William Spicer (123-45-5789) and June Spicer (937-65-4321) have two dependent children, Sophie (236-52-6587) age 9 and Carl (236-52-6588) age 7, both of whom live at home.  William operates a gourmet market in Raleigh, NC Bill’s Market, as an accrual-basis sole proprietorship. The information on gross sales, expenses, and property transactions is shown below.  William receives no salary and therefore, there is no related FICA tax for him.

QUESTION

Term Project-Individual

INDIVIDUAL TAX RETURN WITH SOLE PROPRIETORSHIP

Note: this assignment is for tax year 2019 (the 2019 tax forms have been reproduced under the Syllabus and Other Info tab). 

Required: Please print the forms and prepare this tax return in pencil.  Then when complete, scan the return onto your desktop and upload it to Blackboard.

Facts

William Spicer (123-45-5789) and June Spicer (937-65-4321) have two dependent children, Sophie (236-52-6587) age 9 and Carl (236-52-6588) age 7, both of whom live at home.  William operates a gourmet market in Raleigh, NC Bill’s Market, as an accrual-basis sole proprietorship.

The information on gross sales, expenses, and property transactions is shown below.  William receives no salary and therefore, there is no related FICA tax for him.

The Market sold a unique piece of equipment for $13,000. It had originally cost $5,000

when purchased on March 5, 2015; it had an adjusted basis of $3,000 when sold on August

15, 2019. The Market also sold a display case for $1,000 on December 12, 2019, that had cost

$12,000 when purchased on June 6, 2013; it had an adjusted basis of $4,000 when sold. The

gains or losses on these asset sales are the same for tax and financial accounting. The

business complies with all Form 1099 requirements.

William is also a 10 percent shareholder in Imagineers Corporation, an S corporation, but

takes no active role in the business. He received a Schedule K-1 from this S corporation

reporting $18,000 in ordinary business income.

June is a general partner in The Bridal Shop Partnership. She worked 3 days a week at the shop and received a Schedule K-1 reporting a $12,000 guaranteed payment and $8,000 in ordinary business income. June paid $3,800 for after-school and summer child care while she worked.

2019 financial results for Bill’s Market is as follows:

Gross sales ($1,300,000 from credit card sales) 3,700,000

Merchandise purchases 2,480,000

Expenses:

Advertising 40,000

Charitable contributions 20,000

Cleaning/maintenance 12,000

Depreciation (MACRS pre-2019 purchases) 3,000

Section 179 expense (2/1/19 display case) 5,000

Payroll taxes 18,000

Health insurance 15,000*

Insurance (excludes health) 18,000

Interest expense 1,000

Licenses/fees 4,000

Meals/entertainment 10,000

Office expenses 14,000

Rent 120,000

Salary/wages 210,000

Travel 8,000

Utilities 32,000

*Includes $3,000 for health insurance for William and his family.

The following information pertains to the completion of the Spicers’ personal tax return:

Interest income $ 500

Dividend income (all qualified) 1,300

Unreimbursed doctor’s bills 8,000

Unreimbursed hospital bills 9,000

Dental bills 2,000

Mortgage interest 14,000

Real estate taxes 3,000

Contributions to their church 1,500

Investment advisor fees $3,659

The Spicers sold 10,000 shares of ABC stock on February 2, 2019 for $4,000. They had

purchased the stock on August 1, 2010 for $18,000. During 2019, the Spicers paid $300 with

their 2018 North Carolina state income tax return and made $4,600 in estimated payments for

2019 to NC. This amount exceeds their alternate state sales tax deduction. June is a volunteer at the

children’s school two days a week tutoring at-risk students. Her total mileage for her trips to

and from the school was 1,200 miles. She also had unreimbursed out-of-pocket expenses for

teaching materials for these students of $232. Additionally, the Spicers contribute $3,000 each to regular IRAs.

The Spicers made 2019 Federal quarterly estimated tax payments of $17,500 each quarter. All payments were made when due. Any refund that the Spicers have for 2019 is to be applied to their 2020 estimated taxes.

