David R. Betty N. Lee [ages 45(1964) and 46(1963)] are married and live at 641 Cody Way, Casper, WY82609. David is consulting engineer, while Betty is a paralegal. They file a joint return and use the cash basis for tax purposes.
1. Trained as a mining engineer, David has developed considerable expertise in the treatment and disposition of waste material. He also is well versed in the various Federal
and state requirements for land reclamation projects. David maintains a consulting practice through which he renders advice on these matters. Most of his clients are small
and medium size owners and operators located in Wyoming and contiguous states( e.g Montana, Idaho, Utah). Characteristically, David is retained by a client on a contract fee basis and is reimbursed for all out-of-pocket expenses. In performing his service, David usually visits the job location and later submits his recommendations in written report along with statement for his services and expenses.
Fees for services rendered $92,800 - schedule C line 1 (included into total)
Expenses reimbursement
Airfare $8,200- deduction schedule C line 24a
Lodging $5,200- deduction schedule C line 24a
Meals $6,100 - deduction schedule C line 24b
Transportation(taxi,limo,rentals airports) $920- deduction schedule C line 24a
$20,420 – total reimbursment
Total received $113,220 - schedule C line 1
2.
Payments from Ibis Mining received in January 2009
for work performed in December 2008 $4,400- schedule C – added to line 1 (because of the cash method)
Payment from Anhinga Mining received in January 2010for work performed in December 2009 $5,100 - will be reported in 2010
Nonpayment by Cormorant Mining for workperformed in March 2009 $3,700 - income is not recognized (because of the cash method)
3.
Advertising in trade journals $2,400 - deduction schedule C line 8
Office supplies(including drafting materials) $1,200- deduction schedule C line 18
Contribution to H.R. 10(KEOGH) plan $9,000 - form 1040 line 28
State occupation license $300- deduction schedule C line 23
Subscriptions to trade journals $240- deduction schedule C line 48
Membership dues to trade associations $180- deduction schedule C line 48
Landscape models(amount paid to a topographer for several land reclamation projects) $3,200- deduction schedule C line 11
Business phone and internet service $860- deduction schedule C line 25
Premiums on medical insurance (covering self, spouse, and dependants) $3,800- form 1040 line 29
4.
To save on rent and as a matter of convenience, David maintains an office in the home. Twenty percent of the 3,000-square-foot living area is devoted to the office. - form 8829 lines 1, 2 and 3
David inherited the home on Cody Way from his father, who died on June 6, 2002, when it had fair market value of $400,000 of which $40,000 was allocated to the land. - form 8829 lines 36,37
It is current fair market value is $500,000( $50,000 allocated to the land). – not relevant
County land records reflect that David's father bought the land in 1968 for $6,000 and built the house in 1972 at cost of $60,000. – not relevant
Relevant information regarding the property for 2009 is summarized below: - all are indirect expenses.
Casualty insurance $2,300- form 8829 line 17b
Repairs and maintenance $2,900- form 8829 line 19b
Utilities $4,800- form 8829 line 20b
The property taxes and mortgage interest on the property are listed in item 15 below.
In addition to the repairs and maintenance noted above David had office repainted at cost of $1,200.- form 8829 line 1a – direct expenses
The furniture in the office, including business equipment( e.g computer, fax, machine, copier), was properly expensed in the year bought and has zero basis.– nothing to deduct in the current year.
However, on March 5, 2009, David purchased a heavy-duty, fire-resistant file cabinet with security-vault features for $ 4,800.
He made the acquisition to safeguard and maintain the privacy of client data. If possible, David prefers to avoid capitalizing and depreciating the cabinet. - form 4562 lines 2, 6 (section 179 deduction)
As to the business use of the residence, depreciation has been based on MACRS(using the mid-month convention) applicable to 39-year nonresidential realty. - form 8829 line 41
5. On February 4, 2008, David purchased for $41,000 (including sales tax) an Infiniti crossover SUV (gross weight under 6,000 pounds), which he uses 90% of the time for business. No trade-in was involved, and he did not claim any section 179 expensing of the cost. Under the actual operating cost method, he uses 200% declining balance with a half-year convention. {hint; see table 3 in the instruction to form 4562}– form 4562 line 26 depreciation $4590 schedule C line 13
His expenses pertaining to the operation of the Infiniti for 2009 are as follows:
Gasoline $3,300
Oil changes and lubrication $120
Auto insurance $ 1,600
Repairs $240
Auto club dues $180
License and registration $60
--total $5500 – schedule C line 9
During business use, David received three moving traffic violations (total fines of $680) - not deductible
and incurred tolls and parking charges of $440. -
The Infiniti was driven a total of 14,500 miles during 2009( mileage was incurred evenly during the year). - – form 4562 lines 31-33 schedule C lines 43-47
. Betty is a licensed paralegal and is employed on part-time basis by several local attorneys. She commuted to work ( using the family Suburban) for a total of 813 miles and paid parking fees of $310. - commuting miles are not deductible.
