TAX Project - need to calculate US Taxes using MACRS, provided expenses and submitting them onto 2016 IRS Forms.

George (SS# 123-45-6789) and Mary (SS# 987-65-4321) Wilson are married and file a joint income tax return. Their address is 234 Main Street, Mt. Clemens, Florida. They have a six-year old child, Sam (SS# 333-22-4444) who is a full-time first-grader and they provide 100% of his support. George is employed as a utility groundsman, and Mary operates a small, unincorporated Business Card printing business (EIN 59-1234567, Business Identification Code 541130). She rents a small office at 1111 Somerset Lane, Land-o-Lakes, Florida. George and Mary come to your office to have their 2016 federal income tax return completed. They provide you with the following information:

1. George's 2016 W-2 showed gross income of $107,400, with $20,100 withheld for federal income tax.

2. Mary's business generated gross receipts of $211,000 in 2016. During 2016, she wrote checks for $122,670 related to her business. Mary uses the cash method of accounting and she keeps a separate bank account for her business. An Excel spreadsheet that includes a detailed list of Marys expenditures (and a template for computing tax depreciation) is on a separate document.

3. Additional business-related information:

She received $18,000 on March 16, 2016, from the sale of an old printing machine (the machine was purchased in February 2013).

4. Mary began her business card printing business in 2013 and purchased several assets during that year. She did not elect Section 179 expensing (and she elected out of bonus depreciation) at that time because her business was just beginning (with little cash inflow) and her accountant advised her that it would be better to stretch out the deductions over the depreciable lives of the assets. The following assets, purchased in 2013, are used 100% for business and have been depreciated using MACRS:

Printing machine # 1 purchased in February 2013 for $30,000 (7-year property).

Office furniture purchased in April 2013 for $12,000 (7-year property).

Office computer purchased in August 2013, for $9,000 (5-year property).

5. In April 2014 Mary purchased a copying machine to be used exclusively for the business. She did not elect Section 179 or bonus for this asset. The cost of the machine was $40,000. She financed the entire purchase price and has been making $610/month payments since May 2014. Of the total payments made during 2016, $3,100 was for interest.

6. In August 2016, she purchased a new printing machine (#2) for $68,000. She DID elect Section 179 and bonus depreciation on this asset. You can assume she acquired no additional assets during 2014. She paid $20,000 down and financed the balance. She has been making payments of $725/month since September 2016. Of the total payments made during 2016, $1,250 was for interest.

7. The Wilsons investment activities during the year resulted in the following items of income (or loss):

Interest received on Ocean Trust Savings Bank account $225

Interest received on State of Florida Water District bonds $410

Qualified dividends received on Sterling International stock $2,200

8. Georges father died during the year. George and Mary collected the $170,000 face value from a life insurance policy on Georges father.

9. Mary's parents gave $17,000 to Mary, and $10,000 to Sam.

10. The Wilsons itemized deductions totaled $24,300 for 2016 (do not prepare Schedule A).

11. During the year, the Wilsons sold the following capital assets:

Asset Acquired Sold Selling price Adjusted Basis

A stock 2-15-16 8-13-16 5,100 14,300

B stock 3-2-04 7-7-16 27,000 20,500

C stock 6-8-99 4-10-16 6,500 10,000

D Stock 2-17-04 12-7-16 8,100 7,000

E Stock 5-11-16 10-11-16 6,300 2,000

Sail boat 12-3-06 3-3-16 2,500 10,000

Note1: The C stock was sold to Marys brother.

Note2: The sail boat was used for personal recreation.

Note3: None of the above transactions were reported on Form 1099-B

Required:

Prepare the Wilson's 2016 federal income tax return. They have asked you to minimize their tax liability to the extent legally possible. Round numbers to the nearest dollar. Clearly state any assumptions made in completing the tax return. Include a depreciation schedule ( the excel spreadsheet provided) and any supporting schedules asked for. The following tax forms are required:

Form 1040: U.S. Individual Income Tax Return

Schedule C: Profit or Loss from Business

Schedule D: Capital Gains and Losses

Schedule SE: Self-Employment Taxes

Form 4562: Depreciation and Amortization (remember to include the completed supporting excel spreadsheet)

Form 8949: Sales and Other Dispositions of Capital Assets

Also include a letter to the Wilsons explaining any carryforward items they may have and how much additional tax they have to pay (or any refund they will receive).

