29 Jun Question book of south-western federal
Question
book of south-western federal taxtion 2014 Appendix E, Problem 2, the tax return problem of Carrie A Morgan
PLEASE PROVIDE ALL FORMS AND EXPLANATIONS REQUESTED.
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 expense
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