TAX ACCOUNTING COMPREHENSIVE PROBLEM:
Carrie A Morgan, age 45, is single and lives with her dependentmother at 426 Grouse Avenue, Allentown, PA 18105. Her SocialSecurity number is 111-11-1112.
1. Carrie is a licensed hairstylist and operates her ownbusiness. Located at 480 Laurel Street, Allentown PA 18105, thebusiness is conducted under the name of "Carries Coiffures."Carrie's business activity code is 812112. In addition to 10workstations (i.e., stylist chairs) and a small reception area, theshop has display and storage areas for the products she sells (seeitem 2 below). During the year, Carrie leased nune of the stationsto other hairstylists. As is common practice in similar businessesin the area, the other stylists are considered to be self-employed.In fact, the IRS sanctioned the self-employment classification forthe stylists in an audit of one of Carrie's prior tax returns. Eachstylist pays Carrie a fixed rent for the use of a workstation,resulting in $68,000 of rents received during 2015. From her ownstation, Carrie earned $44,000 (including tips of $12,000) for thestyling services she provided to her own clients.
2. Carrie's Coiffures is the local distributor for severalbeauty products (e.g., conditioners, shampoos) that cannot bepurchased anywhere else. Carrie buys these items from themanufacturers and sells them to regular patrons, walk-in customers,and other beauticians (including those who lease chairs from her).Carrie's Coiffures is also known for the selection and quality ofits hairpieces (i.e., wigs, toupees). Through the shop, Carrie madethe following sales during the year:
Hairpieces and wigs: $69,000
Beauty Products: $48,000
Although Carrie operates her business on a cash basis, shemaintains inventory accounts for the items she sells as required bylaw. So, she uses the hybrid method of accounting for tax reportingpurposes. Relevant information about the inventories (based onlower of cost or market) is summarized below.
Hairpieces and wigs: $10,700 (12/31/2014), $12,600(12/31/2015)
Beauty products: $11,400 (12/31/2014), $9,900 (12/31/2015)
Carrie's purchases for 2015 were $30,500 of hairpieces and wigsand $26,100 of beauty products.
Carrie's Coiffurs had the following operating expenses for2015:
Utilities (i.e., gas, electric, telephone): $12,900
Ad valorem property taxes:
On realty (e.g., shop building and land): $4,200
On personalty (e.g., equipment, inventory): $1,800 ->Totalling $6,000
Styling supplies (e.g., rinses, dyes, gels, hair spray):$5,700
Fire and casualty insurance: $4,100
Liability Insurance: $4,000
Accounting services: $3,800
Janitorial services: $2,400
Sewer service, garbage pickup: $2,300
Water: $2,200
Occupation licenses (city and state): $1,500
Waiting room supplies (e.g., magazines, coffee): $1,300
As Carrie prefers to avoid employer-employee arrangements andthe payroll tax complexities, she retains outside agencies tohandle her accounting and janitorial needs.
3. In early 2015, Carrie decided to renovate the waiting room.On May 10, she spent $10,400 for new chairs, a sofa, various lamps,coffee bar, etc. Carrie follows a policy of claiming as muchdepreciation as soon as possible. The old furnishings were thrownaway or given to customers. For tax purposes, the old furnishingshad a zero basis.
4. Carrie's Coiffurs is located in a building Carrie hadconstructed at 480 Laurel Street in March 2001. The shop was builtfor a cose of $300,000 on a lot she purchased earlier for $35,000.Except for a down payment from savings, the cost was financed by a20-year mortgage. For tax purposes, MACRS depreciation is claimedon the building. During 2015, the following expenses wereattributable to the property:
Repainting (both interior and exterior): $8,000
Repairs (plumbing and electrical): $1,900
In May (after her accident settlement discussed in item 10below), Carrie paid the balance due on the business mortgage. To doso, she incurred a prepayment penalty of $4,400. Prior to payingoff the mortgage, she paid regular interest on the mortgage in 2015of $6,000.
5. In February 2015, Carrie's Coiffures was cited by the cityfor improper disposal of certain waste chemicals. Carrie questionedthe propriety of the proposed fine of $2,000 and retained anattorney to represent her at the hearing. By pleading nolocontendere, the attorney was able to get the fine reduced to$500. Carrie paid both the fine of $500 and the attoney's fee of$600 in 2015.
