Practice Set #2 Doug Jones is age 65 in 2020. He lives with his spouse at 500 North Tustin Ranch Road, Tustin, CA 92780 (which was sold in 2020 see below). His Social Security number is 122- 652112. Doug was divorced to his first wife in 2011. He pays $45,000 annually of alimony to his ex-wife Shirley Jones (Social Security Number 558-55-7567). He married his new wife Nicole Jones (Social Security Number 223-312-2222) in 2014 she is 62 in 2020. They purchased their Tustin home together right after their marriage on June 15, 2014. Nicole Jones does not work. They adopted three newborns in 2016. Their names are Oliva, Garrett, and Jonathon Jones. Their Social Security numbers are 232-90-8909, 252-54-6363 and 235-45-1987, respectively. Doug owns Jones Office Furniture LLC, a single member limited liability company and manufacturers office furniture for which he uses the cash method of accounting and maintains no inventory. Doug formed this business after he left his former employer Desks r us. His revenues and expenses are:

Sales revenue $1,875,000 Cost of goods sold (based on purchases for the year) 550,000 Salary and Wage expenses (per W-2) 395,000 Rent expense 80,000 Utilities 16,000 Telephone 6,800 Advertising 3,500 Entertainment 12,500 Contributions to State Governors Campaign 15,000 Meals 19,000 Depreciation (1) 60,000 Health insurance (2) 53,000 Accounting and legal fees (3) 45,000 Employee Benefits (including contributions to their profit-sharing plan) 47,000 (1)

Assume Bonus Depreciation was taken for this new equipment under Section 168(k) and placed in service on July 15, 2020 (2) $26,000 for employees insurance and $27,000 for Doug and Nicoles insurance (high deductible plan). (3) The $45,000 includes expenses of $15,000 related to the purchase of another desk manufacturer company and $30,000 to expand into the steel business that he purchased on July 1, 2020. Other income for Doug and Nicole includes the following Dividend Inc.: Box 1 a 1099 DIV $28,500 Ford, Inc. Held for 1 year $19,000 Chevron, Inc. Held for 15 days 9,500 Interest income: Second National Bank 16,000 First City Bank 5,500 City of Irvine bonds 26,000 Treasury Bills 15,000 During the year, Doug and Nicole also had the following transactions: Doug received social security benefits for the first-time starting January 1, 2020. His gross social security is $1,200 per month. He was paid $1,000 per month which is net of Medicare premiums. Doug withdrew $75,000 from his 401(k) with his former employer Desks r us. UBS is the investment company of the 401(k). This amount was reported on a 1099 R in Box 1 and 2 a. It was also noted that this was a Normal distribution in Box 7 (Code 7). In Box 4 it was noted that $10,000 of federal taxes were withheld from the distribution. He sold Red, Inc. stock for $35,000 on March 12, 2020. He had purchased the stock on September 5, 2019, for $50,000. On December 10, 2020 Doug sold 300 shares of Apple Inc. stock for $50,000 he purchased over on January 15, 2018 for $200 a share. He purchased 500 shares of Apple, Inc. stock on December 31, 2020 for $165 per share. Received an inheritance as the sole beneficiary on January 4, 2020 of $225,000, which is the fair market value of Land, he received from his Uncle Fester who passed away. His Uncle paid $100,000 for the Land in 2010. Doug borrowed $150,000 (Land Loan-Interest Only) to improve the property. He also received life insurance of $400,000. Doug used $190,000 of the insurance to purchase Purple, Inc. stock on May 31, 2020, and used the remaining amount of the life insurance to invest $210,000 in Gold, Inc. stock on June 30, 2020. Received Salmon, Inc. stock worth $80,000 as a gift from his cousin, Shirley, on June 17, 2017. Her adjusted basis for the stock was $20,000. No gift taxes were paid on the transfer. Shirley had purchased the stock on April 1, 2012. Doug sold the stock on November 1, 2020, for $150,000. On October 15, 2020, Doug sold one-half of the Purple, Inc. stock for $185,000 and all the Gold Stock for $175,000. Doug was notified on August 1, 2020, that Blue, Inc. stock he purchased from Blue, Inc. as one of their first investors on September 1, 2017, for $350,000 had become worthless. Total stock outstanding when he originally invested was $975,000. While he perceived that the investment was risky, he did not anticipate that the corporation would declare bankruptcy. He