Note: The tax year used in this problem is 2016. The tax forms for 2017 have not been released yet. Finally, the following "helpful" hints are provided:

1. The best way to approach the project may be to complete it in the following order:

Depreciation expense (Form 4562, after completing the excel spreadsheet)

Profit and loss from the business (Schedule C),

Self-employment tax (Schedule SE)

Sales and Other Dispositions of Capital Assets (Schedule 8949). Info from this form will flow to Schedule D.

Capital gains & losses (Schedule D)

Finally, carry over the information from Schedules C, D, and SE to Form 1040, along with any other information that needs to be reported on Form 1040.

2. Assume the Wilsons take Section 179 and bonus depreciation on the new printing machine (#2) acquired in 2016.

3. Assume the computers and related equipment are located at her place of business (i.e. they are NOT listed property).

4. For this assignment (and this assignment only!), report the gain or loss on the sale of the old printing machine on Schedule C as other income (line 6) or other expenses (line 27) as appropriate.

5. Ignore Part IV on Schedule C.

6. Enter $500,000 on line 11 of Part I on Form 4562. Ignore Sections IV and V on Form 4562.

7. Neither George nor Mary elect to contribute to the Presidential Election Campaign

8. Assume that Marys business does not qualify for the QPAD.

9. Mary is a big believer in the just-in-time philosophy, so she carries no beginning or ending inventory.

Note: You should work in small groups on this tax return project (no more than 3 students can work together). Please turn in ONE completed tax return per group with each group member contributing to the project. Each student should sign their name on the front of the letter to the client indicating that all students participated equally in completing the assignment. Also, I am available as the client (George and Mary Wilson) and as a consultant. Feel free to email questions, ask questions before class, or come by during office hours.

Please do not ask me to review your entire project prior to submitting it. I am happy to help with SPECIFIC questions, but I do not want to review your final project until you have submitted the final version.

READ THESE INSRTUCTIONS CAREFULLY!! MANY OF YOUR QUESTIONS CAN BE ANSWERED BY READING THESE INSTRUCTIONS.

The instructions to the form are provided to give you guidance when completing specific parts of the form. Please review these instructions before asking questions about the forms.

This project is a learning experience as opposed to a test.

Client: Mary (& George) Wilson

Schedule: Cash disbursements

Date: December 31, 2016

Description

Amount

Purchases of Business Cards Paper

$ 11,000

Purchases of printing supplies

13,500

Down Payment on new printing machine (#2)

20,000

Printer payments (#2)

2,900

Advertising

6,000

Telephone & utilities

1,800

Copy Machine payments

7,320

Office rent

12,000

Liability & property insurance

6,500

Purchases of miscellaneous office supplies

500

Routine repairs made to old printing machine

750

Wages paid to part-time employees

22,500

Payroll taxes (for part-time employees)

1,800

Business Meals (with customers)

2,000

Estimated federal tax payments

7,500

Contribution to political campaign of friend who is running for city council

3,000

Contibution to National Libertarian Party

2,000

Occupational license

1,600

Total cash disbursements

$ 122,670

Client:

Mary (& George) Wilson

Schedule:

Property, plant and equipment

Date:

December 31, 2016

Tax depreciation

2013

2014

2015

2016 deductions

Adjusted

Property

Acquisition Date

Cost

Method

Class

MACRS

MACRS

MACRS

Section 179

Bonus

MACRS

basis

Printing machine #1

2/1/13

30,000

MACRS

200% DB

7

Office furniture

4/1/13

12,000

MACRS

200% DB

7

Office computer

8/1/13

9,000

MACRS

200% DB

5

Copying machine

4/1/14

40,000

MACRS

200% DB

5

Printing machine #2

8/1/16

68,000

MACRS

200% DB

7

Additional notes:

[1] Section 179 and bonus taken on the purchase of the new printing machine.

[2] Printing machine #1 was sold on March 16, 2016.