6. In August 2015, Carrie saw an ad in a trade publication thatattracted her attention. The owner of a well-respected stylingsalon in Reading (PA) had died, and his estate was offering thebusiness for sale. Carrie traveled to Reading, spent several dayslooking over the business (including books and financial results),and met with the executor. Carrie treated the executor to dinnerand a music concert. Immediately after the concert, Carrie made onoffer for the business, but the executor rejected her offer. Herexpenses in connection with this trip were as follows:
Car rental: $140
Entertainment of executor (dinner and concert): $280
Motel ( August 6-7): $220
Personal meals: $110
7. In March 2014, Joan Myers, one of Carrie's best slylists,left town to get away from a troublesome ex-husband. In order tohelp Joan establish a business elsewhere, Carrie loaned her $7,000.Joan signed a note dated March 3, 2014, that was payable in oneyear with 6% interest. On December 30, 2015, Carrie learned thatJoan had been declared bankrupt and was awaiting trial on felonytheft charges. Carrie never received payment from Joan, nor did shereceive any interest on the loan.
8. At Christmas, Carrie gave each of her 35 best customers alarge bottle of body lotion. Each bottle had a wholesale cost toCarrie of $12 but a retail price of $24. Carrie also spent $3 tohave each bottle gift wrapped. (Note: The lostion was special ordermerchanidse and was not part of the business's inventory orpurchases for the year - see item 2 above.) She also gave each ofthe nine stylists who leased chairs from her a friet basket thatcost$30 (not including a $5 delivery cost).
9. In March 2015, the Pennsylvania Department of Revenue auditedCarrie's state income tax returns for 2012 and 2013. She wasassessed additional state income tax of $340 for these years.Surprisingly, no interest was included in the assessment. Carriepaid the back taxes promptly.
10. On a morning walk in November 2014, Carrie was injured whenshe was side-swiped by a delivery truck. Carrie was hospitalizedfor several days, and the driver of the truck was ticketed andcharged with DUI. The owner of the truck, a national parceldelivery service, was concerned that further adverse publicitymight result if the matter went to court. Consequently, the owneroffered Carrie a settlement if she would sign a release. Under thesettlement, her medical expenses were paid and she would receive acash award of $200,000. The award specified that the entire amountwas for physical pain and suffering. Since she suffered nopermanent injury as a result of the mishap, she signed the releasein April 2015 and received the $200,000 settlement.
11. In January 2015, Carrie was contacted by the state ofPennsylvania regarding a tract of land she owned in York County.The state intended to convert the property into a districtheadquarters, barracks, and training center for its highway patrol.Carrie had inherited the property from her father when he died onAugust 11, 2014. The property had a value of $140,000 on that dateand had been purchased by her father on March 3, 1980, for $30,000.On July 25, 2015, after considerable negotiation and after thestate threatened to initiate condemnation proceedings, she sold thetract to the state for $158,000. Since Carrie is not comfortablewith real estate investments, she does not plan to reinvest any ofthe proceeds received in another piece of realty.
12. When her father died in 2014, Carrie did not know that hehad an insurance policy on his life (maturity value of $50,000) inwhich she was named the beneficiary. When her mother told her aboutthe policy in July 2015, Carrie filed a claim with the carrier,Falcon Life Insurance Company. In August 2015, she received a checkfrom Falcon for $51,500 (including $1,500 interest).
13. Upon the advice of a client, who is a respected broker,Carrie purchased 1,000 shares of common stock in GrosbeackExploration for $40,000 on March 4, 2015. In the months followingher purchase, the share value of Grosbeak plummeted. Disgusted withthe unexpected erosion in the value of her investment, Carrie soldthe stock for $28,000 on December 23, 2015.
14. While on her way to work in 2014, Carrie was rear-ended by ahit-and-run driver. Thankfully, she was not injured in theaccident. The damage to her Lexus was covered by her insurancecompany, General Casualty, except for the $1,000 deductible she wasrequired to pay. In 2015, the insurance company located the driverwho caused the accident and was reimbursed by his insurer.Consequently, Carrie received a $1,000 refund check from GeneralCasualty in May 2015 to reimburse her for the $1,000deductible.
15. After her father's death, Carrie's mother (Mildred Morgan,Social Security number 123-45-6789) moved in with her. Mildred'spersistent back trouble made it difficult for her to climb thestairs to the second-floor bedrooms in Carrie's house. So, Carriehad an elevator installed in her personal residence at a cost of$12,000 in January 2015. A qualified appraiser determined that theelevator increased the value of the personal residence by $5,000.The appraisal cost $400. The operation of the elevator during 2015increased Carrie's electric bill by $300.
16. As a favor to a long-time client who is a drama professor ata local state university, Carrie spent a weekend as a stylist forthe key actresses in the annual Theater Department fund-raisingevent. The drama professor provided all of the resources thatCarrie needed to provide her services. Carrie estimates that shewould have charged $800 for the services she donated to thischaritable event.