will not receive anything from the bankruptcy proceedings. On January 31, 2020, Doug received a parcel of land in Phoenix worth $305,000 in exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth $255,000, he also received $50,000 cash. Dougs adjusted basis for the Tucson parcel was $135,000. He originally purchased it on September 18, 2015. During 2015, he loaned $35,000 to his brother. He executed a note and his brother paid interest and some principal payments on the note. The loan balance was $27,000 with $1,000 unpaid interest when his brother filed for Ch 7 bankruptcy on January 20, 2020. Doug was informed on July 31, 2020 by the bankruptcy court that he would not receive any further principal and interest payments on the note. Therefore, the note is worthless in 2020. On December 15, 2020, Doug sold the home in which he and Nicole had been living in since their marriage in 2015. He will move into another home in 2021. The sales price was $1,350,000, selling expenses were $250,000 (including commissions). Doug purchased the condominium for $350,000. On December 31, 2020, Doug sold the inherited land from his uncle. The consideration was $600,000 installment note plus the assumption of the sellers mortgage (Land Loan) of $150,000. The note is to be paid in three installments with payments due on December 31, 2020, December 31, 2021, and December 31, 2022. The selling expenses were $27,500. He received the first installment payment of $200,000 on December 31, 2020. Assume he uses all available elections to minimize the tax consequences of this sale and made improvements to the property with the entire $150,000 Land Loan. Assume Doug contributes to a SEP IRA. You need to consult with Doug and let him know how much he can contribute to his SEP IRA assuming he files his return by April 15, 2021. Include the maximum eligible amount he can contribute to the SEP IRA in his return based on his income from his business. Assume he has a separate plan for his employees. Doug set up a new Health Savings Account during 2020. He used the entire amount of the account in 2020 to pay for his 2020 medical expenses. His wife had COVID-19 and was in the hospital for several weeks. Note the medical expenses paid below over and above the amount covered by insurance. Dougs broker advised him to invest $100,000 on January 15, 2020. Dougs Share of the Ordinary Loss for 2020 from We Drill Oil LLC per his K-1 (taxed as a partnership for tax purposes) was $85,000. Additional potential deductions, exclusive of the aforementioned information, are as follows: Medical expenses $75,000 Property taxes on residence and other properties 11,900 State income taxes (estimated tax payments) 30,000 Charitable contributions to Church (Cash) 35,000 Mortgage interest on residence sold (Second National) Bank, and Interest on Land Loan 18,900 $2,000 Tax Preparation Fees (time incurred by the CPA was 75% related to his business) 10,000 Sales taxes paid 5,000 Equipment was stolen (uninsured) related to his business in 2020 Basis was: 30,000 During the year, Doug made estimated Federal income tax payments totaling $170,000 equally on the quarterly due dates ($42,500 per quarter). Compute Doug and Nicoles lowest net tax payable or refund due for 2020 if he makes any available elections. Prepare the tax forms for your computations, you will need Forms 1040, 4562, 4684, 4797, 6252, 8582, 8824, 8889, 8995 and 8949 and Schedules 1, 2, 3, A, B, C, D, E and SE and any other forms that are necessary to prepare a complete and accurate tax return. Intuit Pro connect has been provided to you. Make sure you prepare the federal tax return with all the required schedules and statements that would be filed with the IRS. Do not prepare the state return. You will also need to document all your assumptions of WHY you treated each item in the problem as taxable, non-taxable, deductible, or nondeductible. Also, you need to analyze the results of 2020 and his impact because of tax reform. The entire assignment is worth 100 points. Failure to provide explanations and your analysis will result in a reduction of all the points on the assignment. Be creative and thorough on your write up. You should pdf only the federal tax return that will be filed with the IRS (do NOT include any estimated tax forms or other information that is generated for the client from the tax software) and your write up.