Proprietorship Business Income

Mr. Warden operated Interiors Unlimited, selling home furnishings at retail, as a sole proprietor during the entire year 2019. The business address was 45 Boswell Blvd., Villa Park, Illinois 60181. His employer identification number is 36-1234567. The business code is 4317.

In order to clearly show business income, Mr. Warden maintains an inventory 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 Insurance 1,450

Merchandise purchased 70,000 Utilities and telephone 1,200

Inventory at end of year 22,000 Advertising 2,240

Truck expenses 550 Legal and accounting fees 400

Other interest 300 Office expense 125

Rent (property) 7,800 Depreciation 6,043

Repairs 300 Travel 400

Taxes 2,000 Meals and entertainment 1040

Wages $12,542

On January 10, 2019, Mr. Warden purchased office furniture at a cost of $3,000. 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. The basis on which the depreciation is computed is $2,000.

On July 15, 2019, Mr. Warden purchased a Ford pickup truck for use in his business. It was driven 8,000 miles. The truck, used 100% for business, cost $17,500 and sales tax was $500, for a basis of $15,000. The truck is considered five-year MACRS property. Also, it falls in the classification of a light, general-purpose truck; therefore, it is subject to the same limitations as are imposed on cars.

In July, a brick garage acquired on July 1, 2012, for $3,000 and used in Mr. Warden's business was damaged by fire. The garage had a useful life of 25 years, and depreciation was computed under the straight-line method. Because the garage was repaired, the depreciation deduction for the garage amounts to $80 for 2019. During September, Mr. Warden spent $1,669 in repairing and renovating the garage after the fire, but the repairs are not completed until October 1, 2019. These costs represent an improvement and, as such, must be depreciated under the MACRS system for nonresidential property. In computing the casualty gain or loss from the fire on Form 4684, the fair market values of the garage before and after the casualty were $2,000 and $1,130, respectively, and an $800 insurance reimbursement was received. In computing the basis of the property for purposes of determining the casualty gain or loss, the total deductible depreciation up to the date of the fire amounted to $2,160.

ASSIGNMENT: Compute the casualty loss on page 2 of Form 4684.

In 2007, Mr. Warden purchased fixtures for the store. The ACRS depreciation deduction for the fixtures is $545.

Mr. Warden bought a brick building on July 1, 2012, $24,000 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 straight-line method and an estimated useful life of 25 years.

On January 3, 2019, Mr. Warden sold a business truck for $570. He had purchased the truck for $5,000 on March 12, 2007. Total depreciation allowed or allowable on the truck was $5,000.

ASSIGNMENT: Report any gain on the sale on Form 4797, Part III, then carry over the gain to Part I of Form 4797 along with the casualty loss computed on page 2 of Form 4684.

ASSIGNMENT: From the above information, complete a Form 4562 and a Schedule C for Form 1040.