Margaret and Tom are married, they have three children: Azhar age 2, Cassidy age 9, and Rachel age 12. Margaret is a manager in a CPA firm. In 2020 she earned $105,000, $12,000 of federal income tax was withheld, and $3,000 of state income tax was withheld.

In 2020, they earned $300 of interest on their joint savings account.

Tom was a CPA firm manager but he became tired of the leisurely life in a CPA firm. He wanted some real work so he now owns and operates a pastry shop in a facility that he rents. He operates as a single member LLC and reports income for tax purposes on Schedule C. The name of the business is Making pastry is tasty, but Tax is more fun. All his business net profit is QBI.

Income and expenses of the business in 2020 were:

Gross revenues $258,000

Insurance 1,700

Employee salaries 54,000

Employee Payroll taxes 5,400

Baking supplies 55,000

Rent 18,900

Legal and accounting fees 2600

Depreciation ?

Toms only business assets are a set of baking ovens. The ovens were purchased in October of 2017 for a total cost of $200,000. The ovens are 7 year property for depreciation. Tom elected out of bonus depreciation and did not use section 179 for the new ovens. He uses the proper mid-quarter MACRS schedule for the ovens.

Tom paid estimated State income tax of $4,300 during the year, and estimated federal income tax of $10,000.

In addition, the family had the following 2020 expenses:

Family medical and dental expenses $16,000

Health insurance premiums 4,000

Real estate taxes 3,400

Home mortgage interest 9,000

Credit card finance charges 2,600

Donations to their church 7,000

Problem 2 Corporate Tax Return Problem

Ayer-Barrett-Chen-Cho, Inc. is a retail company that uses the accrual method. They reported the following financial accounting operating results for 2020:

Sales $800,000

Cost of goods sold (250,000)

Gross profit 550,000

Dividend from a 10% owned corporation 25,000

Loss from sale of stock (10,000)

Interest from Municipal bonds 10,000

Expenses:

Salaries $100,000

Repairs 30,000

Bad debts (allowance method) 10,000

Advertising 5,000

Charitable contributions 50,000

Depreciation (straight-line) 15,000

Consider the following for tax purposes.

• MACRS depreciation was $10,000
• They actually wrote off $9,000 in bad debts

1. in Problem 1, if Tom is the only owner of his business that is organized as a LLC, he would not have to pay self employment tax.

   True

   False

2. In problem 1, for Tom's business, what is the MACRS depreciation expense?

		23,040
		34,980
		26, 040
		28,120

3. For problem 1, assume that Tom reports depreciation expense of 26,040. This is not the correct amount from the MACRS chart but please use it for the remainder of problem 1. This made up number is given so a student will not miss several problems just because they did not get the correct depreciation in the previous problem. Use the 26,040 for the remainder of the questions. What is the Schedule C net profit for the pastry business using 26.040 depreciation?

		137,600
		218,000
		94,360
		76,100

4. What is the AGI in problem 1 using 26,040 depreciation?

		165,700
		85,000
		192,993
		165,400

5. Will they use the standard deduction or itemized deductions, in problem 1?

		Standardized, it is required
		Itemized, it gives the larger deduction
		Standard, it gives the larger deduction
		They can't use either one

6. Assume that they itemize. What is their medical expense deduction, if they use the 7.5% AGI limit that is on the Schedule A

		701
		1,525
		16,000
		5,525