Accounting Tax return problem

Please make modifications according to the content given in Tax return 5 based on the answers to Tax return 4 that I have completed previously provided below. Answer the questions on the Tax return 5 document and complete Form 1040 based on what is given in Tax return 5 and Tax return 4.

ACT 4494
Tax Return 4-Schedule C
Fall 2023
NAME ___________________________________________________________________________
Mrs. Specter’s Psychic Services
Tentative profit or loss (Line 29, Schedule C) $ _______________________________
I spent approximately ____________________ hours on this return.
Donna is responsible for paying self-employment taxes on her Schedule C income. What is the
deductible portion of these taxes? _________________________________
What is the tax liability? ________________________________________
Should (could) any tax expense be included in her Schedule C? If so, what kind?
Are there any deductions related to Donna’s Schedule C that are taken on her 1040?
If so, what are they, and where are they located?
Deduction (item and amount)
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
Tax return location (Form/line #)
_____________________________________
_____________________________________
_____________________________________
_____________________________________
_____________________________________
_____________________________________
I worked on this return with:
________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
Revenues
$
228,300
In July of 2022, Donna Specter started a sole proprietorship called Mrs. Specter’s Psychic Services. MSPS uses
Cash collected,
171,500
Interest
expense including advance payments
$
2,200
the cash method of accounting and Donna has given you the following financial information for the year.
Loan proceeds
72,000
Storage
rent ($400 per month)
8,000
Donna needs you to prepare her 2022 Schedule C for her using all the information that follows. She also has the
Contract labor (1099’s provided to all workers)
10,950
following additional questions and requests for you.
Liability insurance premiums ($350 per month)
4,200
Revenues
$
243,500
1. Supplies
Include (three
a detailed
account
for the
Expense account, per Donna’s records. In a
Office
quarters
will belisting
used this
year)Miscellaneous
400
Health insurance
for Rachel
2,500
column beside
this detail, list the expenses in the Miscellaneous
Expense account that are allowed by the
Interest
expense
$
2,200
Bad
debtIRS.
expense
4,000
Storage
rent ($400
per of
month)
8,000
Depreciation
2. Provide
a list
expenses not deducted on Schedule C1,265
and
a list of revenues not includible on Schedule
Contract
labor
(1099’s
provided
to
all
workers)
11,150
Miscellaneous
Expensesthe Schedule C is only a small part of26,604
C. Remember,
the whole tax return, so please answer the
Liabilityfollowing
insurance
premiums
($350
per
month)
4,200 be deducted if they were deductible?
Inventory
Purchasesfor
50,000
your client. Where would those expenses would
Office
Supplies
(three
quarters
were
used
this
year)
400 the revenues would be included? Are any
Legal fees
for building
purchase
Which
expenses
are not deductible anywhere? Where3,000
would
Health insurance
for Rachel
2,500
Building
downpayment
40,000
cash
inflows
not required to be included on a tax return?
Please clearly label these lists and present them
Bad debtinexpense
4,000
Mortgage
payments
3,100
an organized fashion as your client has limited time and attention and is, after all, paying for your
Depreciation
1,265
expertise.
Miscellaneous
Expenses
Total
156,219
3. Expenses
Calculate Donna’s self-employment taxes and indicate
where both parts of the calculation show up on
Inventory Purchases
50,000
the Form 1040 (part of the return and line number).
Legal
fees
for
building
purchase
3,000
Net Income
72,081
Use the
information provided in the income statement and the
additional information received from your
Building
downpayment
20,000
client
that
follows
to
prepare
your
client’s
Schedule
C
and
to
answer
her questions, in addition to the
Mortgage
payments
4,100
Beginning Inventory
–
requirements
Ending
Inventory from your supervisor.
Total Expenses
35,000
110,815
Mrs. Specter’s Psychic
Services
132,685
Net Income
Cash collected, including advance payments
Advance payments
Money owed
Door prize
Loan proceeds
Revenues
16,500
600
540
1,000
30,000
$
Contract labor (1099’s provided to all workers)
Liability insurance premiums ($350 per month)
Office Supplies (three quarters will be used this year)
Health insurance for Donna
Interest
Bad debt expense
Depreciation
Miscellaneous Expenses
Inventory Purchases
Rent
48,640
1,264
4,200
400
2,500
872
60
238
30,197
1,000
7,200
Total Expenses
$
47,931
Net Income
$
709
Beginning Inventory
Ending Inventory
700
Client notes:
MSPS collected $16,500 in cash for consulting jobs completed during the year (2022) and an additional $600 in
cash as an advance payment for Donna working a corporate party in the next year (2023). The corporation will
pay Donna an additional $400 after the party is over. Customers owe MSPS $200 at the end of the year for
projects completed this year, and while Donna isn’t sure which bills will eventually be paid, she expects to
collect all but about $60 of these outstanding revenues next year.
As Donna is now self-employed she pays for her own health insurance as a sole proprietor. She paid for this
policy from her business checking account. Her premiums this year were $2,500.
At year end, MSPS had a small inventory of tshirts, bumper stickers and coozies to be used as promotional
items. Each item has the MSPS logo on it. The total paid for these items was $1,000. By the end of the year,
there was $700 left in inventory.
Donna rented a cute little loft to use as her business space. She pays $1,200 per month.
Donna became interested and active in politics and contributed $2,222 to the August mayoral campaign of an
independent candidate. She made the contribution because she believed that, if elected, the candidate would
institute local policies beneficial to her business. The candidate lost the election and immediately started a grass
roots lobbying organization. The purpose of the organization is to keep track of elected officials’ campaign
promises and report to the public when they vote contrary to their stated campaign promises. In September,
Donna paid $1,650 in dues to join the lobbying organization. These expenditures are included in Miscellaneous
Expense.
