Sherwood A. Schwarzenegger, III is married to Sheronda B. Schwarzenegger and they file a joint return. They have been married for 36 years and have filed a joint return each of those years. At December 31, 2015, they live at 4576 Youghiogheny River Way, Monongahela, PA 15063. On January 1, 2015 Sherwood and Sheronda resided in the Philadelphia area, where they rented a three-bedroom house. Sherwood is employed as a certified public accountant. At the start of 2015, he worked in the Philadelphia office of BDO International (BDO), an international CPA firm. In January of 2015, Sherwood transferred to BDO’s Pittsburgh office, 339 Sixth Avenue, Pittsburgh, PA 15243. He remains employed there throughout the remainder of 2015. Sheronda owns and operates a vacuum repair business. Sherwood is age 67 on 12/31/2015, while Sheronda is age 65 on 12/31/2015. Sherwood has maintained qualified health insurance coverage through his employer for the entire year for both himself and his spouse. Sherwood’s social security number is 135-24-5687, while Sheronda’s social security number is 246-35-6798. Sherwood wants to contribute $3 to the Presidential Election Campaign Fund, but Sheronda does not. The couple’s daytime phone number is 412-424-4573.

The following information is shown on Sherwood’s 2015 Wage and Tax Statement (Form W-2) that he received from his employer. (Sheronda is self-employed and thus does not receive a Form W-2 for 2015.)

Line Description

1 Wages, tips, other compensation $ 108,000

2 Federal income tax withheld 16,000

3 Social Security wages 108,000

4 Social Security tax withheld 6,696

5 Medicare wages and tips 108,000

6 Medicare tax withheld 1,565

16 State wages, tips, etc. 108,000

17 State income tax withheld 3,200

18 Local wages, tips, etc.

19 Local income tax withheld

Sherwood and Sheronda received a $2,100 income tax refund from the state of Pennsylvania on May 29, 2015. On their 2014 Federal income tax return, they reported total itemized deductions of $14,100, which included a $3,100 state income tax deduction. In addition, Sherwood and Sheronda applied their 2014 refund of federal income taxes of $350 toward their 2015 federal income tax liability. If they are owed a refund for 2015, they want the first $100 applied to their 2016 federal income tax. Any additional refund they want to be deposited directly into their checking account. The checking account number is 2583691740, and the bank’s routing number is 031000011.

Sherwood and Sheronda have two adult children, Sherlock and Sharlene, who live on their own and fully support themselves. After Sherlock and Sharlene, each graduated from college, they both got married and settled in the Pittsburgh area. Sherwood and Sheronda decided to move to the Pittsburgh area to be closer to their children. In January 2015, Sherwood and Sheronda moved from the Philadelphia residence to the Monongahela residence. They hired the Mayflower Moving Company to do the bulk of the moving. On 1/29/15, Mayflower packed all of the couple’s household goods and personal effects into a moving van. The couple stayed in a hotel in Philadelphia on 1/29 then on the morning of 1/30, packed up their two cars – a 4-door sedan and a sport utility vehicle – and drove the 295 miles from the old house in Philadelphia to the new house in Monongahela. Sherwood and Sheronda stayed in a hotel in Monongahela on 1/30. The Mayflower Company unloaded the couple’s belongings into the new house on 1/31. Sherwood and Sheronda spent the following amounts while moving. (None of the amounts was reimbursed to either Sherwood or Sheronda.)

Mayflower Moving Company charge	$ 10,000
Meals	500
Lodging	600

Sherwood and Sheronda completed the purchase of their new house on 4576 Youghiogheny River Way on 1/31. They spent $300,000 to purchase their new house: $250,000 for the dwelling, and $50,000 for the land. The fair market value equaled their adjusted basis. To buy the new house, they used money that Sherwood had inherited 3 years earlier after the death of his father. Thus, they did not have to borrow money to purchase the residence. During 2015, Sherwood and Sheronda made the following payments associated with their primary residence in Monongahela:

Property taxes $ 1,500

Property insurance 1,000

Utilities 500

Since Sherwood and Sheronda rented the Philadelphia residence, they did not pay property taxes, property insurance, or utilities for that residence. Sherwood and Sheronda did not make any charitable contributions during 2015.

Sheronda has owned and operated her vacuum repair business for the last 5 years. She calls her company Sheronda’s Vacuum Cleaner Repair. During 2015, Sheronda received cash receipts from customers totaling $49,000. During 2015, she paid the following expenditures in connection with her business:

Cost of an engine diagnostic machine (5-year property) $ 26,000

Cost of new equipment (7-year property) 14,000

Supplies 3,000

Advertising fees 2,000

Liability insurance premiums 1,000

For the engine diagnostic machine, Sheronda elected not to expense any portion of the cost allowed under the provisions of § 179, but rather elected to take the maximum allowed depreciation. For the new equipment, Sheronda elected to take § 179 expense. The diagnostic machine plus all the equipment were placed in service on March 1, 2015. The diagnostic machine and equipment are used exclusively for business purposes.