Her earnings and job-related expenses are summarized below:
Salary(from four employers) $38,000 - form 1040 line 7
Subscriptions and dues to professional organizations $180 - form 2106 line 4
Laptop computer $1,200 - form 4562 line 26
Occupational license fee $80- form 2106 line 4
Continuing education correspondence course $120- form 2106 line 4
She purchased the laptop computer on March 12 and uses it about 80% of the time for business. - form 4562 line 26(c)
The correspondence course is required for retention of her license. Betty is considering going to law school, so she attend a series of LSAT preparation sessions at cost of $350. - form 2106 line 4
Because Betty is a part-time employee, she is not covered by any of her employers medical or retirement plans. - important for form 1040 line 27 deduction
During 2009 however, she contributed $5,000 to a traditional IRA that she establish several years ago. - form 1040 line 32
As to the family Suburban, the Lees use the automatic mileage method for tax purposes. – not relevant as commuting miles are not deductible
7. With funds received from the settlement of his father's estate, David purchased rental property at 4620 CottonwoodLand. Of the $250,000 purchases price, $30,000 was allocated to the land. - basis for depretiation $220,000 – form 4562 line 17 schedule E line 20
After a substantial renovation to the house ( e.g new flooring, roof, heating unit) costing $80,000, - adjusted basis $300,000
the property was rented beginning February 1, 2003.
In 2007, the Lees decides that their investment would be more marketable if the house was rented as furnished. Consequently, in May of that year they spent $38,000 on new furniture( including grapes, carpeting, and appliances). - form 4562 line 17 schedule E line 20
Under the current lease agreement, the property rents for $2,200 a month( payable at the beginning of each month) with utilities not included. Information regarding the property for 2009 appears below:
Rent received $28,600 - schedule E line 3
Property taxes $2,400- schedule E line 16
Insurance $3,100- schedule E line 9
Yard maintenance $1,200- schedule E line 7
Repairs $800- schedule E line 14
The amount of rent received included $2,200 for January 2010. Because the tenants were going on vacation during the Christmas/New Year holidays, in mid December they pre-paid the rent for next month. - included because of cash basis.
The property taxes listed above do not include a special assessment of $2,400 by the city of Casper for repaving the street in front of the property.- schedule E line 16
Regarding depreciation, the Lees use MACRS straight-line for the reality, assuming the mid-month convention, and MACRS accelerated depreciation for the personality, assuming the half-year convention.
8. As another investment, the Lees own 1,000 share stock in Cormorant Mining acquired on March 7,2008. David had performed services for the company and submitted a bill for $3,900. Because Cormorant was experiencing a cash-flow problem, David accepted the stock as payment for such a services. Cormorant currently is in bankruptcy(see item 2 below) and expectations are that the shareholders will not recover anything on their stock investment. The stock ic not publicly traded. – assuming $3,900 were included into taxable income for 2008 – worthless securities should be reported on the schedule D line 8
9. On March 10, 1991, David's father gave the Lees a tract of the land located in TentonCounty as an anniversary present. It had a value of $150,000 and no gift tax was due on the transfer. The land had been purchased by David's father on June 1, 1981, for $50,000.– donor’s basis
In December 2008 the Lees contracted by a real estate developer and offered $800,000 for the property. After considerable negotiation, the following transactions took place on March 4,2009: the Lees transferred the Teton tract in return for $8,000 in cash and four city in Laramie WY worth $792,000. The Lees considered the city lots to be a good investment as they are locate near the state university. All closing cost and legal fees were absorbed by the real estate developer. - schedule D line 8 – sale price $800.000
10. One of the items David inherited from his father was an antique gun collection-mainly large caliber rifles used for buffalo hunting. Although David has no idea what his father's cost basis was, the collection had a date of death value of $22,000. David sold it to a dealer for $29,000. – schedule D line 8 (collectible)
11. On July 12, 1999, using $50,000 - – form 6252 line 8
of fund she had received from an aunt's life insurance policy, Betty purchased grazing land in Converse Country WY. On August 2, 2008, she sold the land to a local rancher for $75,000. – form 6252 line 5
Under the terms of the sale, Betty received a down payment of $15,000 – form 6252 line 23
and 10 annual notes of $6,000 each. Simple interest of 8% is provided for. On August 4, 2009, Betty collected $10,800
(including interest of $4,800) – interest schedule B line 1 ; principal payment form 6252 line 21; capital gain schedule D line 11
on the maturity of the first note.
