Carrie Morgan

The forms can be located through http://www.irs.gov/. 
1) Form 1040

2) Form 1040 Schedule A

3) Form 1040 Schedule B

4) Form 1040 Schedule C

5) Form 1040 Schedule D

6) Form 1040 Schedule SE

7) Form 8949

8) Form 4562



Carrie A. Morgan, age 45, is single and lives with her dependent mother atXXXXX Allentown, PA 18105. Her social security number isNNN-NN-NNNN 

1. Carrie is a licensed hairstylist and operates her own business. Located atXXXXX Allentown, PA 18105, the business is conducted under the name of “Carrie's Coiffures.” Carrie's business activity code is 812112. In addition to 10 workstations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the 
products Carrie sells (see item 2 below). During the year, Carrie leased nine of the stations to other hairstylists. As is common practice in similar businesses in the area, the other stylists are considered to be self-employed. In fact, the IRS sanctioned the self-employment classification for the stylists in an audit of one of Carrie's prior tax returns. Each stylist pays Carrie a fixed rent for the use of a workstation, resulting in 
$68,000 of rents received during 2012. From her own station, Carrie earned $44,000 
(including tips of $12,000) for the styling services she provided to her own clients. 

2. Carrie's Coiffures is the local distributor for several beauty products (e.g., conditioners, 
shampoos) that cannot be purchased anywhere else. Carrie buys these items from the 
manufacturers 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 of its hairpieces (i.e., wigs, toupees). Through the 
shop, Carrie made the following sales during the year: 

Hairpieces and wigs $69,000 
Beauty products 48,000 

3. Although Carrie operates her business on a cash basis, she maintains inventory 
accounts for the items she sells as required by law. Relevant information about the 
inventories (based on lower of cost or market) is summarized below. 
4. 
12/31/11 12/31/12 
Hairpieces and wigs $10,700 $12,600 
Beauty products 11,400 9,900 

5. Carrie's purchases for 2012 were $30,500 of hairpieces and wigs and $26,100 of beauty 
products. 

6. Carrie's Coiffures had the following operating expenses for 2012: 

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 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 
7. As Carrie prefers to avoid employer-employee arrangements and the payroll tax
complexities, she retains outside agencies to handle her accounting and janitorial 
needs. 

8. In early 2012, Carrie decided to renovate the waiting room. On May 10, she spent 
$10,400 for new chairs, a sofa, various lamps, coffee bar, and other furnishings. Carrie 
follows a policy of claiming as much depreciation as soon as possible. The old 
furnishings were thrown away or given to customers. For tax purposes, the old 
furnishings had a zero basis. 

9. Carrie's Coiffures is located in a building Carrie had constructed atXXXXXin 
March 1998. The shop was built for a cost of $300,000 on a lot she purchased earlier 
for $35,000. Except for a down payment from savings, the cost was financed by a 20-
year mortgage. For tax purposes, MACRS depreciation is claimed on the building. 
During 2012, the following expenses were attributable to the property: 

Repainting (both exterior and interior) $8,000 
Repairs (plumbing and electrical) 1,900 

10. In May (after her accident settlement discussed in item 11 below), Carrie paid the 
balance due on the business mortgage. To do so, she incurred a prepayment penalty of 
$4,400. Prior to paying it off, she paid regular interest on the mortgage in 2012 of 
$6,000. 

11. In February 2012, Carrie's Coiffures was cited by the city for improper disposal of 
certain waste chemicals. Carrie questioned the propriety of the proposed fine of $2,000 
and retained an attorney to represent her at the hearing. By pleading nolo contendere, 
the attorney was able to get the fine reduced to $500. Carrie paid both the fine of $500 
and the attorney's fee of $600 in 2012. 

12. In August 2012, Carrie saw an ad in a trade publication that attracted her attention. 
The owner of a well-respected styling salon in Reading (PA) had died, and his estate 
was offering the business for sale. Carrie traveled to Reading, spent several days 
looking over the business (inc