While living in the Philadelphia residence, Sheronda operated the vacuum cleaner repair business out of a spare bedroom, which was not used exclusively and regularly to operate Sheronda’s business. Beginning February 1, 2015, upon moving into the Monongahela residence, Sheronda commenced operating the business out of the new home’s garage. She uses the garage to store business supplies and to repair vacuum cleaners. The garage totals 800 square feet, while the house, including the garage, totals 4,000 square feet. The garage is also used to park a personal automobile and to store personal items. Sheronda estimates that half of the garage is used exclusively on a regular basis in the operation of Sheronda’s business. In February 2015, Sheronda paid a painter $700 to paint the entire garage. Sheronda uses the cash basis to account for revenues and expenses.

During March 2015, Sheronda’s mother died after a long illness. Sheronda inherited $750,000. Using the inheritance, Sherwood and Sheronda purchased a vacation home on Lake Chautauqua for $700,000 on May 1, 2015. (The land had an appraised value of $100,000 and the house itself had a fair market value of $600,000.) The address is:

4268 Lake Shore Drive

Chautauqua, NY 14723

However, at the time of the purchase, the realtor had already rented out the house beginning June 1^st. Therefore, before the summer started, Sherwood and Sheronda only got to spend 1 weekend there in May; 3 days in total since it was Memorial Day weekend. The house was then rented from June 1^st through September 30^th. During the fall, Sherwood and Sheronda spent Columbus Day weekend (3 days) at the house, a week in November on a hunting trip (8 days), plus 3 days over Thanksgiving weekend cleaning/repairing the house to get it ready for the winter renters. Then, Sherwood and Sheronda rented the house for the ski season effective 12/1/15. They received rental income payments totaling $47,000 for 2015, which applied to these months in 2015: June, July, August, September, and December. Their expenses associated with the property were as follows:

Property insurance $ 9,000

Property taxes 7,000

Repairs 5,000

Utilities 3,000

Cleaning 1,000

If the property is classified as personal/rental property, then Sherwood and Sheronda choose to allocate mortgage interest and property taxes between the rental and personal portions using the IRS approach.

Sherwood and Sheronda hosted 3 other couples at their Chautauqua residence in November during the hunting trip. On the last day of the trip, 11/14/15, Prescott and Penelope noticed that a couple of expensive paintings that had been hanging on the wall of their Chautauqua property were stolen. One painting, that had been purchased on 5/4/15, cost $5,000 and had an appraised value of $6,000 at the time it was stolen. The other painting, purchased 6/5/14, cost $8,000 and had an appraised value of $9,000 at the time it was stolen. There was no insurance reimbursement for the theft of the paintings.

While on vacation at a resort in Atlantic City, New Jersey during the summer, Sheronda entered a beauty pageant. She won the competition and was crowned Mrs. South Jersey Shore in 2015. As a result, she received a cash prize of $3,000.

Tax Computation

Prepare Sherwood and Sheronda’s federal income tax return for 2015. Consider including the following forms and schedules with your return:

• Forms 1040, 3903, 4562, and 4684

• Schedule A (only necessary if the taxpayer chooses to itemize deductions)

• Schedule C

• Schedule E

• Schedule SE

• Form 8829 (if required)

Remember, you are to assume that you are a paid tax practitioner preparing the tax return for your client(s). Therefore, be sure to complete the “Paid Preparer Use Only” section on page #2 of Form 1040. It is okay to make up a fictitious firm name and address for this section. Be sure to sign your name where the form says “Preparer’s signature”. In addition, include the appropriate date (on or before the filing date) next to your signature.

Attach behind the return, the cover page (first page) only from the set of IRS-prepared instructions for each IRS form and IRS schedule included with the return. If you include multiple copies of a particular form or schedule with the return, you only need to include one cover page from the IRS instructions for that particular form or schedule. Some forms and schedules do not have a separate set of instructions. (In other words, the instructions are included with the actual form or schedule.) Therefore, a separate cover page does not have to be included for the following form: Form 3903.

The solution to the return shows that Sherwood and Sheronda will be owed a total refund of $313. (Note that the instructor has prepared the federal income tax return and feels confident that this check figure is correct, but does not guarantee the accuracy of this amount.) Your answer could be a few dollars different due to either rounding or using the tax rate schedule instead of the tax table (or vice-versa) to compute the tax liability. No points will be deducted for differences due to either one of these two reasons.