Donna went to a psychic’s conference in Boston in December. Harvey went with her so that he could visit his
brother. Donna included the following travel costs (for both her and Harvey) in the Miscellaneous Expense
account.
Travel costs consisted of the following: airfare of $1280, $900 for four days and three nights at the College
Club of Boston, meals of $2,000 over the four days, and business center fees of $45 for sending faxes and
printing documents so that MSPS’s could keep operating while Donna was away.
Of the four days she spent in Boston, three of those days were spent attending the conference. She could have
come home earlier, but she decided to stay the extra day and sightsee in Boston. She caught an Uber that took
her on a tour of the historic district and cost her $250. The good news is, Donna won a door prize drawing for
tourists at the Boston Public Market. The prize was $1,000, which she contributed to her Schedule C business to
help with cash flow. She recorded this on her income statement as an offset to the Miscellaneous Expense with
her travel costs.
In October, Donna purchased 12 months of liability insurance. This was to keep clients from sung her in the
event her predictions turned out to be incorrect. The policy cost $4,200, ($350 per month).
In order to meet potential rich clients, Donna paid $5,000 in dues to join the Grand Oaks Country Club on
Staten Island. This year she also paid $2,200 in greens fees and court fees when golfing and playing tennis with
clients and potential clients. She plays golf or tennis with them when they need her help with complicated life
questions. She recorded the country club costs in Miscellaneous Expense. Because of her time spent at the
country club, Donna must meet the highest standards of fashion and beauty. As she has always been kind of a
fashion plate and clothes horse, this is not a hardship. It’s better now though since she can spend the same
money she did before and deduct it as a business cost! She gets her hair cut at the most stylish salon in town and
has spent $2000 there since July. Regular salon haircuts would have cost $320. Because of this, Donna has
recorded the $2000 in salon fees as a business expense, in, you guessed it, the Miscellaneous Expense account.
Her sporty wardrobe for her time at the Country Club cost her $6,000, also recorded in Miscellaneous Expense.
Donna also purchased uniforms for herself. Her uniform is a black sheath dress from Bergdorf Goodman’s, and
black Louboutin heels. She also wears a hot pink silk shrug with custom embroidery that says Mrs. Specter’s
Psychic Services with an embroidered rose. The uniforms weren’t cheap: the embroidery alone cost $100 per
shrug, the dresses were $750 each, the shrugs were $200 each (without the embroidery!) and the shoes were
$1,200 per pair. Altogether, Donna purchased 2 pairs of shoes, 5 shrugs with embroidery, and 5 dresses. All
uniform costs were included in Miscellaneous Expense.
Since the early business costs were so high, Donna took out a loan to help her get started. She got a loan for
$30,000 which she recorded as revenue on her income statement. The loan cost her $872 in interest from July to
December. Any proceeds left from this loan were deposited into the business savings account for future use.
Please help Donna determine her tax basis net income from MSPS’s using a 2022 Form 1040 Schedule C.
Please present the required items to your client in the following order, stapled:
Cover sheet with the requested information
Handwritten Schedule C (all expenses from the tax basis income statement should be shown on the
Schedule C in the places the IRS wants them.)
Income statement, per Donna, in good form and the related tax basis income statement in good form
(Prepare the income statement using ALL the information given, as the client has provided it, without
making any adjustments for tax law. Then show the income statement as it should be following tax law.
Put the two income statements side by side for comparison.)
Miscellaneous Account detail (What costs are included per Donna’s Income statement?)
List of nondeductible expenses and nontaxable income
List of expenses not deductible and revenues not includible on Schedule C but deductible/includible
elsewhere on the return with the tax return location (form and line number).
Any workpapers required to reach your answers to the questions and/or to calculate the Schedule C results
*****Depreciation calculations are not required as Donna has provided them to you. Nor are any
additional forms for depreciation or asset purchases.
The only REQUIRED IRS form is the Schedule C.
******If you use Excel or Word to prepare your workpapers, please submit through Canvas when you
submit your paper copy to me. As always, each student is required to prepare their own workpapers and
returns.
1
ACT 4494
Tax Return 4-Schedule C
Fall 2023
NAME ___________________________________________________________________________
Mrs. Specter’s Psychic Services
Tentative profit or loss (Line 29, Schedule C) $709_____________________________
I spent approximately _______20_____________ hours on this return.
Donna is responsible for paying self-employment taxes on her Schedule C income. What is the
deductible portion of these taxes? ___$108.48______________________________
What is the tax liability? ____$108.48____________________________________
Should (could) any tax expense be included in her Schedule C? If so, what kind? Yes, business-related
tax expenses are allowed for Schedule C. In this context, miscellaneous expenses like lobbying dues,
conference travels, spa costs, country club expenses, etc., comprise the Miscellaneous Expense entry of
Schedule C.
Are there any deductions related to Donna’s Schedule C that are taken on her 1040?
If so, what are they, and where are they located?
Deduction (item and amount)
Tax return location (Form/line #)
Lobbying dues: $1,650
Schedule C – Miscellaneous Expense
Conference travel costs: $4,325
Schedule C – Miscellaneous Expense
2
Salon fees: $2,000
Schedule C – Miscellaneous Expense
Country Club costs: $7,200
Schedule C – Miscellaneous Expense
Uniform costs: $8,500
Schedule C – Miscellaneous Expense
Loan interest: $872
Schedule C – Interest Expense
I worked on this return with:
________________________________________________________________________________________
Tax Consultant: A coordinated tax consultant expert for specific deductions, tax compliance and optimal
taxation (Maroufkhani et al., 2020).
