ACCT3410 – Fall 2015 Extra Credit Tax Return #2

ACCT3410 – Fall 2015 Extra Credit Tax Return #2

Directions: Please complete the required federal individual income tax return forms for Desi and Lucy Diaz for the 2015 tax year. Ignore the requirement to attach the Form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps. If a 2015 form is unavailable, you may use the 2014 form but utilize all rules, thresholds, rates, percentages, etc. that are applicable to 2015 (i.e. – you must update the form where needed). You are not required to complete the state individual income tax forms. The completed return must be submitted with a tax correspondence letter to the client addressing the return, major items, etc. All Tax Return(s) are to be done individually by each student. Students may not seek nor provide any assistance to other students in completion of these returns. In addition, students may not receive assistance from outside parties (example – mommy is a tax CPA). You may utilize the book, tax code, internet, divine intervention, but you are not allowed to work with fellow students or outside parties (mom, dad, uncle CPA, etc.). The back page of every document you turn must have the following statement HANDWRITTEN, SIGNED and DATED.

I affirm under penalty of perjury and pursuant to the ETSU Honor Code, I have not received nor given any assistance to another student for this project. In addition, I affirm I have not received any assistance from outside parties or providers. Furthermore, I have not witnessed nor suspected another student of academic misconduct for this project. Last but not least, I have not discussed this project with other students or outside parties AND have not been approached to discuss this project by another student or outside parties. Printed Name: ______________________ Signature: _____________________ Date: ______

Facts: Desi and Lucy Diaz live in Lubbock, Texas. The Diazes have two children: Greg (age 14) and Marsha (age 12). Both children qualify as federal income tax dependents of Desi and Lucy. The Diazes provided the following information:

• Greg’s social security number is 589-24-8432 • Marsha’s social security number is 599-74-8733 • The Diaz’s current mailing address is 543 West La Patera, Lubbock, Texas 79401

Desi is a civil engineer. For the first two months of the year, he was employed by West Texas Engineering (WTE). However, he resigned his position with WTE to start his own engineering firm called Diaz Professional Engineers (GPE). GPE is conducted as a sole proprietorship with Desi being the sole owner. GPE started business on January 1, 2015 and is located at 1515 West Industrial Road Lubbock, Texas 79401 (EIN 20-1616167). Lucy works for herself as a part-time bookkeeper. Desi provided the W-2 from WTE.

Company Gross Wages Federal Income Tax Withholding

State Income Tax Withholding

WTE $25,560 4,500 0 Desi reported the following information for GPE’s business activities (GPE uses the cash method of accounting): Revenues: Credit card receipts $352,000 Cash receipts 648,000 Total revenue $1,000,000 Expenses: Advertising $5,450 Insurance-professional 15,750 Office building rent 62,000 Equipment leases 6,050

ACCT3410 – Fall 2015 Extra Credit Tax Return #2

Travel 14,200 Meals and entertainment 2,975 Wages 498,725 Taxes and licenses 44,875 Employee health insurance 42,000 Employee benefit programs 14,500 Utilities 37,425 Office supplies 18,900 Legal and professional fees 15,550 Repairs and maintenance 10,000 Total Expenses $ 788,400 GPE purchased and placed in service the following fixed assets:

Item Date Purchased Amount Laptop computers March 1 $20,500 Printers June 1 $6,500 Office furniture October 10 $19,000 GPE does not want to claim any bonus depreciation or Section 179 expensing on any of these assets. Desi worked part-time on GPE business activities until he finished his employment with WTE early in the year. Desi worked full-time on GPE business activities for the rest of the year. GPE filed Forms 1099 for payments made to contractors when required to do so. Desi and Lucy paid $22,000 for health insurance for his family (for the time he was working at GPE). This amount is not included in the totals for GPE above. Neither Desi nor Lucy had access to employer-provided health insurance during the year while they were paying the premiums for this policy. In need of cash, in February, Desi withdrew $20,000 from his 401(k) account. He received the Form 1099-R:

Box 1 Box 2a Box 4 Box 7 $20,000 $20,000 $4,000 1 In addition, Desi has established a SEP-IRA retirement plan using his business earnings from GPE.. He would like to make the maximum contribution possible to this plan for the 2015 tax year. Assume that you will file this tax return by April 15 of 2016 and Desi will be able to fund the SEP IRA with the full amount allowable by the date he files the return. Lucy received the Form 1099-Misc from her bookkeeping activities for her largest client, Dixon Healthcare with Box 7 marked with $14,000. Lucy received an additional $4,000 from clients who were not required to issue Lucy a Form 1099. During the tax year, Lucy paid the following business-related expenses:

• Paper $365 • Toner $450 • Meals $580

On March 1, 2015 Lucy purchased a new laptop computer for her business at a cost of $1,850. Lucy also purchased a new laser printer/photocopier combination at a cost of $840 on the same date. In April, Lucy purchased computer software to use in her business for $400. Lucy would like to recover the cost of these assets as soon as possible. Lucy owns a 2013 Acura. She started to use the Acura for her business on January 1, 2014. She drove 2,050 business miles during 2015 (she has documentation to verify). She drove the vehicle for a total of 10,000 miles during the year (7,950 personal miles). She also has access to another vehicle that she can use for personal purposes.

