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ACC 311

TAX RETURN PROJECT #2

Spring, 2014

REOUIRED:

1. Complete Jim and Lauren Stapleton’s 2013 federal income tax return, specifically Form 1040, Schedule A, Schedule B, Schedule C (store), Schedule C (real estate business), Schedule E, Schedule SE (page 1), Form 2106, Form 2441 (page 1), Form 4562 (page 1, rental property), Form 4562 (page 1, store), Form 4684 (page 1), Form 8283 (page 1), Form 8829, and Form 8863. Despite what any line on a form states, do not complete any form other than these.

2. You can download the required forms from the IRS website or use a tax software package. If you need to refer to the instructions to the forms, they are available at the IRS website.

3. For all itemized deductions, report the total amount of allowable expenses even if after applying any applicable floor, no actual deduction results (e.g., medical expenses).

4. Although Form 2106 does not require a schedule to be attached, to receive partial credit, attach a schedule showing how you calculated each of your totals for lines 2, 3, 4, and 5. For each line, list the name and amount of each expense included and then the total for that line.

5. For item #10, when you complete Schedule E, do not complete either Form 6198 or Form 8582, despite what Schedule E requests in lines 21 and 22.

6. For all of Jim and Lauren's activities, they did not make any payments that would require them to file Form 1099s.

7. For Form 2441, the tax liability to enter on line 10 is the amount you entered on your Form 1040, line 46. You do not need to complete the worksheet in the instructions.

8. For Form 8283, column (i), the method used to determine the fair market value of the noncash contributions is "thrift store value."

9. Expenses incurred for education that meet the qualifications of being business-related education are treated like other business expenses. In other words, if a taxpayer travels to receive education, the transportation, lodging, and meals incurred on the trip are accounted for the same as regular business trip expenses.

10. If the Stapletons receive a refund, they want it mailed to them. They do not want it direct deposited into their bank account.

11. Check figures are as follows:

Form 1040, line 37 is $107,100

Schedule A, line 15 is $6,550

Schedule A, line 29 is $28,270

Schedule C, line 31 (store) is $12,250

Schedule C, line 31 (real estate) is $7,000

Schedule E, line 41 is $1,625

Form 2106, line 10 is $6,705

Form 8829, line 35 is $3,130

12. Neatness of the completed forms will be considered in the grading of the project.

13. You may complete the project by yourself or with one other student. If you work with another student, turn in one completed return with both of your names on it.

14. The project is worth 67 points.

15. Due Date: Thursday, May 8th, by 4:00 p.m.

CLIENT INFORMATION PROVIDED:

1. Jim (SS# 122-33-4567) and Lauren (SS# 987-65-4321) Stapleton (both age 42) are married taxpayers who reside at 4564 Francis Road, Midland, Michigan, 48640. They have two children, their 19-year-old daughter, Rebecca (SS# 456-78-9999), and their 11-year-old son, Tyler (SS# 111-22-3456). Both Jim and Lauren want $3 to go to the Presidential Election Campaign.

2. Jim is a salaried taxpayer, employed as a regional sales manager for Biologe Corporation. Biologe manufactures and sells specialized medical equipment. Jim’s W-2 provided the following information:

Gross Salary $ 9 2,100

Federal income tax withheld 6,400

Michigan income tax withheld 3,000

Social Security tax withheld 7,046

3. In his job as regional sales manager, Jim is required to travel. His business records indicate he incurred and paid the following expenses during the year:

Qualified overnight business trips (100% business):

Airfare $ 1,850

Lodging 1,700

Meals 900

Auto rental expenses 1,100

Incidentals 200

Cost of lunches in Detroit with prospective and $ 600

current customers during which their display needs

were discussed

Train fare to and from Chicago on one-day business trips $ 650

Registration fee for a one-day sales webinar $ 125

Educational expenses for a two-day global sales conference

held in Orlando, Florida:

Airfare $ 375

Lodging 425

Meals 150

Registration fee 250

4. In addition to the above expenses, Jim used his own auto, a Chevrolet Impala purchased on December 1, 2011, to visit regional sales offices on one-day business trips. According to his business records, he drove 9,500 miles in total for the following purposes: (1) 3,947 business-related miles; (2) 2,100 commuting miles (average daily round trip mileage = 12 miles); and (3) 3,453 personal-related miles. An employer-owned vehicle was not available for Jim’s use. Lauren has her own auto, which is available for personal use. Jim has written evidence to support his auto deduction.

5. Biologe Corporation has an accountable expense plan for employees which reimbursed Jim for his overnight business trips and sales conference as follows: $1,500 for the airfare; $1,600 for the lodging; and $950 for the meals. None of the other expenses were reimbursed. These reimbursements were not reported in box 1 of Jim’s W-2. They were reported "under code L" in box 12 of Jim's W-2.

6. Jim and Lauren earned the following in interest income per the 1099 forms they received from the various financial institutions.