_________________________________________________________________________________________
Assistant or Support Staff: I intend to hire an assistant to organize documents, enter required data, and
provide office support for my tax returns’ preparation work
_________________________________________________________________________________________
Reviewing Partner: Seeking help from a junior partner for the last look-through to ensure adherence to tax
regulations to ensure accuracy (Arnold et al., 2022). It also means advising on how Mrs. Specter can maximize
her tax benefits.
_________________________________________________________________________________________
In July of 2022, Donna Specter started a sole proprietorship called Mrs. Specter’s Psychic Services. MSPS uses
the cash method of accounting and Donna has given you the following financial information for the year.
Donna needs you to prepare her 2022 Schedule C for her using all the information that follows. She also has the
following additional questions and requests for you.
1. Include a detailed account listing for the Miscellaneous Expense account, per Donna’s records. In
a column beside this detail, list the expenses in the Miscellaneous Expense account that are
allowed by the IRS.
Based on Donna Specter’s records, here is a detailed account listing for the Miscellaneous Expense account,
along with items that are allowed by the IRS:
3
Miscellaneous Expense Details
IRS Allowed Expenses
Lobbying dues: $1,650
Allowed
Conference travel costs: $4,325
Allowed
Salon fees: $2,000
Allowed
Country Club costs: $7,200
Allowed
Loan interest: $872
Allowed
Bad debt expense: $60
Allowed (under certain conditions)
Depreciation: $238
Allowed (spread over the asset’s useful life)
Inventory Purchases: $1,000
Allowed
Rent: $7,200
Allowed
2. Provide a list of expenses not deducted on Schedule C and a list of revenues not includible on
Schedule C. Remember, the Schedule C is only a small part of the whole tax return, so please
answer the following for your client. Where those expenses would be deducted if they were
deductible? Which expenses are not deductible anywhere? Where the revenues would be
included? Are any cash inflows not required to be included on a tax return? Please clearly label
these lists and present them in an organized fashion as your client has limited time and attention
and is, after all, paying for your expertise.
Expenses Not Deducted on Schedule C:
For lobbying dues, conference travel costs, salon fees, country club costs, and uniform costs to be
deductible, they should show that all these expenses were solely utilized to further the purpose of the
business.
Revenues Not Includible on Schedule C:
A door prize worth $1,000 is excluded as business revenue in Schedule C because it is treated as a
personal gain.
Cash Inflows Not Required to be Included on a Tax Return:
4
The cash inflows only include advance payments of $600 and money owed of $540 once they earn or
collect.
3. Calculate Donna’s self-employment taxes and indicate where both parts of the calculation show up
Revenues
$ number).
228,300
on the Form 1040 (part of the return and line
Calculation
Interest
expense of Donna’s Self-Employment Taxes:$
2,200
Storage rent ($400 per month)
8,000
The
net
income
from
Schedule
C
is
used
to
calculate
Donna’s self-employment taxes, including social
Contract labor (1099’s provided to all workers)
10,950
Liability
insurance
premiumstaxes.
($350 The
per month)
security
and Medicare
Social Security portion 4,200
is calculated based on the first $142,800 of net
Office Supplies (three quarters will be used this year)
400
income
paid
into
the
FICA
tax
as
it
applies
to
the
year
2021
in full, while the entire net income is used in the
Health insurance for Rachel
2,500
Badcomputation
debt expense of the Medicare portion
4,000
Depreciation
1,265
Social Security
Tax (12.4%): 709 * 0.124 = $88.08 (up to
SSWBL)
Miscellaneous
Expenses
26,604
Inventory Purchases
50,000
Medicare
Tax
(2.9%):
$709
*
0.029
=
$20.60
Legal fees for building purchase
3,000
Building downpayment
40,000
Additional
Medicare Tax (0.9% on income over $200,000):
The data provided is not applicable.
Mortgage
payments
3,100
Donna would report these taxes on her Form 1040, Schedule SE, line 4 (Social Security tax) and line 5
Total Expenses
156,219
(Medicare tax).
Net Income
72,081
Use the information provided in the income statement and the additional information received from
your client
that follows to prepare your client’s Schedule C
Beginning
Inventory
– and to answer her questions, in addition
to the
requirements from your supervisor.
Ending
Inventory
35,000
Depreciation
Miscellaneous Expenses
Inventory Purchases
Legal fees for building purchase
Building downpayment
Mortgage payments
1,265
50,000
3,000
20,000
4,100
Total Expenses
110,815
5
Mrs. Specter’s Psychic
Services
132,685
Net Income
16,500
600
540
1,000
30,000
Cash collected, including advance payments
Advance payments
Money owed
Door prize
Loan proceeds
Revenues
$
Contract labor (1099’s provided to all workers)
Liability insurance premiums ($350 per month)
Office Supplies (three quarters will be used this year)
Health insurance for Donna
Interest
Bad debt expense
Depreciation
Miscellaneous Expenses
Inventory Purchases
Rent
48,640
1,264
4,200
400
2,500
872
60
238
30,197
1,000
7,200
Total Expenses
$
47,931
Net Income
$
709
Beginning Inventory
Ending Inventory
700
Client notes:
MSPS collected $16,500 in cash for consulting jobs completed during the year (2022) and an additional $600 in
cash as an advance payment for Donna working a corporate party in the next year (2023). The corporation will
pay Donna an additional $400 after the party is over. Customers owe MSPS $200 at the end of the year for
projects completed this year, and while Donna isn’t sure which bills will eventually be paid, she expects to
collect all but about $60 of these outstanding revenues next year.
As Donna is now self-employed she pays for her own health insurance as a sole proprietor. She paid for this
policy from her business checking account. Her premiums this year were $2,500.
At year end, MSPS had a small inventory of tshirts, bumper stickers and coozies to be used as promotional
items. Each item has the MSPS logo on it. The total paid for these items was $1,000. By the end of the year,
there was $700 left in inventory.
