accounts payable.......................................................................... Notes payable to bank (short-term)......................................... Mortgage payable to individual (long-term)........................... Partners' capital accounts.......................................................... $56,489 5,116 205,000 87,348 Total liabilities and capital.......................................................... $353,953 2014 CCH Incorporated. All Rights Reserved. 13 FORM 1120 - U.S. CORPORATION INCOME TAX RETURN The Falcon Machinery Corp., 271 East Beaumont Street, Chicago, Illinois 60612, keeps its books on the calendar-year, accrual basis. It is engaged in the manufacture of office supplies, and its business activity code is 339900. Its employer identification number is 35-0816302, and it was incorporated on July 1, 2000. At no time during 2013 did any foreign or domestic corporation, partnership (including any entity treated as a partnership), or trust own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of the corporation's stock entitled to vote. Also, Falcon Machinery did not have an interest in a foreign bank, securities or financial account and was not the grantor of, or the transferor to, a foreign trust. This corporation is not a personal holding company or a member of a group of controlled corporations. All of the income is derived from sources in the United States. Falcon Machinery Corp elects to take the domestic production activities deduction. The following is the corporation's trial balance per books as of the close of the year 2013 (additional information on specific accounts follows the trial balance): TRIAL BALANCE DECEMBER 31, 2013 Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . . . . Note receivable. . . . . . . . . . . . . . . . . . . . . . . . Inventories (closing). . . . . . . . . . . . . . . . . . . . Corporate bonds 1. . . . . . . . . . . . . . . . . . . . . . Unamortized bond premium 2 . . . . . . . . . . . State and municipal bonds. . . . . . . . . . . . . . U.S. Treasury bonds . . . . . . . . . . . . . . . . . . . . Stock: Domestic corporations 1. . . . . . . . . . . . . . Foreign corporations 1 . . . . . . . . . . . . . . . . Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . Office furniture. . . . . . . . . . . . . . . . . . . . . . . . Trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . Federal estimated tax payment Sinking fundBond retirement 2. . . . . . . . . Goodwill2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value Officers' life insurance 2 . . . . . . . . . . . . . . . . Unamortized bond issue expense 2. . . . . . . Accounts payable. . . . . . . . . . . . . . . . . . . . . . Notes payable (short term). . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . Accrued payroll. . . . . . . . . . . . . . . . . . . . . . . . Accrued vacation pay. . . . . . . . . . . . . . . . . . . Accrued taxes: IL Replacement tax. . . . . . . . . . . . . . . . . . . IL Franchise tax. . . . . . . . . . . . . . . . . . . . . . IL Income tax. . . . . . . . . . . . . . . . . . . . . . . . Foreign taxes. . . . . . . . . . . . . . . . . . . . . . . . Property taxes. . . . . . . . . . . . . . . . . . . . . . . Employment taxes. . . . . . . . . . . . . . . . . . . Bonds payable (long term). . . . . . . . . . . . . . Capital stock: 7% Preferred. . . . . . . . . . . . . . . . . . . . . . . . Common. . . . . . . . . . . . . . . . . . . . . . . . . . . . SurplusPaid. . . . . . . . . . . . . . . . . . . . . . . . . . Unappropriated retained earnings . . . . . . . Treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . 14 Dr. 158,985 61,159 11,100 333,894 22,400 1,265 15,000 48,000 Cr. 97,500 8,000 25,500 670,500 434,892 30,629 45,264 407,781 2,215 29 50,255 1 23,150 8,875 36,075 30,000 2,925 3,328 18,910 520 300 320 93 8,000 4,110 552,403 50,000 435,000 20,000 282,379 2,544 2014 CCH Incorporated. All Rights Reserved. * Appropriated retained earnings 16 . . . . . . Dividends paid: Common stock . . . . . . . . . . . . . . . . . . . . . . Preferred stock. . . . . . . . . . . . . . . . . . . . . . Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Returns and allowances. . . . . . . . . . . . . . . . . Purchases (net). . . . . . . . . . . . . . . . . . . . . . . . Inventory variation (decrease) 4 . . . . . . . . . Factory wages . . . . . . . . . . . . . . . . . . . . . . . . . Costs attributable to inventory 5 . . . . . . . . Depreciation 6 . . . . . . . . . . . . . . . . . . . . . . . . . Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Officers' life insurance premiums (net of CSV adjustment). . . . . . . . . . . . . . Office salaries 7 . . . . . . . . . . . . . . . . . . . . . . . . Salesmen's compensation 7. . . . . . . . . . . . . . Officers' compensation 8. . . . . . . . . . . . . . . . Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilities9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service guarantees 9. . . . . . . . . . . . . . . . . . . . Office supplies and expense 9 . . . . . . . . . . . Amortized bond issue expense 9 . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . Legal and accounting fees 9 . . . . . . . . . . . . . Travel expense 9 . . . . . . . . . . . . . . . . . . . . . . . . Health plan costs . . . . . . . . . . . . . . . . . . . . . . Taxes: IL Replacement tax. . . . . . . . . . . . . . . . . . . IL Franchise tax. . . . . . . . . . . . . . . . . . . . . . IL Income tax. . . . . . . . . . . . . . . . . . . . . . . . Federal Income tax . . . . . . . . . . . . . . . . . . . Foreign taxes. . . . . . . . . . . . . . . . . . . . . . . . Property taxes. . . . . . . . . . . . . . . . . . . . . . . . . Employment taxes. . . . . . . . . . . . . . . . . . . Interest income: Corporate bonds 10 . . . . . . . . . . . . . . State and municipal bonds. . . . . . . . . . . . U.S. Treasury bonds. . . . . . . . . . . . . . . . . . Notes receivable. . . . . . . . . . . . . . . . . . . . . Trade accounts . . . . . . . . . . . . . . . . . . . . . . Dividends received 11. . . . . . . . . . . . . . . . . . . . Amortized bond premium 10. . . . . . . . . . . . . Storage rental income. . . . . . . . . . . . . . . . . . Sale of scrap. . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sales (net) 12 . . . . . . . . . . . . . . . . . Real estate and equipment sales 13. . . . . . . Worthless stocks 12. . . . . . . . . . . . . . . . . . . . . Fire loss 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions 15. . . . . . . . . . . . . . . . . . . . . . . . Totals 1 67,544 3,500 26,000 1,935,943 36,395 422,133 21,346 149,613 424,441 227,878 25,815 3,923 2,573 82,392 91,703 126,000 10,000 9,720 8,252 5,115 700 22,000 12,500 6,850 20,700 520 300 4,320 59,971 93 8,000 25,491 1,426 788 7,125 2,300 770 9,210 142 15,000 411 1,758 17,288 12,500 7,414 2,250 $3,911,707 $3,911,707 Bonds and stock: Corporate bonds and foreign and domestic stocks are entered at Line 9 of Schedule L. Sinking fund; Goodwill; Cash surrender value of officers' life insurance; Unamortized bond premium; Unamortized bond issue expense: All these asset accounts should be aggregated at Line 14 on the balance sheet, Schedule L, as \"other assets.\" 2 Accrued taxes; Income (federal): The federal income tax for 2013, as determined on Line 31 of Form 1120, should be included in the item \"Other current liabilities\" on page 5, Schedule L, Line 18(d) of the balance sheet to the extent not paid as of December 31, 2013, and in full on Line 2 of Schedule M-1. Assume that the Federal estimated taxes of $60,000 were paid in equal installments by the due dates. The 2012 tax liability was $38,750. 3 2014 CCH Incorporated. All Rights Reserved. 15 Inventory variations: This figure represents the difference between the aggregate inventories at the beginning and the end of the tax year, as part of the cost of goods sold. (This figure would not be entered on Form 1120; it is solely a book figure.) Falcon used the lower of cost or market method for the valuation of inventory. There was no change in this method from previous years. 4 Costs attributable to inventory: Costs attributable to inventory are the indirect UNICAP costs reported on line 5 of Form 1125-A. For Falcon, these costs include a portion ($8,444) of the officers' salaries. Falcon's total indirect costs are $424,441, as shown on the trial balance sheet for 2013. None of these indirect costs are included in the amount of expenses listed elsewhere on the trial balance sheet. 5 Depreciation: The Falcon Machinery Corporation purchased machinery (7-year recovery property) in August 2013 at a cost of $300,000. Falcon claimed $150,000 Code Sec. 179 expense deduction and depreciates the remaining basis using MACRS straight-line with a 7-year recovery period. The rate for the current year is 7.14%. Falcon elected not to claim bonus depreciation. 