U.S. Treasury bonds 350

Dow Corporation bonds 575

The Stapletons had no type of ownership interest or authority over any financial account in any foreign country, including any type of foreign trust.

7. In addition to the investments shown above, Jim owns 1,500 shares of Western Oil and Mining Corporation common stock. Western is organized as a S corporation and has 50,000 shares outstanding (S Corporation ID number 45-4567890). Western reported ordinary income of $100,000 and paid charitable contributions of $15,000 in 2013. Jim does not materially participate in Western's activities, so this is a passive investment for him. All his investment in Western is “at-risk.”

8. Lauren operates an office supplies store as a sole proprietor. She has owned and operated the store since 2000, and she materially participates in the operation of the store. The name of the store is Midland Office Supply, and it is located at 810 Russell Street, Midland, Michigan, 48640. Her employer I.D. number is 39-9876759. Her business code is 448140. Inventories are valued at cost using the first-in, first-out method, and are considered to be a significant component of income. Lauren withdrew inventory items worth $750 for personal use during 2013; these items were originally purchased by the store for $300 and were included in gross purchases. The accounting records for Midland Office Supply disclose the following account balances:

1/l/13 12/31/13

Merchandise inventory $ 229,800 $ 232,500

The store’s accrual-method records for the year reveal the following information:

Gross Sales $ 336,500

Sales returns and allowances 5,300

Purchases 220,850

Gross salary payment (1 employee) 21,830

Advertising expense 6,250

Utilities expense 13,500

Supplies expense 7,200

Payroll taxes (employer's share of FICA and FUTA) 1,670

Parking ticket fines paid on customer deliveries 350

Professional accounting services 3,600

New store shelves and display equipment 18,500

Tax on inventory (tax is assessed based on the 2,150

fair market value of the clothing in inventory)

Property insurance premium (annual premium for 3,000

the period 8/l/13-7/31/14)

Rent for building (1/1/13-12/31/13) 23,400

Cash withdrawals by Lauren during 2013 22,200

The store shelves and display equipment are 7-year property. They were placed in service on August 1, 2013. Lauren requests that you maximize any depreciation expense Midland Office Supply is entitled to.

9. On February 20, 2013, Lauren's mother died. From her mother's estate, she received her mother's house valued at $135,172 (her mother's basis in the house was $75,000).

10. Lauren found a renter for her mother's house on August 1. The monthly rent is $800, and the lease agreement is for one year. The lease requires the tenant to pay the first and last months' rent and a $700 security deposit. The security deposit is to be returned at the end of the lease if the property is in good condition. On August 1, Lauren received $2,300 from the tenant per these terms of the lease agreement. In October, the roof leaked after a heavy thunderstorm. The tenant had the repairs done and paid the $650 bill. In November, the tenant reduced his rental payment to $150 to compensate for the plumbing repairs. Lauren provides you with the following additional information for the rental in 2013:

Real estate taxes on property $ 2,350

Insurance expense 900

Depreciation expense (needs to be computed) ?

Management fee 600

Other maintenance expenses 200

The rental property is located at 408 Sunset Boulevard, Midland, Michigan, 48640. Local practice is to allocate 20 percent of the fair market value of the property to the land. (See #8.) Lauren uses the cash-method for tax reporting purposes. She makes all decisions with respect to the property and actively participates in its operation during the year.

11. In addition to her retail business, Lauren also sells real estate in the evening and on weekends. She runs her business from an office in the basement of their home. The name of the business is Daybreak Real Estate and the employer ID number is 09-1234567. The business code for this activity is 531210. She has been operating as a sole proprietor in a business-like way since 2005 and has always shown a profit. She uses the accrual-method and reported the following income and expenses from this business during the year:

Commissions earned $ 19,850

Advertising expense 2,850

Cell phone expense 2,100

Real estate license 350

Office supplies expense 500

Lauren uses a separate cell phone for her real estate business.

12. Lauren attended the national conference for real estate agents held in Phoenix, Arizona, in November. The 5-day conference covered educational topics of interest to real estate agents. She incurred the following expenses to attend the conference:

Airfare $ 525

Lodging (4 nights) 850

Meals (5 days) 280

Conference registration fee 435

13. Lauren has used her Chrysler 300 in her real estate business since June 1, 2010. During 2013, she properly documented 8,327 business miles. The total mileage on her car (i.e., business-and personal-use miles) during the year was 15,140 miles (including 200 miles commuting to and from the real estate office). She elects to use the standard mileage method to calculate her car expenses. She spent $175 on parking related to the real estate business. She has written evidence to support her auto deduction.

14. Lauren and Jim incurred and paid the following total expenses in operating their home in 2013:

Water $ 950

Electric 1,900

Gas 1,700

Insurance 800

Housecleaning maintenance services 2,600

The total living area, which includes the basement office, measures 3,000 square feet. The office measures 900 square feet. When she started her real estate business in April, 2005, the basis of their house was $113,946. 15% of the purchase price was attributable to the land.