Donna rented a cute little loft to use as her business space. She pays $1,200 per month.
6
Donna became interested and active in politics and contributed $2,222 to the August mayoral campaign of an
independent candidate. She made the contribution because she believed that, if elected, the candidate would
institute local policies beneficial to her business. The candidate lost the election and immediately started a grass
roots lobbying organization. The purpose of the organization is to keep track of elected officials’ campaign
promises and report to the public when they vote contrary to their stated campaign promises. In September,
Donna paid $1,650 in dues to join the lobbying organization. These expenditures are included in Miscellaneous
Expense.
Donna went to a psychic’s conference in Boston in December. Harvey went with her so that he could visit his
brother. Donna included the following travel costs (for both her and Harvey) in the Miscellaneous Expense
account.
Travel costs consisted of the following: airfare of $1280, $900 for four days and three nights at the College
Club of Boston, meals of $2,000 over the four days, and business center fees of $45 for sending faxes and
printing documents so that MSPS’s could keep operating while Donna was away.
Of the four days she spent in Boston, three of those days were spent attending the conference. She could have
come home earlier, but she decided to stay the extra day and sightsee in Boston. She caught an Uber that took
her on a tour of the historic district and cost her $250. The good news is, Donna won a door prize drawing for
tourists at the Boston Public Market. The prize was $1,000, which she contributed to her Schedule C business to
help with cash flow. She recorded this on her income statement as an offset to the Miscellaneous Expense with
her travel costs.
In October, Donna purchased 12 months of liability insurance. This was to keep clients from sung her in the
event her predictions turned out to be incorrect. The policy cost $4,200, ($350 per month).
In order to meet potential rich clients, Donna paid $5,000 in dues to join the Grand Oaks Country Club on
Staten Island. This year she also paid $2,200 in greens fees and court fees when golfing and playing tennis with
clients and potential clients. She plays golf or tennis with them when they need her help with complicated life
questions. She recorded the country club costs in Miscellaneous Expense. Because of her time spent at the
country club, Donna must meet the highest standards of fashion and beauty. As she has always been kind of a
fashion plate and clothes horse, this is not a hardship. It’s better now though since she can spend the same
money she did before and deduct it as a business cost! She gets her hair cut at the most stylish salon in town and
has spent $2000 there since July. Regular salon haircuts would have cost $320. Because of this, Donna has
recorded the $2000 in salon fees as a business expense, in, you guessed it, the Miscellaneous Expense account.
Her sporty wardrobe for her time at the Country Club cost her $6,000, also recorded in Miscellaneous Expense.
Donna also purchased uniforms for herself. Her uniform is a black sheath dress from Bergdorf Goodman’s, and
black Louboutin heels. She also wears a hot pink silk shrug with custom embroidery that says Mrs. Specter’s
Psychic Services with an embroidered rose. The uniforms weren’t cheap: the embroidery alone cost $100 per
shrug, the dresses were $750 each, the shrugs were $200 each (without the embroidery!) and the shoes were
$1,200 per pair. Altogether, Donna purchased 2 pairs of shoes, 5 shrugs with embroidery, and 5 dresses. All
uniform costs were included in Miscellaneous Expense.
Since the early business costs were so high, Donna took out a loan to help her get started. She got a loan for
$30,000 which she recorded as revenue on her income statement. The loan cost her $872 in interest from July to
December. Any proceeds left from this loan were deposited into the business savings account for future use.
7
Please help Donna determine her tax basis net income from MSPS’s using a 2022 Form 1040 Schedule C.
Please present the required items to your client in the following order, stapled:
Cover sheet with the requested information
Handwritten Schedule C (all expenses from the tax basis income statement should be shown on the
Schedule C in the places the IRS wants them.)
Income statement, per Donna, in good form and the related tax basis income statement in good form
(Prepare the income statement using ALL the information given, as the client has provided it, without
making any adjustments for tax law. Then show the income statement as it should be following tax law.
Put the two income statements side by side for comparison.)
Miscellaneous Account detail (What costs are included per Donna’s Income statement?)
List of nondeductible expenses and nontaxable income
List of expenses not deductible and revenues not includible on Schedule C but deductible/includible
elsewhere on the return with the tax return location (form and line number).
Any workpapers required to reach your answers to the questions and/or to calculate the Schedule C results
*****Depreciation calculations are not required as Donna has provided them to you. Nor are any
additional forms for depreciation or asset purchases.
The only REQUIRED IRS form is the Schedule C.
******If you use Excel or Word to prepare your workpapers, please submit through Canvas when you
submit your paper copy to me. As always, each student is required to prepare their own workpapers and
returns.
Cover Sheet:
Mrs. Specter’s Psychic Services
Tentative profit or loss (Line 29, Schedule C): $709
I spent approximately hours on this return: 12 hours
As such, Donna will pay self-employment taxes on her Schedule C income. How much of these taxes does
the deductible cover? $108.48
What is the tax liability? $108.48
Are (any) tax expenses for inclusion in her Schedule C? If so, what kind? Yes, include allowable business
expenses like lobby dues, travel costs, insurance premiums, etc.
Will any Schedule C deduction made show up on Donna’s 2013 1040? If yes, what are those items, and
where can they be found?
8
Deduction 1: Line 16 of Schedule 1 ($2,500) for health insurance premiums.