17. In addition to the items already mentioned, Carrie had thefollowing receipts during 2015:
Interest income:
CD at Scranton First National Bank: $900
City of Lancaster general purpose bonds: $490
Money market account at Allentown State Bank: $340 -> $1,730total.
Qualified dividends on stock investments:
General Motors: $470
AT&T common: $380 -> $850 total.
Federal income tax refund (for tax year 2014): $791
Pennsylvania state income tax refund (for tax year 2014):$205
18. Expenditures for 2015, not previously noted, are summarizedbelow.
Contribution to pension plan: $10,000
Medical:
Premiums on medical insurance: $4,800
Dental bills: $1,400 -> $6,200 total.
Property taxes on personal residence: $3,800
Interest on home mortgage: $3,200
Professional expenses:
Subscriptions to trade journals: $180
Dues to beautician groups: $140 -> $320 total.
The $10,000 contribution to the pension plan is to a 401(k) typeof plan she established in 2015. Previously, she had contributed toan H.R. 10 (Keogh) plan but found that the 401(k) retirementarrangement provides more flexibility and is less complex. Themedical insurance policy covers Carrie and her dependents and wasissued in the name of the business (i.e., "Carrie's Coiffures"). Itdoes not cover dental work or capital modifications to a residence(see item 15 above).
19. During 2015, Carrie made total estimated tax payments withrespect to her 2015 tax returns of:
Federal estimated income tax payments: $20,800
Pennsylvania estimated income tax payments: $2,400
Allentown estimated income tax payments: $800
Requirements:
Prepare an income tax return (with appropriate schedules) forCarrie for 2015. In doing this, use the following guidelines:
Make necessary assumptions for information not given in theproblem
Carrie has itemized deductions ever since she became a homeownermany years ago.
The sales tax option was not chosen in 2014, and Carrie had nomajor purchases that qualify for the sales tax deduction in2015.
Carrie has substantiation (e.g., record, receipts) to supportthe transactions involved.
If a refund results, Carrie wants it sent to her.
Carrie is preparing her own return (i.e., no preparer isinvolved).
Carrie does not wish to contribute to the Presidential ElectionCampaign Fund.
TAX ACCOUNTING COMPREHENSIVE PROBLEM:
Carrie A Morgan, age 45, is single and lives with her dependentmother at 426 Grouse Avenue, Allentown, PA 18105. Her SocialSecurity number is 111-11-1112.
1. Carrie is a licensed hairstylist and operates her ownbusiness. Located at 480 Laurel Street, Allentown PA 18105, thebusiness is conducted under the name of "Carries Coiffures."Carrie's business activity code is 812112. In addition to 10workstations (i.e., stylist chairs) and a small reception area, theshop has display and storage areas for the products she sells (seeitem 2 below). During the year, Carrie leased nune of the stationsto other hairstylists. As is common practice in similar businessesin the area, the other stylists are considered to be self-employed.In fact, the IRS sanctioned the self-employment classification forthe stylists in an audit of one of Carrie's prior tax returns. Eachstylist pays Carrie a fixed rent for the use of a workstation,resulting in $68,000 of rents received during 2015. From her ownstation, Carrie earned $44,000 (including tips of $12,000) for thestyling services she provided to her own clients.
2. Carrie's Coiffures is the local distributor for severalbeauty products (e.g., conditioners, shampoos) that cannot bepurchased anywhere else. Carrie buys these items from themanufacturers and sells them to regular patrons, walk-in customers,and other beauticians (including those who lease chairs from her).Carrie's Coiffures is also known for the selection and quality ofits hairpieces (i.e., wigs, toupees). Through the shop, Carrie madethe following sales during the year:
Hairpieces and wigs: $69,000
Beauty Products: $48,000
Although Carrie operates her business on a cash basis, shemaintains inventory accounts for the items she sells as required bylaw. So, she uses the hybrid method of accounting for tax reportingpurposes. Relevant information about the inventories (based onlower of cost or market) is summarized below.
Hairpieces and wigs: $10,700 (12/31/2014), $12,600(12/31/2015)
Beauty products: $11,400 (12/31/2014), $9,900 (12/31/2015)
Carrie's purchases for 2015 were $30,500 of hairpieces and wigsand $26,100 of beauty products.
