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Tax Accounting Probem – Javier F. and Eldi M. Barbosa Javier F. and Eldi M. Barbosa are married and live at 9540 Maple Leaf Drive, Gaitherburg, MD 20852. They file a joint return and are calendar year, cash basis taxpayers.
1. Javier is a self-employed accountant (professional activity code is 541213). He maintains an office at 123 SE Wisconsin Avenue, Bethesda, MD. 20849. He shares the suite with several other professionals and has no employees. A receptionist handles all calls and is provided by the landlord as part of the services offered to tenants. Javier’s work-related expenses for 2014 are as follows:
Office rent $9,800
Accounting services 1,200
Office expenses (supplies, use of copier, etc.) 1,100
Legal services (see item 9. below) 300
State and local license fees 900
Renter’s insurance (covers personal liability, casualty, theft) 1,500
Replacement of reception room furnishings (6/5/2014) 2,200
Professional dues and subscriptions to trade publications 600
Business lunches 1,400
Contribution to H.R. 10 (Keogh) plan 4,000
Medical insurance premiums 6,000
The business meals Javier paid for were to entertain various visiting executives from the clients he does business with. As is the case with all of Javier’s business transactions, the lunches are properly documented and supported by receipts. Because the reception room furnishings were looking shabby, Javier and his suite-mates had them replaced. The $2,200 Javier spent was his share (i.e., a sofa and coffee table) of the cost. Javier follows a policy of avoiding depreciation by utilizing the Section 179 election to expense assets. All of Javier’s office equipment (e.g., desk, chairs, file cabinets, computer, etc.) has previously been expensed. Of 16,000 total miles in 2014, Javier drives his car (a Ford Explorer purchased on 6/1/2012) 13,400 miles for business (not including commuting) and has business parking and toll charges of $310. The Barbosas use the automatic mileage method of claiming automobile expenses.
2. Eldi is an occupational therapist employed on a part-time basis by Therapy Consultants, Inc. Her employer does not provide her with an office, and she has no separate office in her home. She does, however, maintain her business records at home and lists it as her business address. After receiving her assignments by phone, she drives her car Mazda 626 (purchased on 7/1/2009 directly to the residence of the patient. Therapy Consultants, Inc. requires all of its therapists to wear uniforms while on duty. As Eldi is not a full-time employee, she is not covered by her employer’s health or retirement plans. Eldi’s work-related expenses for 2014 appear below:
Mileage (total miles in 2014 = 10,000) 6,000 miles
Professional dues and subscriptions $1,280
Continuing education programs (required to
maintain license) 440
Annual license fee 180
Therapy supplies 260
Uniforms purchased (including $240 for shoes) 410
Laundering of uniforms 210
3. At a foreclosure sale on May 8, 2014, the Barbosas purchased a house to be held as a rental investment. The property cost $300,000 (of which $40,000 is allocated to the land) and is located at 2340 Spruce Street, Rockville, MD 20850. After making minor repairs and placing the property in service on June 1, the Barbosas were fortunate in that they were able to rent it immediately for $2,250 a month (payable on the first of each month). Information regarding the rental property for 2014 is summarized below:
Rent received ($2,250 x 8 months) $18,000
Refundable damage deposit 2,000
Property taxes 1,800
Interest on mortgage 1,500
Street paving assessment 2,500
Although the property was rented for only seven months, in late December 2014 the tenants prepaid the January 2015 rent because they were going to be out of town on New Year’s Day. The special assessment was levied by the city of Bethesda to resurface the street in front of the house. The Barbosas plan to use MACRS straight-line depreciation, assuming the mid-month convention.
4. On her birthday on June 27, 2004, Eldi received as a gift from her father unimproved land located in Dumas County (TN). The land cost her father $50,000 in 1975 and had a value of $285,000 on the date of the gift. No gift tax was due as a result of the transfer. On July 15, 2014, Eldi sold the land to an adjoining property owner for $420,000. She incurred $28,200 in selling costs.
5. When Eldi’s father died in 2010, he had a life insurance policy issued by John Hancock Insurance Company with a maturity value of $1,000,000. As the designated beneficiary of the policy, Eldi picked a settlement option of $215,000 annually, payable over five years. In 2014, she received a check from John Hancock for $215,000.
6. Based on a tip from a friend who is an investment adviser, on November 6, 2012, Javier purchased 15,000 shares of common stock in Turner Corporation for $14,000, a manufacturer of bicycle shocks, was experiencing financial difficulties and was contemplating bankruptcy. Nevertheless, the adviser was sure that its liquidation value would far exceed the cost of the stock. Turner went into receivership in early May 2013, and by August 15, 2014 it was determined that investors will receive $.40 on the dollar in February 2015.