Form 1040 and Related Forms and Schedules

Form 1040: U.S. Individual Income Tax Return & Schedules 1-5

Schedule A: Itemized Deductions

Schedule C: Profit or Loss from Business (Sole Proprietorship)

Schedule D: Capital Gains and Losses

Schedule E: Supplemental Income and Loss

Schedule SE: Self-Employment Tax (2)

Form 2441: Child and Dependent Care Expenses

Form 4562: Depreciation and Amortization

Form 4797: Sales of Business Property

Form 8582: Passive Activity Loss Limitations

Form 8949: Sales and Other Disposition of Capital Assets

The Spicers will prepare only one joint tax return, their Form 1040, along with all the required

schedules and forms including the Schedule C where the income and expenses for Bill’s Market are reported. A Form 4797 is completed for the business property dispositions; the

sale of the stock is entered on the Form 8949; the net gain on the equipment disposition and

the gain or loss on the stock are both included on the Spicer’s Schedule D. The depreciation

recapture, if any, is also entered on Form 4797 and is transferred directly to the Spicers’ Form 1040.

Two other items are not included on the Schedule C—the health insurance for William and

his family (which is deducted on page 1 of the Form 1040 as a deduction for AGI) and the

charitable contribution (which is included with the Spicers’ personal charitable deductions on

their Schedule A). June is allowed to deduct 14 cents per mile for the 1,200 miles driven

($168) for her volunteer work along with her out-of-pocket charitable expenses of $232.

Their other itemized deductions are $23,800 for mortgage interest, $7,800 for Real Estate taxes, and $680 for Personal Property taxes.   Their dividend income is taxed at the Capital Gain rate, while the rest of their income is taxed at the regular rates.

ANSWER

 Individual Tax Return with Sole Proprietorship – A Comprehensive Guide

Introduction

In this essay, we will prepare an individual tax return for William and June Spicer for the tax year 2019. The Spicers have two dependent children and run a sole proprietorship called Bill’s Market. We will analyze their income, expenses, property transactions, and other relevant information to complete their tax return accurately. The essay will follow the required forms and schedules as outlined in the instructions.

Filing Status and Dependents

William and June Spicer will file a joint tax return (Form 1040) for the tax year 2019. They have two dependent children, Sophie and Carl, who live at home.

Business Income

William operates Bill’s Market, an accrual-basis sole proprietorship. The financial results for Bill’s Market in 2019 include gross sales of $3,700,000 and merchandise purchases of $2,480,000. Other business expenses, such as advertising, payroll taxes, rent, and utilities, will be accounted for on Schedule C.

 Sale of Business Property

During 2019, Bill’s Market sold a unique piece of equipment and a display case. The gains or losses from these asset sales will be reported on Form 4797, Sales of Business Property.

Shareholder Income

William is a 10 percent shareholder in Imagineers Corporation, an S corporation. He received a Schedule K-1 reporting $18,000 in ordinary business income. This income will be reported on Schedule E, Supplemental Income and Loss.

Partnership Income

June is a general partner in The Bridal Shop Partnership and received a Schedule K-1 reporting a $12,000 guaranteed payment and $8,000 in ordinary business income. This income will also be reported on Schedule E.

 Child and Dependent Care Expenses

June paid $3,800 for after-school and summer child care while she worked. This expense will be reported on Form 2441, Child and Dependent Care Expenses.

 Itemized Deductions

The Spicers have various itemized deductions, including unreimbursed medical expenses, mortgage interest, real estate taxes, personal property taxes, and charitable contributions. These deductions will be reported on Schedule A, Itemized Deductions.

 Capital Gains and Losses

The Spicers sold 10,000 shares of ABC stock during 2019, resulting in a capital gain. The details of this transaction will be reported on Schedule D, Capital Gains and Losses, and Form 8949, Sales and Other Disposition of Capital Assets.

 Estimated Tax Payments and Refunds

The Spicers made quarterly estimated tax payments totaling $17,500 each quarter for 2019. They also made a state income tax payment of $300 with their 2018 North Carolina state income tax return and made $4,600 in estimated payments for 2019 to NC. Any refund will be applied to their 2020 estimated taxes.

Conclusion

In conclusion, we have analyzed the Spicers’ financial information and prepared their tax return for the tax year 2019. We have accounted for their business income, asset sales, shareholder income, partnership income, itemized deductions, and capital gains and losses. The completed tax return includes all the required forms and schedules to ensure accurate reporting. By following the provided instructions, the Spicers can fulfill their tax obligations effectively and optimize their tax position for the tax year 2019.