Taxation

Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice's birthday is September 21, 1961, and Bruce's is June 27, 1960. Bruce is the office manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP. The Jones provide over half of the support of their two children, Cynthia (born January 25, 2001, Social Security number (017-44-9126) and John (born February 7, 1999, Social Security number (017-27-4148), who live with them. Both children are full- time students and live with the Jones. The Jones also provided all the support for their 22- year-old son Ryan who recently graduated college but cannot find employment. Ryan lives in DC According to Mr. Jones on May 31, 2018, he and his wife exchanged their two- family house in Westchester County (675 Pinebrook Blvd, New Rochelle, NY), which they rented entirely from January 01, 2014 to May 31, 2018, for a four family rental property located at 62 Atlantic Avenue, Brooklyn, NY. At the time of the exchange, the FMV of the two-family house was $925,000, and the adjusted basis was $??????? (Calculate based on information provided below). The Four family house had an adjusted basis of $150,000 and a FMV of $890,000. The two-family home was subject to a $35,000 mortgage, which the buyer assumed. The Jones also owned and rented a two-unit commercial retail building located at 1560 Avenue A, New York NY, which they purchased on November 01, 2017 and placed in service on January 01, 2018. Information for all three of the rental properties is listed below. In April 2018, Bruce decided to start his own business; a retail bicycle shop to be located in NYC near Central Park called "Bruce's Bikes." On April 20, 2018, Bruce signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2017, for retail space on 110 Street and CPW. The lease provided that Bruce was responsible for the costs of improving the retail space for its intended use. The terms of the lease also provided that the first three months were rent-free so that Bruce could complete the construction needed to operate a retail bike shop. When Bruce executed the lease he paid the landlord $20,000 as a security deposit. On May 01, 2018, Bruce paid a contractor $200,000 to provide all construction work relating to the build-out, which included electrical, plumbing, and carpentry. On July 01, 2018, Bruce purchased the following assets for the business: Equipment Furniture & Fixtures Computer Equipment $ 20,000 $ 15,000 $ 11,750 1 Although Bruce planned on a grand opening on July 01, 2018, the construction was not completed until July 21, 2018, causing Bruce to delay the grand opening until August 01, 2018 On August 01, 2018, Bruce purchased a new truck for $26,000, which weighs 12,850 pounds, to be used 100% in the business for pickups and deliveries. Bruce planned to finance the new business with the $50,000 inheritance he received on 05/01/2018, from his late father's estate. Bruce also planned to use $100,000 of savings he had invested with Madoff Investment Securities (MIS) but learned on 3/29/2018, that his entire savings was lost as a result of a massive ponzi scheme, which was not covered by any insurance. In order to come up with the additional funds needed to finance the construction, equipment, and inventory, Bruce's grandfather loaned him $75,000 on 07/15/2018. On December 30, 2018, Bruce received a letter from his grandfather stating that he forgives the entire $75,000 loan effectively immediately. For 2018, the bike shop generated the following revenues and incurred the following expenses: Sales, Rental, & Service Revenue $ 465,000.00 Inventory purchased 220,000.00 Inventory on hand at December 31, 2018 150,000.00 Rent from (August 01 - December 31, 2018) 50,000.00 Salaries 45,000.00 Supplies 11,500.00 Utilities 6,500.00 Promotional expense 7,50000 Travel to Trade Shows 4,000.00 Meals & Entertainment 2,600.00 Postage and Delivery 1,200.00 Telephone 3,850.00 Attorney fees 9,500.00 Pre-startup investigative expense 52,000.00 Other relevant information: Bruce has decided that he wants to minimize his tax as much as legally possible and has requested your assistance in preparing his 2018 Federal income tax return. Bruce has asked you to depreciate as much of the capital expenditures as legally possible, but does not want to use IRC Sec 179 or first year bonus depreciation. 