Deduction 2: Loan interest ($872) – Schedule 1 entry line 20
Deduction 3: Line 16, schedule 1. Self-employed health insurance deduction
Deduction 4: Miscellaneous itemized deductions subject to 2% AGI limit – Schedule A, Line 21
I worked on this return with the following:
[Your Name]
[Tax Consultant]
[Assistant or Support Staff]
[Reviewing Partner]
Schedule C:
Mrs. Specter’s Psychic Services
Part I – Income
Amount ($)
1. Cash collected
$16,500
2. Advance payments
$600
3. Door prize
$1,000
4. Loan proceeds
$30,000
Total Income
$48,640
Part II – Expenses
Amount ($)
8. Contract labor (1099)
$1,264
9. Liability insurance premiums
$4,200
10. Office Supplies (three quarters)
$400
11. Health insurance for Donna
$2,500
12. Interest
$872
13. Bad debt expense
$60
9
14. Depreciation
$238
15. Miscellaneous Expenses
$30,197
16. Inventory Purchases
$1,000
20. Rent
$7,200
Total Expenses
$47,931
Part III – Cost of Goods Sold
Amount ($)
35. Beginning Inventory
–
36. Ending Inventory
($700)
Total Cost of Goods Sold
($700)
Part IV – Information on Your Vehicle
Amount ($)
N/A (as no vehicle-related expenses were provided)
Part V – Other Expenses (Miscellaneous Account Detail):
•
According to client’s records and IRS allowable expenses”. See detailed accounting of all.
List of Nondeductible Expenses and Nontaxable Income:
Nondeductible Expenses:
•
Personal contributions to political campaigns.
•
Personal use portion of travel and meal expense allocations.
Nontaxable Income:
•
None provided.
List of Expenses Not Deductible and Revenues Not Includible on Schedule C but Deductible/Includible
Elsewhere on the Return:
Expenses Not Deductible on Schedule C:
10
•
Deductible if personal contribution towards a qualified political campaign (Schedule A).
•
Certain parts of such expenses as traveling allowance, etc., are related to personal activities.
Revenues Not Includible on Schedule C:
•
None provided.
Work papers:
Calculations for Schedule SE (Self-Employment Taxes):
1. Net Income Calculation: =−
Net Income=Total Income−Total Expenses−Total Cost of Goods Sold
Net income = $48,640 – $47,931 – (-$700)
Net Income = $709
2. Schedule SE Calculation:
ℎ= × 92.35%
Schedules=NetIncome×92.35%
SE = $709 × 92.35%.
Schedule SE = $653.52
3. Self-Employment Tax Calculation: −=
ℎ × 15.3%
Self−Employment Tax=ScheduleSE×15.3%
15.3% of $653.52 = $97.82.
Self-Employment Tax = $100.05
4. Deductible Portion of Self-Employment Taxes: =1/2×−Deductible SE Tax=1/2×Self−EmploymentTax
Half of $100.05 is deducted as SE Tax.
Deductible SE Tax = $50.03
11
Expenses Details
1. Miscellaneous Expense Account:
Expense Category
Amount ($)
Allowable by IRS
Lobby Dues
$1,650
Yes
Travel Costs
$3,475
Partially (Business portion only)
Salon Fees
$2,000
Yes
Country Club Expenses
$13,200
Partially (Business-related portion)
Uniforms
9,500
Yes
Supporting Documentation for Deductions:
Lobby Dues:
•
Receipts for dues payment.
•
A document containing the business purpose.
Travel Costs:
•
Airfare receipts, lodging bills, meal receipts, and business centre receipts.
•
Days spent for business and non-business activities breakdown.
Salon Fees:
•
Salon receipts.
•
Reasons why the cost is related to business.
Country Club Expenses:
•
Itemized statements of membership dues, greens’ fees and court fees.
•
Business-related aspects of the country club.
Uniforms:
•
Receipts for uniform purchases.
•
The use of uniforms solely for business.
12
References
Arnold, M. N. G., Balakrishnan, M. R., Barkbu, M. B. B., Davoodi, M. H. R., Lagerborg, A., Lam, M. W. R., …
& Zettelmeyer, M. J. (2022). Reforming the EU fiscal framework: Strengthening the fiscal rules and
institutions. International Monetary Fund.
Maroufkhani, P., Tseng, M. L., Iranmanesh, M., Ismail, W. K. W., & Khalid, H. (2020). Big data analytics
adoption: Determinants and performances among small to medium-sized enterprises. International
journal of information management, 54, 102190.
Schedule C Outline
I. Cover Sheet:
•
Title: Mrs. Specter’s Psychic Services
•
Profit/Loss: $709
•
Hours Spent:
•
Deductible SE Taxes: $50.03
•
Tax Liability:
•
Tax Expense on Schedule C:
•
1040 Deductions: [
II. Handwritten Schedule C:
•
Reflecting income, expenses, net income.
III. Income Statement:
•
Per Donna’s records and Tax basis statement.
IV. Miscellaneous Account Detail:
•
Expenses under Miscellaneous; IRS-allowed breakdown.
V. Lists: a. Nondeductible Expenses, Nontaxable Income. b. Expenses Not Deductible,
Revenues Not Includible on Schedule C.
VI. Workpapers: a. Schedule SE Calculations. b. Detailed Expense Breakdowns. c. Supporting
Docs for Deductions.
Conclusion:
•
Recap findings, deductions, tax implications.
•
Note assumptions made.
Additional Notes:
•
Stress record-keeping importance.
•
Recommend professional consultation for personalized advice.
Tax Return 5
ACT 4494
FA 2023
Name: ____________________________________________________________________________
Harvey and Donna’s taxable income from this return is: $ __________________________
I worked on this return with:
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________
I worked for approximately _________________________hrs/min on this return.
Harvey greatly appreciates the tax estimate you prepared for him a few days ago. He has more information which
will require some changes to the original return you did for him. Please read the new information and make
whatever changes are required to update the 2022 Form 1040 you have already prepared.