6 Construction of a factory building (39-year recovery property) was completed during June 2013 at a cost of $250,000 and depreciated under the MACRS straight-line method. The rate for the current year is 1.391%. This building was constructed on land that was purchased for $8,000. For machinery (7-year recovery property) purchased in July 2012 at a cost of $134,892, the company uses the regular MACRS method and a 7-year recovery period. Depreciation for 2012 used a rate of 14.29%, while the 2013 rate is 24.49%. Neither bonus depreciation nor a Code Sec. 179 deduction was elected. For office furniture and fixtures (7-year property) purchased in April 2011 at a cost of $30,629, the company uses the regular MACRS method and a 7-year recovery period. Depreciation for 2011 and 2012 used rates of 14.29% and 24.49%, respectively, while the 2013 rate is 17.49%. Based on projected future earnings, Falcon decides to elect out of claiming both bonus depreciation and Code Sec. 179 expense deductions. For a truck (5-year recovery property that is not subject to Code Sec. 280F) purchased in 2012 at a cost of $45,264, the company uses the regular MACRS method and a 5-year recovery period. Depreciation for 2012 used a rate of 20%. The 2013 depreciation rate is 32%. Neither bonus depreciation nor a Code Sec. 179 deduction was elected. A shed placed in service on January 2, 2003 was destroyed by fire in February 2013. The MACRS deduction claimed in previous years is $2,554, and the full-year depreciation for 2013 would otherwise be $256. The property cost $10,000, and there is no insurance recovery. The total cost of the original factory buildings placed in service in 2000 was $420,500. Accumulated depreciation on these buildings is $139,728. Office salaries; Salesmen's compensation: The aggregate of these two items should be entered at Line 13, page 1 of Form 1120. 7 Officers' compensation: Compensation of $54,000 was paid to the president, F.L. Davis (social security number 252-67-8315). He owned 15 percent of the common stock. Compensation of $41,500 was paid to the vice-president, B.L. West (social security number 29640-7222), who owned 10 percent of the common stock. Compensation of $38,944 was paid to the secretary-treasurer, T.N. Dorst (social security number 307-31-3433), who owned 10 percent of the common stock. All three worked full time for the corporation. As noted above, $8,444 of the salaries paid to the officers consists of costs attributable to inventory. Note: Form 1125-E should be completed before 8 entering any amounts on Line 12, page 1 of Form 1120. Insurance; Utilities; Service guarantees; Office supplies and expense; Legal and accounting fees; Amortized bond issue expense; Travel expenses: The aggregate of these items is entered on Line 26, page 1 of Form 1120. 9 Interest income; Corporate bonds; Amortized bond premium: Corporate bonds were purchased on July 1, 2012, for $23,875. The bonds mature on December 31, 2020, have a face value of $22,400, pay interest at 7%, and are expected to yield an effective rate of return of 6% (3% every six months for 17 periods). Falcon has elected to amortize the bond premium. The amortization for 2013 is $142 and is offset 10 against the interest income reported on Line 5, page 1 of Form 1120. The carrying value of the bonds at the beginning of 2013 was $23,807. Dividends received; Domestic corporations: Falcon received $6,850 in dividends from Dunbar Steel, Inc. and $2,120 from Marshall Co. Both are domestic corporations and the dividends qualify for the 70% deduction. A cash dividend of $240 was received from Canadian Shipping, Ltd., a foreign corporation. 11 Securities sales and worthless stock: On February 3, 2013, the corporation sold 100 shares of XYZ Corp. stock for $20,500. The stock was bought on May 26, 2012, for $18,487. On January 26, 2013, the corporation sold 200 shares of ABC Corp. preferred stock for $4,400. The stock had cost $4,755 on April 14, 2012. On May 14, 2013, the corporation sold for $15,100, net, U.S. Treasury bonds which had cost $15,000 on June 9, 2007. A 1099-B was received for these sales with the basis reported to the IRS. Further, 250 shares of Zero Corp. common stock became worthless in 2013. It was acquired on January 30, 2002, for $12,500, which was its adjusted basis at the time it became worthless. 12 Real estate sale: On July 5, 2013, the corporation sold vacant land for $30,000. It paid $12