2 . . . On March 15, 2018, York Technology Inc. filed for bankruptcy resulting in a total loss for its' only two shareholders. Bruce and a friend founded the company on July 15, 2016, with each owning 50% of the outstanding shares. Both Bruce and his friend each initially contributed $40,000 in exchange for their 50% interest in the company. Bruce and Alice earned $1,800.00 interest income from savings in 2018. Bruce earned $3,000 in interest income from US Treasury Bonds in 2018. On October 18, 2018, Bruce received $4,800 of dividend income from JP Morgan Chase Stock, which he purchased on September 01, 2018 On November 15, 2018, Bruce sold some of his JP Morgan Stock for $95,000, which he purchased on July 01, 2017 for $22,000. Bruce was named as the sole beneficiary on his late mother's life insurance policy, and on December 31, 2018, Bruce received a check for $95,000 from the insurance company, which he held and deposited on January 02, 2019. On June 13, 2018, Bruce sold 1,000 shares Citibank Stock for $90,000. He purchased the stock on July 17, 2017 for $85,250. On November 04, 2018, Alice received a settlement award for injuries sustained in 2017. The settlement award included the following amounts: Loss income $10,000 o Punitive damages $18,000 o Compensatory relating to a broken leg $25,000 On November 03, 2018, Bruce determined that a personal loan to a friend was uncollectible because his friend had recently and unexpectedly died. The amount of the loan was $5,000. Bruce collected $6,000.00 per month for six months (July - December) in rental income on 62 Atlantic Avenue. For 2018 Bruce paid mortgage interest of $7,500 and real estate taxes of $5,200.00. Bruce paid no other expenses in 2018 for 62 Atlantic Avenue. The property was placed in service on July 01, 2018. Other Rental Income and Expenses for 2018 included: 3 Rental Income Mortgage Interest Expense Real Estate Taxes Utilities Insurance Water & Sewer Place in Service Purchase Price Pinebrook Property $55,000.00 $12,000.00 $6,000.00 $2,500.00 $1.250.00 $1,800.00 01/01/2014 $475,000.00 Avenue A Property $135,000.00 $19,500.00 $10,000.00 $4,500.00 $5,000.00 $2,200.00 01/01/2018 850,000.00 Bruce and Alice 2018 W-2 statement shows the following wages and withholdings: Alice Bruce 1) Wages $65.000 $62,000 2) FWT 12,000 13,500 3) SWT 8,000 9,500 4) CWT 3,500 4,900 . The Jones also paid the following personal expenses in 2018: a. Contributions to Museum of Modern Art (a 50% Organization): i. Cash $33,000 ii. JP Morgan Chase Stock -FMV $85,000 (Long Term) -A/B $22.000 b. Real Estate Taxes on primary residence $10,100 c. Mortgage Interest on primary residence $13,750 d. Student loan Interest $4,000 Instructions: Make realistic assumptions about any missing or inconsistent data and state your assumptions on a separate typed schedule. Required: i. Prepare form 1040, including all schedules and forms for 2018. (Do not prepare NYS or NYC tax returns). il Taxpayers does not want to use the Reduce Deduction Election for charitable donations ill. All work must be typed onto approved IRS forms (no hand written forms will be accepted). iv. Read chapter 8 to determine how to handle depreciation/amortization. Only hand in the appropriate forms and schedules. V. 4 Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice's birthday is September 21, 1961, and Bruce's is June 27, 1960. Bruce is the office manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP. The Jones provide over half of the support of their two children, Cynthia (born January 25, 2001, Social Security number (017-44-9126) and John (born February 7, 1999, Social Security number (017-27-4148), who live with them. Both children are full- time students and live with the Jones. The Jones also provided all the support for their 22- year-old son Ryan who recently graduated college but cannot find employment. Ryan lives in DC According to Mr. Jones on May 31, 2018, he and his wife exchanged their two- family house in Westchester County (675 Pinebrook Blvd, New Rochelle, NY), which they rented entirely from January 01, 2014 to May 31, 2018, for a four family rental property located at 62 Atlantic Avenue, Brooklyn, NY. At the time of the exchange, the FMV of the two-family house was $925,000, and the adjusted basis was $??????? (Calculate based on information provided below). The Four family house had an adjusted basis of $150,000 and a FMV of $890,000. The two-family home was subject to a $35,000 mortgage, which the buyer assumed. The Jones also owned and rented a two-unit commercial retail building located at 1560 Avenue A, New York NY, which they purchased on November 01, 2017 and placed in service on January 01, 2018. Information for all three of the rental properties is listed below. In April 2018, Bruce decided to start his own business; a retail bicycle shop to be located in NYC near Central Park called "Bruce's Bikes." On April 20, 2018, Bruce signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2017, for retail space on 110 Street and CPW. The lease provided that Bruce was responsible for the costs of improving the retail space for its intended use. The terms of the lease also provided that the first three months were rent-free so that Bruce could complete the construction needed to operate a retail bike shop. When Bruce executed the lease he paid the landlord $20,000 as a security deposit. On May 01, 2018, Bruce paid a contractor $200,000 to provide all construction work relating to the build-out, which included electrical, plumbing, and carpentry. On July 01, 2018, Bruce purchased the following assets for the business: Equipment Furniture & Fixtures Computer Equipment $ 20,000 $ 15,000 $ 11,750 1 Although Bruce planned on a grand opening on July 01, 2018, the construction