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Wade (SS# 123-45-6789) and Maddy (SS# 987-65-4321) Brown are married and file a joint income tax return

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Wade (SS# 123-45-6789) and Maddy (SS# 987-65-4321) Brown are married and file a joint income tax return. Their address is 523 Upham Street, Haviland, KS, 67059. They have a seven-year old child, Savannah (SS# 333-22-4444) who is a full-time 2nd-grader and they provide 100% of her support. Wade is employed as a steelworker, and Maddy operates a small, unincorporated tee-shirt printing business (EIN 59-1234567, Business Identification Code 541130). She rents a small office at 1606 Lawrence Court, Pratt, KS, 67124. Wade and Maddy come to your office to have their 2020 federal income tax return completed. They provide you with the following information:

• Wade's 2020 W-2 showed gross income of $65,000, with $10,500 withheld for federal income tax, $4,972.50 withheld for social security taxes (FICA), and $4,200 withheld for Kansas (state) income tax.
• Maddy's business generated gross receipts of $253,000 in 2020. During 2020, she wrote checks for $212,650 related to her business. Maddy uses the cash method of accounting and she keeps a separate bank account for her business. She has provided you with an Excel spreadsheet (available on K-State Canvas) which includes a schedule of the expenses she paid out of her business checking account, as well as a template for computing tax depreciation.
• Maddy received $11,000 on November 11, 2020, from the sale of an old printing machine, Printing Machine #1 (the machine was purchased in February 2016). (This was not reported on a 1099-S or 1099-B).
• Maddy began her tee-shirt printing business on January 1, 2016 and purchased several assets during that year. She did not elect Section 179 expensing (and she was not eligible for 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. She did not make any capital purchases during 2017, 2018, or 2019. The following assets, purchased in 2016, are used 100% for business and have been depreciated using MACRS:
  • Printing machine purchased in February 2016 for $15,000 (7-year property).
  • Office furniture purchased in April 2016 for $8,000 (7-year property).
  • Office computer purchased in August 2016, for $5,000 (5-year property).
• In April 2020, Maddy purchased a pre-owned (used) car to be used exclusively (100%) for the business; she has evidence to support the business use claimed, and the evidence is written.
• The Browns’ investment activities during the year resulted in the following items of income (or loss):
  • Interest received on OceanTrust Savings Bank account $300
  • Interest received on State of Florida Water District bonds $450
  • “Qualified” dividends received on Sterling International stock $800
• Wade’s father died during the year. Wade and Maddy collected the $100,000 face value from a life insurance policy on Wade’s father.
• Maddy's parents gave $10,000 to Maddy, and $25,000 to Savannah.
• The Browns bring you the following potential itemized deductions for the year; assume all proper documentation is provided:
• During the year, the Browns sold the following capital assets (all properly reported on a Form 8949 with either Box A or Box D checked):

 

 

Maddy did not make any modifications to the car. The cost of the car was $40,000. She financed the entire purchase price and has been making $500/month payments since May 2020. Of the total payments made during the year, $1,200 was for interest.

 

6.In July 2020, she purchased a new printing machine for $25,000 cash.

Unreimbursed doctor bills	1,000
Prescription drugs	500
Cosmetic surgery (not medically necessary)	8,000
Real Estate Taxes	6,000
Mortgage Interest (properly reported on Form 1098)	12,000
Cash charitable contributions to church (documentation and receipts provided)	5,000

• 100 shares of Knight stock were sold on August 14, 2020 for $25,000, incurring broker’s fees of $500. The shares were purchased on August 1, 2019, for
• 200 shares of Jet stock were sold on April 15, 2020, for $3,000, incurring broker’s fees of $750. The Jet shares were inherited from Wade’s father on March 11, 2020. Wade’s father had paid $8,000 for the stock. The stock was valued in the estate tax return at $4,000.
• 300 shares of Shark stock were sold on December 31, 2020, for $3,000, incurring broker’s fees of $600. Maddy had received the stock as a gift from an aunt on May 1, 1999, when the stock was worth $10,000. Her aunt paid $15,000 for the stock on October 2, 1992.
  • Form 1040: U.S. Individual Income Tax Return (https://www.irs.gov/pub/irs- pdf/f1040.pdf)
    • Schedule 1 for Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040s1.pdf)
    • Schedule 2 for Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040s2.pdf)
  • Schedule A: Itemized Deductions (if you choose to itemize) https://www.irs.gov/pub/irs-pdf/f1040sa.pdf)
  • Schedule C: Profit or Loss from Business https://www.irs.gov/pub/irs- prior/f1040sc--2020.pdf)
  • Schedule D: Capital Gains and Losses (https://www.irs.gov/pub/irs- pdf/f1040sd.pdf)
  • Schedule SE: Self-Employment Taxes (https://www.irs.gov/pub/irs- prior/f1040sse--2020.pdf )
  • Form 4562: Depreciation and Amortization (remember to include a supporting schedule) (https://www.irs.gov/pub/irs-pdf/f4562.pdf)
  • Form 4797: Sales of Business Property (https://www.irs.gov/pub/irs- pdf/f4797.pdf)
  • Qualified Dividend and Capital Gain Worksheet (normally not filed as part of a tax return, but turn it in for this project to show your work), Pages 36 and 78 in the following document (https://www.irs.gov/pub/irs-pdf/i1040gi.pdf)
  • Also include a letter to the Browns explaining to them any (1) carryforward items they might have and (2) how much additional tax they have to pay with their return (or refund that they will receive). Also explain any (3) assumptions that you made in completing their tax return, and if you have any (4) suggestions or tax planning tips for next year’s tax return. Be sure to sign your letter.

