1. Part1:
2. PandJareamarriedcouplewiththefollowingitemsofincomefor2011:

P wages $45,000

State tax refunds $5,000

J unemployment $2,750

Dividends $400

Interest income $350

J Social Security $18,000

P is a flight attendant who occasionally takes advantage of the airlines friends and family benefits where P and J can fly for free on certain flights at certain times. The only restriction on the use of the flights by P and J is that the flight cannot be full, otherwise, they can fly anywhere in the world. P and J took flights costing $4,000 during the year when compared to regular passenger costs. A review of their 2010 tax return shows they deducted $1,200 of state income taxes on their federal return.

P and J also have the following deductions:

Interest on home mortgage $5,000

State income taxes $2,500

State sales taxes $1,000

Property taxes $1,500

Charitable contributions $300

Contributions to congressman $400

Airline uniform costs $300

Calculate P and Js 2011 Adjusted Gross Income (AGI) as well as their taxable income. Presume that their personal exemptions total $7,000 and they will file a married filing joint tax return. If you are excluding any of the above items from either income or deductions, provide an explanation as to why. Show your calculations.

1. Part2:
2. Addingtothefacts,Jdecidedhehadenoughofwatchingtelevisionalldayanddecidedtostarthisownbusiness.Jincursthefollowingcoststogetupandrunning:

Legal fees to secure his business name and website domain name $500

Purchase of computer equipment $4,000

Purchase of equipment to put stitching on hats and clothing $3,000

His business is reasonably successful during 2011 and he had sales of $12,000 and total cost of goods sold of $10,000. Presume that both the computer equipment and the stitching equipment are assigned the 5 year life category for MACRS.

Separately calculate what you think is the best result for tax purposes of Js business in 2011. Once you have that complete, use your conclusions and the information inpart 1to calculate the AGI and taxable income of P and J for 2011. Do they end up with a net operating loss which they can carryback to 2009 and 2010?