Carrie's Coiffurs had the following operating expenses for2015:
Utilities (i.e., gas, electric, telephone): $12,900
Ad valorem property taxes:
On realty (e.g., shop building and land): $4,200
On personalty (e.g., equipment, inventory): $1,800 ->Totalling $6,000
Styling supplies (e.g., rinses, dyes, gels, hair spray):$5,700
Fire and casualty insurance: $4,100
Liability Insurance: $4,000
Accounting services: $3,800
Janitorial services: $2,400
Sewer service, garbage pickup: $2,300
Water: $2,200
Occupation licenses (city and state): $1,500
Waiting room supplies (e.g., magazines, coffee): $1,300
As Carrie prefers to avoid employer-employee arrangements andthe payroll tax complexities, she retains outside agencies tohandle her accounting and janitorial needs.
3. In early 2015, Carrie decided to renovate the waiting room.On May 10, she spent $10,400 for new chairs, a sofa, various lamps,coffee bar, etc. Carrie follows a policy of claiming as muchdepreciation as soon as possible. The old furnishings were thrownaway or given to customers. For tax purposes, the old furnishingshad a zero basis.
4. Carrie's Coiffurs is located in a building Carrie hadconstructed at 480 Laurel Street in March 2001. The shop was builtfor a cose of $300,000 on a lot she purchased earlier for $35,000.Except for a down payment from savings, the cost was financed by a20-year mortgage. For tax purposes, MACRS depreciation is claimedon the building. During 2015, the following expenses wereattributable to the property:
Repainting (both interior and exterior): $8,000
Repairs (plumbing and electrical): $1,900
In May (after her accident settlement discussed in item 10below), Carrie paid the balance due on the business mortgage. To doso, she incurred a prepayment penalty of $4,400. Prior to payingoff the mortgage, she paid regular interest on the mortgage in 2015of $6,000.
5. In February 2015, Carrie's Coiffures was cited by the cityfor improper disposal of certain waste chemicals. Carrie questionedthe propriety of the proposed fine of $2,000 and retained anattorney to represent her at the hearing. By pleading nolocontendere, the attorney was able to get the fine reduced to$500. Carrie paid both the fine of $500 and the attoney's fee of$600 in 2015.
6. In August 2015, Carrie saw an ad in a trade publication thatattracted her attention. The owner of a well-respected stylingsalon in Reading (PA) had died, and his estate was offering thebusiness for sale. Carrie traveled to Reading, spent several dayslooking over the business (including books and financial results),and met with the executor. Carrie treated the executor to dinnerand a music concert. Immediately after the concert, Carrie made onoffer for the business, but the executor rejected her offer. Herexpenses in connection with this trip were as follows:
Car rental: $140
Entertainment of executor (dinner and concert): $280
Motel ( August 6-7): $220
Personal meals: $110
7. In March 2014, Joan Myers, one of Carrie's best slylists,left town to get away from a troublesome ex-husband. In order tohelp Joan establish a business elsewhere, Carrie loaned her $7,000.Joan signed a note dated March 3, 2014, that was payable in oneyear with 6% interest. On December 30, 2015, Carrie learned thatJoan had been declared bankrupt and was awaiting trial on felonytheft charges. Carrie never received payment from Joan, nor did shereceive any interest on the loan.
8. At Christmas, Carrie gave each of her 35 best customers alarge bottle of body lotion. Each bottle had a wholesale cost toCarrie of $12 but a retail price of $24. Carrie also spent $3 tohave each bottle gift wrapped. (Note: The lostion was special ordermerchanidse and was not part of the business's inventory orpurchases for the year - see item 2 above.) She also gave each ofthe nine stylists who leased chairs from her a friet basket thatcost$30 (not including a $5 delivery cost).
9. In March 2015, the Pennsylvania Department of Revenue auditedCarrie's state income tax returns for 2012 and 2013. She wasassessed additional state income tax of $340 for these years.Surprisingly, no interest was included in the assessment. Carriepaid the back taxes promptly.
10. On a morning walk in November 2014, Carrie was injured whenshe was side-swiped by a delivery truck. Carrie was hospitalizedfor several days, and the driver of the truck was ticketed andcharged with DUI. The owner of the truck, a national parceldelivery service, was concerned that further adverse publicitymight result if the matter went to court. Consequently, the owneroffered Carrie a settlement if she would sign a release. Under thesettlement, her medical expenses were paid and she would receive acash award of $200,000. The award specified that the entire amountwas for physical pain and suffering. Since she suffered nopermanent injury as a result of the mishap, she signed the releasein April 2015 and received the $200,000 settlement.