$22,000.

 

Required:

Prepare the Browns’ 2020 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 and any supporting schedules for any calculations that you do. The following 2020 tax forms are required:

• Form 8949 (https://www.irs.gov/pub/irs-pdf/f8949.pdf )

You can download the necessary forms, instructions, and tax tables from the IRS website (www.irs.gov). Make sure you obtain the 2020 tax return forms. You may NOT prepare the tax return using Commercial Tax Software (e.g., TurboTax).

While both the Accounting Success Academy coaches/tutors and I are available as a “consultant” on this project, please be sure you have tried to answer your own questions by reading the instructions to the forms and looking for the answer in your book or lecture notes before consulting.

Finally, the following "helpful" hints are provided – review carefully:

• The best way to approach the project may be to complete it in the following order:
• Assume the Browns would like to minimize their taxable income to the extent possible (e.g., by taking a Section 179 deduction and/or bonus depreciation, etc.). Keep in mind, though, that the delivery car is subject to the luxury auto limitations.
• For the delivery car, make sure you treat it as listed property reported on the back page of Form 4562. You do NOT need to fill out Section B, Information on Use of Vehicles, on this form (you only need to fill out Section A).
• The office computer (used 100% in business) is NOT considered listed property for Form 4562.
• You do not need to fill out Part IV on Schedule C.

 

6. Enter $1,040,000 on Line 1, $2,590,000 on Line 3, and $1,040,000 on line 11 of Part I on Form 4562. On Form 4562 (for depreciation expense), the following lines should be filled out (the rest should be blank): 1-12, 17, 21, 22, 26, and 28. Also note that line 4 and 10 should be filled out as “zero.”

• The sale of the printing machine will be reported on Part III of the Form 4797. Use the tax depreciation schedule (that you calculated to fill out the Form 4562) to compute the adjusted basis and gain on the machine. Be sure to complete Part III down through lines 30-32. The amount reported on these lines should be carried over to the first page of Form 4797. Page 1 of Form 4797 will tell you to carry the amounts to either Form 1040 (Line 13) or Schedule D. (Note: Line 18a on the Form 4797 will be “zero”).
• Both Wade and Maddy elect to contribute to the Presidential Election Campaign.
• Maddy is a big believer in the “just-in-time” philosophy, so she carries no beginning (or ending) inventory.
• Assume that only the T-Shirt costs and the printing supplies are part of COGS.
• For the Qualified Business Income Deduction on Line 13 of the Form 1040, enter 20% of the bottom-line amount from Schedule C (Line 31 on Schedule C) as the amount of your deduction.
• Use the qualified dividend and capital gain worksheet figure the tax on line 16 of Form 1040. This will require use to use the tax computation worksheet and/or the tax tables also within the instructions.
  • Use pages 36 and 78 in the following document (https://www.irs.gov/pub/irs- pdf/i1040gi.pdf)
• The dividends are BOTH ordinary and qualified.
• Round all numbers to the nearest dollar and leave the “cents” column blank. Any lines on the return that are not relevant should be left blank (thus, do not put zeros on every line that does not apply to the taxpayer). Be sure that you include totals on any lines requiring totals, and make sure that you check any boxes requiring a yes/no answer.
• Do NOT sign or date the return for the client. You may sign and date the return as the “tax preparer.”
• Be sure to fill out the taxpayer name and social security number in the heading for each schedule.
• Remember to attach a schedule for any calculations that you made.
• Don’t forget about the potential child tax credit for Savannah.

19. CHECK FIGURES:

• The amount on Line 22 of Form 4562 is between $40,000 and $50,000.
• The amount on Line 31 of Schedule C is between $90,000 and $100,000.
• The net refund or amount owed on the Form 1040 is under $1,000.