Harvey R. Specter, born April 3, 1983, is a married taxpayer who works at the law firm Pearson Hardman. He
lives at 901 20 Stewart Street, New York, New York (in the penthouse!!!). His Social Security number is 933-669999. Harvey earned $90,000 in wages and had $10,439 withheld in federal income taxes; both items were
reported to him on his W-2. He also earned $1,000 in bank interest from Goldman Sachs (at 200 West St.) on his
savings account. This amount was reported to him on his December 2022 bank statement.
Harvey married his long time, secret love, Donna Paulsen, on December 31, 2022 at 11:45pm. They would like to
file a joint return for 2022. Harvey and Donna will live in Harvey’s apartment. Donna has not changed her last
name with the Social Security Administration. Donna’s Social Security number is 944-55-8888.
Harvey provides support for a few people. He has a daughter, named Lily after his mother (SSN 999-55-8787)
with his former flame Dana Scott (SSN 888-77-9999). Even though he didn’t love Dana, he married her when she
became pregnant so that his daughter would not be born out of wedlock. The two were divorced soon after Lily’s
birth on August 23, 2015. Their divorce was finalized on January 1, 2016. Lily was born in New York, but
currently lives in the United Kingdom with her mother who is her custodial parent. Harvey provides more than
half of Lily’s support. Harvey and Dana are still friends and they do not have a formal agreement as to which of
them claim Lily as a dependent. Harvey also provides support for Dana. He pays her a total of $6,000 per month
for both her and Lily. These payments are all in cash. When Lily turns 18, the payments will be reduced to $4,000
per month. He also provides support to his younger brother Marcus. Marcus lives in Boston. Harvey provides
approximately one half of Marcus’ support, which includes bailing him out of gambling debts.
Donna earned wages of $70,000 as an administrative assistant at Pearson Hardman. She had $7,384 withheld for
federal income taxes. Both items were reported to her on her W-2. Tips of $500 given to her by one of the firm’s
clients were also included on her W-2. Since Donna’s bank does not pay interest on savings or checking accounts,
she has moved her money over to Harvey’s account. While Donna did not earn any interest on her money in the
bank, her financial news for the year wasn’t all bad. Two of her stock investments paid dividends. She received
total dividends of $286 ($82 from Canopy Growth Corp, $204 from Alphabet). Donna also sold some stock. She
bought Giz Co., Inc. stock many years ago for $2,000. She sold this stock in 2022 for $5,000. She also sold
Magaliscious, Inc. stock for $500 on Thanksgiving. She bought the Magaliscious stock for $4,000 in 2022 when
she was at home during the COVID pandemic. Donna realized by the middle of December that Magaliscious
stock was about to take off, so she bought it back before Christmas, paying $500 for the same number of shares
she’d held previously. Harvey sold his Western Union stock. He bought it in 2018 for $5,000 and sold it in
February 2022 for $1,000.
Donna and Harvey had a busy year. Donna had to obtain a loan of $20,000 to pay off her credit cards; Harvey
refused to pay them for her. She started out with $20,100 of debt but $5,000 of her credit card debt was forgiven
by the credit card company. She received a 1099-C from the credit card company for that amount. She is so glad
that her debt is almost clear!
Donna sustained an injury from too much filing. She was out of work for one week while her injury healed. Since
she had already used up her sick leave with a bout of COVID 19z, she would not have been paid while out of
work with her filing injury. However, Donna has a disability insurance policy that she purchased on her own (no
affiliation to her job at Pearson). She paid premiums of $775 during the year, and the policy paid her a benefit of
$2,000 for the week she was out of work.
Harvey found a black cloth bag full of cash in the elevator in their apartment building. He took it home and
counted it and discovered there was $8,000 in the bag! Since Harvey believed the cash likely belonged to a
criminal, he decided not to turn it in to the cops, and kept it instead.
Because Pearson Hardman offers its employees a health plan with high deductibles, Harvey contributes to a health
savings account (HSA). In 2022 he contributed $2,000.
Harvey’s father Gordon died in 2022. His insurance policy named Harvey and Marcus as beneficiaries. Each of
them received $2,000,000 from the policy. Harvey also received $50,000 in cash from his father’s estate, in
addition to the life insurance benefit; Harvey promptly put all of his inheritance into the bank. He opened a CD
with $50,000 since he didn’t need the money right away, and the interest rate was higher. He earned $1,990
dollars in interest on the money in the CD. Unfortunately, he had to withdraw some of the money to pay some
unexpected Amazon credit card bills. The bank charged him a penalty of $78 for taking the money out of the CD
early.
Gordon also left Harvey his 1025sq. ft. cabin in the mountains. That cabin had a fair market value of $210,000
when Gordon died, even though he only paid $50,000 for it back in the day. Harvey immediately set to work,
advertising the cabin for rent to make some extra money. They did pretty well renting it out. And of course, some
of their family members like to use it. He and Donna like to use it too, for weekends every now and then. From
June thru December, they stayed at the cabin for six weekends total (3 days each weekend), and for an entire week
at Christmas.
The cabin was rented for a total of 105 days at fair market value (this included ten days that they rented the home
to Harvey’s brother Marcus). In addition to the 105 days, Donna’s good friend, Rachel stayed in the home at halfprice for fifteen days with her significant other. Harvey and Donna had rental revenues of $18,500 in 2022. They
incurred the following expenses associated with the cabin in 2022.
•
•
•
•
•
•
•
$4,000 of real property taxes.
$1,500 for homeowner’s insurance.
$4,000 for electricity, gas, water and trash pickup.
$3,000 for depreciation on the whole cabin
$450 in advertising
$624 in repair costs (A renter punched a hole in the wall during a wild party; they had a handyman
repair it.)
$1,000 in cleaning fees related to the rental of the property.