11. In January 2015, Carrie was contacted by the state ofPennsylvania regarding a tract of land she owned in York County.The state intended to convert the property into a districtheadquarters, barracks, and training center for its highway patrol.Carrie had inherited the property from her father when he died onAugust 11, 2014. The property had a value of $140,000 on that dateand had been purchased by her father on March 3, 1980, for $30,000.On July 25, 2015, after considerable negotiation and after thestate threatened to initiate condemnation proceedings, she sold thetract to the state for $158,000. Since Carrie is not comfortablewith real estate investments, she does not plan to reinvest any ofthe proceeds received in another piece of realty.
12. When her father died in 2014, Carrie did not know that hehad an insurance policy on his life (maturity value of $50,000) inwhich she was named the beneficiary. When her mother told her aboutthe policy in July 2015, Carrie filed a claim with the carrier,Falcon Life Insurance Company. In August 2015, she received a checkfrom Falcon for $51,500 (including $1,500 interest).
13. Upon the advice of a client, who is a respected broker,Carrie purchased 1,000 shares of common stock in GrosbeackExploration for $40,000 on March 4, 2015. In the months followingher purchase, the share value of Grosbeak plummeted. Disgusted withthe unexpected erosion in the value of her investment, Carrie soldthe stock for $28,000 on December 23, 2015.
14. While on her way to work in 2014, Carrie was rear-ended by ahit-and-run driver. Thankfully, she was not injured in theaccident. The damage to her Lexus was covered by her insurancecompany, General Casualty, except for the $1,000 deductible she wasrequired to pay. In 2015, the insurance company located the driverwho caused the accident and was reimbursed by his insurer.Consequently, Carrie received a $1,000 refund check from GeneralCasualty in May 2015 to reimburse her for the $1,000deductible.
15. After her father's death, Carrie's mother (Mildred Morgan,Social Security number 123-45-6789) moved in with her. Mildred'spersistent back trouble made it difficult for her to climb thestairs to the second-floor bedrooms in Carrie's house. So, Carriehad an elevator installed in her personal residence at a cost of$12,000 in January 2015. A qualified appraiser determined that theelevator increased the value of the personal residence by $5,000.The appraisal cost $400. The operation of the elevator during 2015increased Carrie's electric bill by $300.
16. As a favor to a long-time client who is a drama professor ata local state university, Carrie spent a weekend as a stylist forthe key actresses in the annual Theater Department fund-raisingevent. The drama professor provided all of the resources thatCarrie needed to provide her services. Carrie estimates that shewould have charged $800 for the services she donated to thischaritable event.
17. In addition to the items already mentioned, Carrie had thefollowing receipts during 2015:
Interest income:
CD at Scranton First National Bank: $900
City of Lancaster general purpose bonds: $490
Money market account at Allentown State Bank: $340 -> $1,730total.
Qualified dividends on stock investments:
General Motors: $470
AT&T common: $380 -> $850 total.
Federal income tax refund (for tax year 2014): $791
Pennsylvania state income tax refund (for tax year 2014):$205
18. Expenditures for 2015, not previously noted, are summarizedbelow.
Contribution to pension plan: $10,000
Medical:
Premiums on medical insurance: $4,800
Dental bills: $1,400 -> $6,200 total.
Property taxes on personal residence: $3,800
Interest on home mortgage: $3,200
Professional expenses:
Subscriptions to trade journals: $180
Dues to beautician groups: $140 -> $320 total.
The $10,000 contribution to the pension plan is to a 401(k) typeof plan she established in 2015. Previously, she had contributed toan H.R. 10 (Keogh) plan but found that the 401(k) retirementarrangement provides more flexibility and is less complex. Themedical insurance policy covers Carrie and her dependents and wasissued in the name of the business (i.e., "Carrie's Coiffures"). Itdoes not cover dental work or capital modifications to a residence(see item 15 above).
19. During 2015, Carrie made total estimated tax payments withrespect to her 2015 tax returns of:
Federal estimated income tax payments: $20,800
Pennsylvania estimated income tax payments: $2,400
Allentown estimated income tax payments: $800
Requirements:
Prepare an income tax return (with appropriate schedules) forCarrie for 2015. In doing this, use the following guidelines:
Make necessary assumptions for information not given in theproblem
Carrie has itemized deductions ever since she became a homeownermany years ago.
The sales tax option was not chosen in 2014, and Carrie had nomajor purchases that qualify for the sales tax deduction in2015.
Carrie has substantiation (e.g., record, receipts) to supportthe transactions involved.
If a refund results, Carrie wants it sent to her.
Carrie is preparing her own return (i.e., no preparer isinvolved).
Carrie does not wish to contribute to the Presidential ElectionCampaign Fund.
