T$2125$ Tax Form Practice Problem

Danielle $$Danny$$ Thomas runs a home$-$based business that she purchased from a family friend on

December $31$ st of last year. The purchase included all the inventory of the existing business at a

cost of $$9,000$ and the business name and web domain for an additional $$5,000.$

In her business Danny purchases all$-$natural hair care products from various local suppliers and

sells them online via her website Dragonesshair.com. Her business is an unincorporated sole

proprietorship $($she has no partners$).$

Danny has a workspace in her home which is $150$ sq ft and her total home is $1,000$ sq ft$.$ She

operates the business fully out of her home. All inventory is stored in her home and all shipping

is prepared there as well.

Danny has no tax or accounting background and has asked you to help her prepare her tax return.

She has provided you with the following financial information:

REVENUES

Sales of product $$100,000$

Shipping charges $$12,000$

EXPENDITURES:

Hair care products $($for resale$)$ $$53,000$

Advertising $$4,700$

Accounting software $$500$

Small tools $($each under $$500)$ $$750$

Competitor$$s customer list $($See Note $1)$ $$2,500$

Delivery truck $($See Note $2)$ $$6,000$

Legal and accounting fees $$3,600$

Office supplies $$2,500$

Filing cabinet $$500$

Business insurance $$1,200$

Business dues and fees $$115$

Gym membership $$650$

Home mortgage interest $$6,500$

Macbook Pro $$1,500$

Desk $$1,000$

Worktables $$3,000$

Home electricity $$1,800$

Home insurance $$1,000$

Home property taxes $$4,490$

Wages for one shipping employee $$20,000$

Telephone $1-800$ number $$1,800$

Meals with suppliers $$1,200$

$($Note: figures are annual totals$)$

Other information:

Her ending inventory of products was valued at $$12,000$ based on average cost.

On January $1$st Danny personally purchased a Lexus LX $570$ SUV for $$80,000.$ She kept a

mileage log for the year evidencing that she used the Lexus about $15\%$ of the time for business

including visits to the bank, suppliers and of course trips to visit you her new trusted Accountant.

Danny borrowed money from her bank towards the purchase and has an annual interest cost of

$$6,000.$ Her operating expenses for the vehicle are as follows:

$*$Gas $$40$ per week

$*$Car insurance $$1,500$ annually

$*$Purchased new tires during the year for $$875$

Note $1-$ The customer list was acquired from a competitor who closed their business soon after

the transaction. It contained a complete list of the competitor$$s current and past customers

including their e$-$mail addresses which Danny was planning to market to with an e$-$mail

campaign.

Note $2$ The delivery truck was sold on November $30$ th as Danny decided she didn$$t really need

it for her business. She sold it for $$4,500$