was not completed until July 21, 2018, causing Bruce to delay the grand opening until August 01, 2018 On August 01, 2018, Bruce purchased a new truck for $26,000, which weighs 12,850 pounds, to be used 100% in the business for pickups and deliveries. Bruce planned to finance the new business with the $50,000 inheritance he received on 05/01/2018, from his late father's estate. Bruce also planned to use $100,000 of savings he had invested with Madoff Investment Securities (MIS) but learned on 3/29/2018, that his entire savings was lost as a result of a massive ponzi scheme, which was not covered by any insurance. In order to come up with the additional funds needed to finance the construction, equipment, and inventory, Bruce's grandfather loaned him $75,000 on 07/15/2018. On December 30, 2018, Bruce received a letter from his grandfather stating that he forgives the entire $75,000 loan effectively immediately. For 2018, the bike shop generated the following revenues and incurred the following expenses: Sales, Rental, & Service Revenue $ 465,000.00 Inventory purchased 220,000.00 Inventory on hand at December 31, 2018 150,000.00 Rent from (August 01 - December 31, 2018) 50,000.00 Salaries 45,000.00 Supplies 11,500.00 Utilities 6,500.00 Promotional expense 7,50000 Travel to Trade Shows 4,000.00 Meals & Entertainment 2,600.00 Postage and Delivery 1,200.00 Telephone 3,850.00 Attorney fees 9,500.00 Pre-startup investigative expense 52,000.00 Other relevant information: Bruce has decided that he wants to minimize his tax as much as legally possible and has requested your assistance in preparing his 2018 Federal income tax return. Bruce has asked you to depreciate as much of the capital expenditures as legally possible, but does not want to use IRC Sec 179 or first year bonus depreciation. 2 . . . On March 15, 2018, York Technology Inc. filed for bankruptcy resulting in a total loss for its' only two shareholders. Bruce and a friend founded the company on July 15, 2016, with each owning 50% of the outstanding shares. Both Bruce and his friend each initially contributed $40,000 in exchange for their 50% interest in the company. Bruce and Alice earned $1,800.00 interest income from savings in 2018. Bruce earned $3,000 in interest income from US Treasury Bonds in 2018. On October 18, 2018, Bruce received $4,800 of dividend income from JP Morgan Chase Stock, which he purchased on September 01, 2018 On November 15, 2018, Bruce sold some of his JP Morgan Stock for $95,000, which he purchased on July 01, 2017 for $22,000. Bruce was named as the sole beneficiary on his late mother's life insurance policy, and on December 31, 2018, Bruce received a check for $95,000 from the insurance company, which he held and deposited on January 02, 2019. On June 13, 2018, Bruce sold 1,000 shares Citibank Stock for $90,000. He purchased the stock on July 17, 2017 for $85,250. On November 04, 2018, Alice received a settlement award for injuries sustained in 2017. The settlement award included the following amounts: Loss income $10,000 o Punitive damages $18,000 o Compensatory relating to a broken leg $25,000 On November 03, 2018, Bruce determined that a personal loan to a friend was uncollectible because his friend had recently and unexpectedly died. The amount of the loan was $5,000. Bruce collected $6,000.00 per month for six months (July - December) in rental income on 62 Atlantic Avenue. For 2018 Bruce paid mortgage interest of $7,500 and real estate taxes of $5,200.00. Bruce paid no other expenses in 2018 for 62 Atlantic Avenue. The property was placed in service on July 01, 2018. Other Rental Income and Expenses for 2018 included: 3 Rental Income Mortgage Interest Expense Real Estate Taxes Utilities Insurance Water & Sewer Place in Service Purchase Price Pinebrook Property $55,000.00 $12,000.00 $6,000.00 $2,500.00 $1.250.00 $1,800.00 01/01/2014 $475,000.00 Avenue A Property $135,000.00 $19,500.00 $10,000.00 $4,500.00 $5,000.00 $2,200.00 01/01/2018 850,000.00 Bruce and Alice 2018 W-2 statement shows the following wages and withholdings: Alice Bruce 1) Wages $65.000 $62,000 2) FWT 12,000 13,500 3) SWT 8,000 9,500 4) CWT 3,500 4,900 . The Jones also paid the following personal expenses in 2018: a. Contributions to Museum of Modern Art (a 50% Organization): i. Cash $33,000 ii. JP Morgan Chase Stock -FMV $85,000 (Long Term) -A/B $22.000 b. Real Estate Taxes on primary residence $10,100 c. Mortgage Interest on primary residence $13,750 d. Student loan Interest $4,000 Instructions: Make realistic assumptions about any missing or inconsistent data and state your assumptions on a separate typed schedule. Required: i. Prepare form 1040, including all schedules and forms for 2018. (Do not prepare NYS or NYC tax returns). il Taxpayers does not want to use the Reduce Deduction Election for charitable donations ill. All work must be typed onto approved IRS forms (no hand written forms will be accepted). iv. Read chapter 8 to determine how to handle depreciation/amortization. Only hand in the appropriate forms and schedules. V. 4