ACCT3410 – Fall 2015 Extra Credit Tax Return #2

Lucy started her bookkeeping service in 2014 and she uses the cash method of accounting. She is the only person performing services in the business. She did not make any payments that would have required her to file a Form 1099. On January 3, 2015, the Diazes sold their prior principal residence. They purchased that residence in 2010 and had lived there full-time until they sold it this year. They originally purchased the home for $310,000. The Diaz family has never claimed any tax depreciation (nor were they allowed to) on the home in any tax year. The sales price of the home was $405,000. The home is located at 45 East Entrada Trail, Lubbock Texas 79401. The Diaz family purchased (and moved into) their current residence at 543 West La Patera, Lubbock, Texas 79401 in late January of 2015. The La Patera residence is 2,000 square feet. The purchase price of the residence was $500,000 (building value was $350,000 and the lot value was $150,000). The mortgage on the purchase was $300,000. Expenses relating to the La Patera residence were as follows:

Mortgage Interest $12,000 Mortgage Points Paid $3,000 Property taxes $10,750

Utilities $3,000 Insurance $2,000 In addition to the primary mortgage on the home, the Diazes borrowed $150,000 on a home equity line of credit (“HELOC”) against the La Patera home. They received Form 1098 with Line 1 amount of $7,500. They used the funds from the line of credit borrowed funds to pay off personal debts on credit cards, take a European vacation, and to purchase two new personal vehicles. Lucy utilized a room in the La Patera home for her bookkeeping business. The room was used exclusively on a regular basis as the principal place of business for Lucy’s business. Lucy wants to maximize her home office deduction related to this use. The room she uses is 200 square feet. In the summer of 2015, the Diaz family rented out the La Patera residence to another family. The La Patera residence is situated along the 9th green of the famous Lubbock Country Club (LCC). The LCC hosted the U.S. Senior Open golf tournament this year. The Diaz family rented their residence to a golfer participating in the event for $1,000 per day for 10 days (the home office remained locked and off limits to the renters, however). During this time the Diaz family went on vacation touring the west coast of the United States. The Diaz family incurred $1,500 of cleaning and other expenses associated with the 10-day rental period. Lucy owns 20 acres of vacant ground within the city limits of Lubbock. Lucy acquired the land as a gift from her parents on July 1, 2006. The land was valued at $4,000 per acre on the date of the gift. Her parents purchased the land in 1990 at a price of $500 per acre. Lucy has held this land as an investment since she received it. On September 15, 2015 Lucy exchanged this land with a development company that plans to develop the 20 acres (Lucy and the development company are not related). In exchange for the 20 acres, Lucy received a condominium in Lubbock that was valued at $160,000. For purposes of depreciation, the building is valued at $120,000 and the land is valued at $40,000. The condominium is located at 990 El Mar, Unit A, Lubbock Texas 79401. Lucy first rented out the El Mar unit on October 1, 2015. The revenue and expenses from the rental unit from October through December is as follows: Rental revenue $3,600 HOA fee expense $300 Property taxes paid $225 Utilities expense $350

ACCT3410 – Fall 2015 Extra Credit Tax Return #2

No Form(s) 1099 were required to be filed for this rental. The Diazes also received Forms 1099 for the year for various items: Form 1099 INT – Bond Interest Income $3,500 (Box 8 & 9)

Originally issued in 2008 by the City of Grand Junction, CO Form 1099 INT – Interest Income $125 (Box 1) Payor: First Bank of Texas Form 1099 INT – Bond Interest Income $400 (Box 8) Payor: Lubbock Texas School District Originally issued in 2013 Form 1099 INT – Interest Income $150 (Box 3) Payor: Department of the US Treasury Form 1099 INT – Interest Income $600 (Box 1) Payor: Rio Tinto Materials Form 1099 DIV $400 (Box 1a, 1b) Payor: General Mills Form 1099 DIV $250 (Box 1a, 1b) Payor: Sysco Corporation Form 1099 DIV $350 (Box 1a, 1b) Payor: Tyco Integrated Security Form 1099 DIV $525 (Box 1a, 1b) Payor: JM Smucker Company Form 1099-B $50,000 (Box 2a – Sales price less commissions) Payor: Limited Brokerage $45,000 (Box 3) Date sold: 01/03/2015 Box 1c Long term checked Date bought: 20/10/08 Box 6 both boxes checked Box 1d: GE / Box 1e: 2,000 The Diazes did not own, control, or manage any foreign bank accounts nor were they a grantor or beneficiary of a foreign trust during the tax year. The Diazes paid the following expenses for 2015 (in addition to the personal residence-related items listed above):

Dentist (unreimbursed by insurance) $ 500 Doctors (unreimbursed by insurance) $1,750 Prescriptions (unreimbursed by insurance) $ 425 Vehicle property tax based upon value $ 950 Contribution to qualified charities $3,500

The Diazes did not pay any state individual income taxes during the year. The Diazes made federal estimated tax payments related to the 2015 tax year as follows during the current year: April 15, 2015 $11,000 June 15 $11,000 September 15 $11,000 January 15, 2014 $11,000 The Diazes want to contribute to the Presidential Election Campaign. The Diazes would like to receive a refund (if any) of tax they may have overpaid for the year. Their preferred method of receiving the refund is by check.