7. In 2013, a hit-and-run driver damaged Javier’s Ford while it was parked in front of his office. Javier’s insurance carrier, State Farm Insurance Company, paid the cost of repairing the vehicle, but he was charged $2,000 under the deductible provision. In 2014, the authorities located the driver who caused the accident, and State Farm recovered on the loss. As a result, in February 2014 Peregrine reimbursed Javier for the $2,000 deductible. The Barbosas itemized when they filed the 2013 income tax return, and claimed a $1,400 deduction for this casualty loss. The claimed
8. Javier has a 45% ownership in Gandle Company EIN 12-333333, an 1120S corporation. In 2014 Gandle Company recorded gross receipts of $300,000, Cost of Goods sold of $90,000 and other expenses of $140,000. Javier made cash withdrawals during the year totaling $40,000.
9. Besides those previously noted, the Barbosas had the following receipts for 2014:
Payment for services rendered as an accountant
(as supported on Forms 1099 issued by several
payor client companies) $80,000
Therapist wages (Form W-2 issued by Therapy Consultant’s Inc.
A vacation package $ 8,500
Income tax refunds for tax year 2013
Federal tax $1,400
State tax 450 $1,850
City of Miami bonds $1,800
Interest on SunTrust Bank CD 3,600 $5,400
Estate sale $13,600
Loan repayment $20,000
The vacation package was a Christmas surprise from a former client as a way of expressing thanks for the accounting work Javier had done.
The estate sale (like a fancy garage sale) involved mostly items Eldi inherited from her father (e.g., boat and trailer, camper, hunting and fishing equipment). Eldi has no proof as to the cost of these assets, nor does she know their value at the time of his death (assume that all assets declined in value when comparing inherited value to proceeds from sale of each item).
Three years ago, Javier had loaned a friend, Michael, $15,000 to help start a business. No note was signed, no interest was provided for, and no due date was specified. Much to Javier’s surprise, Michael repaid the loan at $20,000 in late 2014.
10. In addition to any items previously noted, the Barbosas had the following expenses for 2014:
Medical and dental expenses not covered by
Ad valorem property tax on personal residence 3,800
Home mortgage $3,800
Interest on home equity loan 1,400 5,200
Charitable contributions 4,000
Tax return preparation fee (60% relates to
Javier’s business) 600
Of the $8,000 in medical expenses, $5,000 was used to pay for Nancy Barbosa’s cosmetic surgery to smooth over her facial wrinkes. Nancy is Javier’s mother who lives with them and would otherwise qualify as their dependent except for the gross income test.
During 2014, Eldi borrowed $20,000 under a home equity loan arrangement. The money was used to help pay family credit card debt and to purchase jet skis for the family to enjoy on weekends.
11.Besides Nancy, the Barbosa’s’ household includes their three children: Bo (age 17), Judy (age 16), and John (age 14). All are full-time students. Bo is very proficient with the bagpipes and during the year earned $4,400 playing at special occasions (i.e., mainly funerals). Bo is saving his earnings for college.
12. Eldi’s Form W-2 from Therapy Consultants, Inc. shows $2,000 withheld for Federal income tax and $941 for state income tax. Javier made equal quarterly payments of $2,600 (Federal) and $500 (state). Relevant Social Security numbers are noted below.
Name Number Birth Date
Javier L. Barbosa 123-45-6789 07/01/1967 07/01/1967
Eldi S. Barbosa 123-45-6782 02/20/1968
Bo Barbosa 123-45-6788 04/09/1997
Judy Barbosa 123-45-6783 12/06/1998
John Barbosa 123-45-6781 07/29/2000
Nancy Barbosa 111-11-1111 01/03/1939
Prepare an income tax return by hand inblue pen (no tax software) with appropriate schedules that can be found at the IRS website (irs.gov) for the Barbosas for 2014. In doing this, use the following guidelines:
· Make necessary assumptions for information not given in the problem but needed to complete the return. Be aware of the possible application of certain tax credits.
· The taxpayers have the necessary substantiation (e.g., records, receipts) to support the transactions involved.
· If a refund results, the taxpayers want it sent to them.
· The Barbosas do not wish to contribute to the Presidential Election Campaign fund.
·In the past several years, the Barbosas have itemized their deductionsfrom AGI (have not claimed the standard deduction option).