Because of their influx of money in 2022, Harvey and Donna decided to contribute to charity. When Donna
moved in with Harvey, she went through her closets and decided to donate four bags of clothing to charity. She
figured that way, she would have room for all of the new clothes Harvey would buy her. She took the bags to the
Salvation Army (5 miles away). On the way there, she passed a homeless woman on the street and gave her one of
the bags. Each bag had an IRS value of $100. While Donna was shopping on Amazon, she noticed that a local
charity, Animal Haven, was asking for contributions. It was so cool, she could just shop right in Amazon, have
the stuff delivered to the shelter, and charged to her credit card! She donated $1,032 worth of pet food, cat litter
and cleaning products in 2022, just through Amazon. Of course, Animal Haven wrote her a very nice thank you
note which included the value of her contributions. Harvey and Donna also spent a day volunteering at a homeless
shelter. They cooked and served food, and cleaned for a whole day. They had to take off work to do so, but the
sense of accomplishment they felt at the end of the day was worth the eight hours they spent there. Harvey makes
$100 per day and Donna makes $70 per day. They drove 25 miles to the shelter, round trip. Harvey’s favorite
charity was having a silent auction to raise funds. He donated a bottle of Macallen 18. The bottle sold at the
auction for $800. The fair market value of the bottle (and the price Harvey paid for it) is $500. The charity he
likes is the Just Like My Child Foundation. Donna encouraged him to make the donation when she heard about
their Girl Power Project. The charity used the funds from the auction to support their mission.
Harvey and Marcus went on a few gambling trips during which Harvey won $11,523 dollars at the poker tables.
They went to the Turning Stone Resort Casino, a luxury establishment in central New York. Unfortunately
Marcus lost each time they went. Harvey also had some losses at the casino, totaling $6,500.
Harvey paid interest on the condo mortgage of $23,000. He also paid real estate property taxes of $9,000. Both
items were reported to him on a 1098 from the mortgage company.
Donna is redoing her books for her Schedule C and will provide that information to you at a later date. Please do
not complete the 1040 until you have this information,
Since Harvey was uncertain of the amount of taxes he and Donna would owe, he made an estimated tax payment
of $6,000. They would like any refund they may receive to be deposited into their checking account. Their
account number is 321456987. They cannot remember the routing number for the bank. They would like for you,
their professional tax preparer and CPA, to deal with the IRS if needed with regards to their 2022 tax return. If
they owe money, they will send in a check to the IRS. Harvey would like $3 to go the Presidential Campaign
Fund, but Donna is not interested in contributing in any way to politics.
Please prepare Harvey and Donna’s 2022 Form 1040 and any required schedules.
The assignment should be stapled and assembled in the correct IRS order, with the attached cover sheet on the
front. The text of the return problem should be included at the back of your workpapers if you make notes on it.
If you do not take notes and write calculations on it, there is no need to turn in anything except the cover page.
Please include the names of everyone you worked with to complete the return. This assignment is due on 11/30 at
2:00pm.
All tax return assignments are to be turned in on paper with handwritten tax forms. Workpapers may be prepared
either by hand or by using Excel or Word, but the return forms should be completed by hand. Any electronic
(Word or Excel) file used to help you prepare the return should be turned in on paper with the return and
electronically through Canvas. Only the files you use to show me your work (your workpapers) are required to be
uploaded. Workpapers are an essential part of preparing a tax return and should be included. Be sure to include
any calculations that disallow or allow your taxpayers to take a credit. While this can be a group assignment, each
person is required to turn in their own tax return and workpapers. If you use Excel to complete your workpapers,
you MAY NOT copy another student’s file.
I would highly recommend using the Form 1040 instructions to help with the forms if you have questions about
what goes on what line. I expect that while completing this return you will need to perform some research. You
may even need to go outside of your textbook. If you do so, please remember to cite your sources. Tax returns
also require some critical thinking. While facts have been given to you, you may need to interpret those facts or
make assumptions. Please document any assumptions you make to complete the return in your workpapers. If
you feel that you are missing required information, please let me know and I will ask the client for you.
Schedules B and D are not required. Form 8332 is not required. Credit forms are not required as long as you show
the calculations required.
Form
1040 U.S. Individual Income Tax Return 2022
Filing Status
Check only
one box.
Department of the Treasury—Internal Revenue Service
Single
Married filing jointly
OMB No. 1545-0074
Married filing separately (MFS)
IRS Use Only—Do not write or staple in this space.
Head of household (HOH)
Qualifying surviving
spouse (QSS)
If you checked the MFS box, enter the name of your spouse. If you checked the HOH or QSS box, enter the child’s name if the qualifying
person is a child but not your dependent:
Your first name and middle initial
Last name
Your social security number
If joint return, spouse’s first name and middle initial
Last name
Spouse’s social security number
Home address (number and street). If you have a P.O. box, see instructions.
Apt. no.
City, town, or post office. If you have a foreign address, also complete spaces below.
Foreign country name
Digital
Assets
Standard
Deduction
Foreign province/state/county
Were born before January 2, 1958
(1) First name
If more
than four
dependents,
see instructions
and check
here . .
If you did not
get a Form
W-2, see
instructions.
Attach Sch. B
if required.
Standard
Deduction for—
• Single or
Married filing
separately,
$12,950
• Married filing
jointly or
Qualifying
surviving spouse,
$25,900
• Head of
household,
$19,400
• If you checked
any box under
Standard
Deduction,
see instructions.
You
Spouse
Yes
No
Someone can claim:
You as a dependent
Your spouse as a dependent
Spouse itemizes on a separate return or you were a dual-status alien
Spouse:
Are blind
Dependents (see instructions):
Attach Form(s)
W-2 here. Also
attach Forms
W-2G and
1099-R if tax
was withheld.
State
At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell,
exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.)
Age/Blindness You:
Income
Presidential Election Campaign
Check here if you, or your
spouse if filing jointly, want $3
ZIP code
to go to this fund. Checking a
box below will not change
Foreign postal code your tax or refund.