15. Jim and Lauren incurred the following medical expenses (before considering the $1,500 reimbursement they received from their health insurance plan for their doctor, hospital, and emergency room charges):

Medical health insurance premiums (paid by Jim to participate $ 3,600

in Biologe's medical insurance plan for which only Jim,

Rebecca, and Tyler are eligible to participate)

Medical health insurance premiums for Lauren's separate policy 4,800

Doctors 1,700

Optometrist 950

Dentist 600

Veterinarian fees (for family dog Sandy) 500

Prescription drugs 400

Over-the-counter drugs 550

Emergency room charges 1,200

Hospital charges 4,500

16. The Stapletons paid the following property taxes during the year:

Midland home $ 3,900

Vacation home in Munising, Michigan 1,270

Family car used by Jim (ad valorem) 520

Lauren’s car (ad valorem) 400

Special assessment paid on the Midland home for installation 900

of sidewalks

17. The Stapletons received two Form 1098s for the cost of interest on their bank loans and also paid the following interest on their personal loans:

First Midland Bank 1098 (on Midland home’s original mortgage) $ 5,500

First Midland Bank 1098 (home equity loan) 1,775

Macy’s credit card 50

Bank of America Mastercard 350

Jim’s student loan (proceeds of loan were used to pay for tuition 640

in his MBA degree program five years ago)

Car loan (100% for Jim's car) 2,400

Margin debt (proceeds of loan used to purchase bond investments) 1,500

The proceeds from the home equity loan, $22,000, were used to renovate their kitchen and pay for Tyler's tuition to private school. The interest on the portion of the loan used for private school tuition is $300.

18. Jim and Lauren made cash charitable contributions to the United Fund Campaign ($800), Central Michigan University ($1,500), and First Evangelical Church in Midland ($2,100). They received a statement from each of these organizations acknowledging their contributions. They also donated the following property to the Salvation Army located at 500 East Grand River, Midland, Michigan, 48640, on July 31st:

Property FMV Original Cost Date Acquired

Refrigerator $400 $1,200 7/30/07

Dining table set 200 1,000 4/10/03

Coats 100 300 Various

The Salvation Army acknowledges that these amounts represent the fair market value of the donated items.

19. In June, a tornado touched down in Midland and ripped the roof and siding off of the Stapleton’s house and garage. They originally paid $110,000 for their home in May, 2004, but they were able to repair the damage for $21,500. They estimate the fair market value of their home before the tornado hit was $155,000. The repairs did not increase the value of the home. Insurance reimbursed them $9,250 for the damage. Lauren's office was not damaged or affected by the tornado.

20. Tyler stays with a neighbor, Tammy Lurch, after school and during the summer while Jim and Lauren are both working. The Stapletons paid their neighbor $2,800 in day care costs for Tyler during 2013. Tammy's address is 310 Greywing Road, Midland, Michigan, 48640. Her social security number is 888-99-1234.

21. Jim and Lauren’s personal records disclose the following expenditures during the current year:

2012 tax preparation fee (paid in 2013) 627

Professional dues and publications not reimbursed 550

by employer (Jim)

Clothing purchases 3,900

Investment management fees at brokerage firm 700

22.During the year, the Stapletons paid for Rebecca's tuition payments to attend The College of St. Louis (CSL). Rebecca attended the spring and fall semesters as a full-time student. Total amount paid by the Stapletons during the year for tuition was $3,000 and $2,000 for books. Rebecca also used $4,000 from a scholarship received from CSL to pay the rest of the tuition. Rebecca was not required to perform any services as a condition of accepting the scholarship. Rebecca was not employed during the year. CSL's address and employer identification number (EIN) is as follows:

The College of St. Louis

65 Ivory Tower

St. Louis, Missouri

EIN: 22-5698324

23. Because Lauren is self-employed, the Stapletons made $800 in total estimated federal income tax payments and $400 in total estimated Michigan income tax payments as follows:

1. The federal estimated income tax payments were paid as follows: (1) $200 on April 15, 2013; (2) $200 on June 15, 2013; (3) $200 on September 15, 2013: and (4) $200 on January 15, 2014.

2. The Michigan estimated income tax payments were paid as follows: (1) $100 on April 15, 2013; (2) $100 on June 15, 2013; (3) $100 on September 15, 2013; and (4) $100 on December 15, 2013.

Additional Return Preparation Notes

1. The gross salary of $92,100 is before any subtractions or additions due to withholding or fringe benefits.

2. All charitable contributions to First Evangelical Church were made in cash in amounts of less than $250 each.

Additional Information for TurboTax (or Other Software) Users Only

1. Jim’s birthday is January 1, 1972. Lauren’s birthday is June 30, 1972. Rebecca's birthday is January 1, 1995. Tyler's birthday is April 16, 2003.

2. All charitable contributions should be classified as 50% limitation contributions.