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Carrie A. Morgan, age 45, is single and lives with her dependent




Question;The forms can be located through 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 S;E 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;((including books and financial results), and met with the;executor. Carried treated the executor to dinner and a music;concert. Immediately after;the concert, Carrie made an offer for the business, but the;executor rejected it. Her;expenses in connection with this trip were as follows;Car rental $140;Entertainment of executor 280;Motel (August 6-7) 220;Meals 110;13. In March 2011, Joan Myers, one of Carrie's best;stylists, left town to get away from a;troublesome ex-husband. In order to help Joan establish a;business elsewhere, Carrie;loaned her $7,000. Joan signed a note dated March 3, 2011;that was payable in one;year with 6% interest. On December 30, 2012, Carrie learned;that Joan had declared;bankruptcy and was awaiting trial on felony theft charges.;Carrie never received;payment from Joan, nor did she receive any interest on the;loan.;14. At Christmas, Carrie gave each of her 35 best customers;a large bottle of body lotion.;Each bottle had a wholesale cost to Carrie of $12 but a;retail price of $24. Carrie also;spent $3 to have each bottle gift wrapped. (Note: The lotion;was special order;merchandise and was not part of the business's inventory or;purchases for the year?see item 2 above.) She also gave each of the nine;stylists who leased chairs from her a;basket of fruit that cost $30 (not including $5 delivery;cost).;15. In March 2012, the Pennsylvania Department of Revenue;audited Carrie's state income;tax returns for 2009 and 2010. She was assessed additional;state income tax of $340;for these years. Surprisingly, no interest was included in;the assessment. Carrie paid;the back taxes promptly.;16. On a morning walk in November 2011, Carrie was injured;when she was sideswiped by;a delivery truck. Carrie was hospitalized for several days;and the driver of the truck;was ticketed and charged with DUI. The owner of the truck, a;national parcel delivery;service, was concerned that further adverse publicity might;result if the matter went to;court. Consequently, the owner offered Carrie a settlement;if she would sign a release.;Under the settlement, her medical expenses were paid and she;would receive a cash;award of $200,000. The award specified that the entire;amount was for physical pain;and suffering. Because she suffered no permanent injury as a;result of the mishap, she;signed the release in April 2012 and received the $200,000;settlement.;17. In January 2012, Carrie was contacted by the state of;Pennsylvania regarding a tract of;land she owned in York County. The state intended to convert;the property into a;district headquarters, barracks, and training center for its;highway patrol. Carrie had;inherited the property from her father when he died on;August 11, 2011. The property;had a value of $140,000 on that date and had been purchased;by her father on March;3, 1980, for $30,000. On July 25, 2012, after considerable;negotiation and after the;state threatened to initiate condemnation proceedings, she;sold the tract to the state;for $158,000. Since Carrie is not comfortable with real;estate investments, she does not;plan to reinvest any of the proceeds received in another;piece of realty.;18. When her father died in 2011, Carrie did not know that;he had an insurance policy on;his life (maturity value of $50,000) in which she was named;as the beneficiary. When;her mother told her about the policy in July 2012, Carrie;filed a claim with the carrier;Falcon Life Insurance Company. In August 2012, she received;a check from Falcon for;$51,500 (including $1,500 interest).;19. Upon the advice of a client who is a respected broker;Carrie purchased 1,000 shares of;common stock in Grosbeak Exploration for $40,000 on March 4;2012. In the months;following her purchase, the share value of Grosbeak;plummeted. Disgusted with the;unexpected erosion in the value of her investment, Carrie;sold the stock for $28,000 on;December 23, 2012.;20. While on her way to work in 2011, Carrie was rear-ended;by a hit-and-run driver. The;damage to her Lexus was covered by her insurance company;General Casualty, except;for the $1,000 deductible she was required to pay. In 2012;the insurance company;located the driver who caused the accident and was;reimbursed by his insurer.;Consequently, Carrie received a $1,000 refund check from;General Casualty in May;2012 to reimburse her for her $1,000 deductible.;21. After her father's death, Carrie's mother (Mildred;Morgan, Social Security number NNN-NN-NNNN moved in with her. Mildred's;persistent back trouble made it difficult for;her to climb the stairs to the second-floor bedrooms in;Carrie's house. So Carrie had an;elevator installed in her personal residence at a cost of;$12,000 in January 2012. A;qualified appraiser determined that the elevator increased;the value of the personal;residence by $7,000. The appraisal cost $400. The operation;of the elevator during;2012 increased Carrie's electric bill by $300.;22. As a favor to a long-time client who is a drama;professor at a local state university;Carrie spent a weekend as a stylist preparing hairdos for;the key actresses in the annual Theater Department fund-raising event. The;drama professor supplied all of the;resources that Carrie needed to provide her services. Carrie;estimates that she would;have charged $800 for the services she donated to this;charitable event.;23. In addition to the items already mentioned, Carrie had;the following receipts during;2012;Interest income?;CD at Scranton First National Bank $900;City of Lancaster general purpose bonds 490;Money market account at Allentown State Bank 340 $1,730;Qualified dividends on stock investments?;General Motors $470;AT&T common 380 850;Federal income tax refund (for tax year 2011) 791;Pennsylvania state income tax refund (for tax year 2011) 205;24. Expenditures for 2012, not previously noted, are;summarized below.;Contribution to pension plan $10,000;Medical?;Premiums on medical insurance $4,800;Dental bills 1,400 6,200;Property taxes on personal residence 3,800;Interest on home mortgage 3,200;Professional expenses?;Subscriptions to trade journals $ 180;Dues to beautician groups 140 320;25. The $10,000 contribution to the pension plan is to a;401(k) type of plan she;established in 2011. Previously, she had contributed to an;H.R. 10 (Keogh) plan but;found that the ? 401(k) retirement arrangement provides more;flexibility and is less;complex. The medical insurance policy covers Carrie and her;dependents and was;issued in the name of the business (i.e., ?Carrie's;Coiffures?). It does not cover dental;work or capital modifications to a residence (see item 16;above).;26. During 2012, Carrie made the following total estimated;tax payments with respect to;her 2012 tax returns;Federal estimated income tax payments $20,800;Pennsylvania estimated income tax payments 2,400;Allentown City estimated income tax payments 800;Requirements;Prepare an income tax return (with appropriate schedules);for Carrie for 2012. In doing this, use the;following guidelines;1) Make necessary assumptions for information not given in;the problem.;2) Carrie has itemized deductions ever since she became a;homeowner many years ago.;3) The sales tax option was not chosen in 2011, and Carrie;had no major purchases that;qualify for the sales tax deduction in 2012.;4) Carrie has substantiation (e.g., records, receipts) to;support the transactions involved.;5) If a refund results, Carrie wants it sent to her.;6) Carrie is preparing her own return (i.e., no preparer is;involved).;7) Carrie does not wish to contribute to the Presidential;Election Campaign Fund.


Paper#43012 | Written in 18-Jul-2015

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