(2) Social security
number
Last name
Was born before January 2, 1958
(3) Relationship
to you
.
.
.
Child tax credit
Credit for other dependents
1a
b
c
Total amount from Form(s) W-2, box 1 (see instructions) .
Household employee wages not reported on Form(s) W-2 .
Tip income not reported on line 1a (see instructions) . .
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1a
1b
1c
d
e
f
Medicaid waiver payments not reported on Form(s) W-2 (see instructions) .
Taxable dependent care benefits from Form 2441, line 26
. . . . .
Employer-provided adoption benefits from Form 8839, line 29
. . . .
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1d
1e
1f
g
h
i
Wages from Form 8919, line 6 . . . . . . .
Other earned income (see instructions) . . . .
Nontaxable combat pay election (see instructions) .
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1i
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1g
1h
z
2a
3a
Add lines 1a through 1h
Tax-exempt interest . .
Qualified dividends . .
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.
. . . . . . .
b Taxable interest
.
b Ordinary dividends .
.
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1z
2b
3b
4a
5a
6a
IRA distributions . . .
Pensions and annuities .
Social security benefits .
.
.
.
b Taxable amount .
b Taxable amount .
b Taxable amount .
.
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4b
5b
6b
c
7
8
If you elect to use the lump-sum election method, check here (see instructions)
Capital gain or (loss). Attach Schedule D if required. If not required, check here
Other income from Schedule 1, line 10 . . . . . . . . . . . .
.
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7
8
9
10
11
Add lines 1z, 2b, 3b, 4b, 5b, 6b, 7, and 8. This is your total income .
Adjustments to income from Schedule 1, line 26
. . . . . .
Subtract line 10 from line 9. This is your adjusted gross income
.
.
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9
10
11
12
13
14
15
Standard deduction or itemized deductions (from Schedule A)
. . . . .
Qualified business income deduction from Form 8995 or Form 8995-A . . . .
Add lines 12 and 13 . . . . . . . . . . . . . . . . . . .
Subtract line 14 from line 11. If zero or less, enter -0-. This is your taxable income
.
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12
13
14
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. .
2a
3a
4a
5a
6a
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For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions.
Is blind
(4) Check the box if qualifies for (see instructions):
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Cat. No. 11320B
15
Form 1040 (2022)
Page 2
Form 1040 (2022)
Tax and
Credits
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16
17
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18
19
20
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21
22
23
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24
25b
25c
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25d
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26
29
30
31
American opportunity credit from Form 8863, line 8 .
Reserved for future use . . . . . . . . .
Amount from Schedule 3, line 15 . . . . . .
32
33
Add lines 27, 28, 29, and 31. These are your total other payments and refundable credits
Add lines 25d, 26, and 32. These are your total payments
. . . . . . . . . .
.
.
.
.
Refund
34
If line 33 is more than line 24, subtract line 24 from line 33. This is the amount you overpaid
.
.
32
33
34
35a
Direct deposit?
b
See instructions.
d
36
Amount of line 34 you want refunded to you. If Form 8888 is attached, check here .
Routing number
c Type:
Checking
Account number
Amount of line 34 you want applied to your 2023 estimated tax . . .
36
Amount
You Owe
37
Subtract line 33 from line 24. This is the amount you owe.
For details on how to pay, go to www.irs.gov/Payments or see instructions .
.
38
Estimated tax penalty (see instructions)
38
Payments
If you have a
qualifying child,
attach Sch. EIC.
Third Party
Designee
16
17
Tax (see instructions). Check if any from Form(s): 1
8814
Amount from Schedule 2, line 3
. . . . . . . .
.
.
.
18
19
20
Add lines 16 and 17 . . . . . . . . . . . . . . .
Child tax credit or credit for other dependents from Schedule 8812 .
Amount from Schedule 3, line 8
. . . . . . . . . . .
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21
22
23
Add lines 19 and 20 . . . . . . . . . . . . . . .
Subtract line 21 from line 18. If zero or less, enter -0- . . . . .
Other taxes, including self-employment tax, from Schedule 2, line 21
.
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24
25
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a
Add lines 22 and 23. This is your total tax
Federal income tax withheld from:
Form(s) W-2 . . . . . . . . .
.
.
.
.
.
.
.
.
.
25a
b
c
d
Form(s) 1099 . . . . . .
Other forms (see instructions) .
Add lines 25a through 25c . .
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26
27
28
2022 estimated tax payments and amount applied from 2021 return .
Earned income credit (EIC) . . . . . . . . . . . . .
Additional child tax credit from Schedule 8812
. . . . . . .
.
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Joint return?
See instructions.
Keep a copy for
your records.
Paid
Preparer
Use Only
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4972 3
. . . .
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. .
27
28
29
30
31
.
Do you want to allow another person to discuss this return with the IRS? See
instructions
. . . . . . . . . . . . . . . . . . . . .
Designee’s
name
Sign
Here
.
.
.
.
2
Phone
no.
.
.
.
.
.
Savings
35a
.
.
.
37
.
Yes. Complete below.
No
Personal identification
number (PIN)
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and
belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
Your signature
Date
Your occupation
If the IRS sent you an Identity
Protection PIN, enter it here
(see inst.)
Spouse’s signature. If a joint return, both must sign.
Date
Spouse’s occupation
If the IRS sent your spouse an
Identity Protection PIN, enter it here
(see inst.)
Phone no.
Email address
Preparer’s name
Preparer’s signature
Date
PTIN
Check if:
Self-employed
Firm’s name
Phone no.
Firm’s address
Firm’s EIN
Go to www.irs.gov/Form1040 for instructions and the latest information.
Form 1040 (2022)