12. Although the Lees had several Schedule D transaction during 2008, they end up with a net short-term capital loss of $7,000. Of this loss $3,000 was deducted in 2008 and $4000 carried over to 2009. – schedule D line 6
13. For several years, Betty's widowed mother, Vivian Newman, has lived with the Lees and has been claimed by them as a dependent. On December 30,2008 Vivian suffered a heart attack. After three days in the ICU of local hospital, Vivian died. In early February 2009, the Lees paid the following expenses regarding Vivian:
Medical expenses incurred in 2008 $4,200 – deductible in 2008
Medical expenses incurred in 2009 $3,100 – schedule A line 1 (as for dependent)
Burial expenses $4,400 – not deductible
Remainder of church pledge for 2008 $600 – not dedutible as not maid by taxpayer
Fortunately, the balance of Vivian's medical expenses ($11,900) was covered by insurance. Besides personal and household effects, Vivian's major asset was life insurance. As the designated beneficiary of the policy, Betty was paid the $20,000 proceeds on March 13,2009. – not taxable income
14. Besides the items already mentioned, the Lees had the following receipts during 2009:
Interest income
City of Cheyenne general purpose bonds $1,900 – not taxable
CD at Wells Fargo Bank $1,100 – schedule B line 1
Money market account at Bank of America $400 – schedule B line 1
Qualified dividend income issued onMeadowlark Corporation common stock $700 – form 1040 line 9b
Jury duty fees $420 – form 1040 line 21
Yard (garage)sale $950 – most likely – no capital gain and not taxable.
In connection with her jury duty assignment in June, Betty drove Suburban 40 miles and incurred expenses of $30 for parking and $4 for meals. –because employee’s business expenses are limited by 2% AGI – most likely these expenses will not be deductible
The yard sale involved used furniture, appliances, books, toys, and other household goods having an estimated original cost value of $1,800.
15. In addition to the items already noted, the Lees had the following expenditures for 2009:
Medical and dental dills(including prescription drugs of $400) – schedule A line 1
Other than those relating to Vivian (see item13) $1,800 – schedule A line 1 (I assume that are medical expenses)
Ad valorem property taxes on personal residence $3,100 – 20% form 8829line 11; 80% ($2480) schedule A line 6
Interest on home equity loan used to finance the purchaseof personal items (e.g camper) $4,400 – for the loan up to $100,000 - 20% form 8829 line 10; 80% ($3520) schedule A line 10
Charitable contributions (not include Vivian's pledge) $3,200 – schedule A line 16
In connection with her medical expenses incurred in August, the Lees drove the Suburban 420 miles. - *$.24 per mile = $101 schedule A line 1
Although they do not keep track of their sale tax, in May 2009 they purchased a camper for $ 40,000.
The sales tax on this purchase was $1,600. - 200 – schedule A line 5b
WY sales tax rate 4% plus local rate – assumed 3%
16. Besides Vivian (see item13) the Lees household include two daughters, Meredith (age19-1991) and Kirby (age19-1992) and son Toby (age17-1993). Kirby and Toby are full-time students. Meredith works part-time earnings $9,000 which she deposits in a saving account.- all are qualified children
17. For tax year 2008 the Lees had an overpayment of $4150 which they applied toward their 2009 income tax.– form 1040 line 62
Betty's income tax withholdings for the year are $5,100 – form 1040 line 61
and the Lees made quarterly payments of $4,000 (for a total of $16,000). – form 1040 line 62
Use the business activity code of 541990 for David. – schedule C – header B
Betty's social security number is XXX-XX-XXXX; assume all other parties have the following ssn XXX-XX-XXXX.