Question

Tony and Jeannie Nelson are married and file a joint return. They have four children whose ages are: 12,15,19 & 23. The three youngest live at home with their parents and qualify as their dependents. The oldest Roger got married on 5/5 2019 and lives with his wife, Jane. The 19-year old Tabitha is studying Fine Arts at Savannah College of Art & Design. During the summer she helps her mother put together the art exhibits. They provide you with the following information regarding their 2019 upcoming tax return:

1) Tony Nelson is an aerospace engineer he runs an engineering firm, Nelson Engineering (NE), as a sole proprietorship since 2010

. a) NE has very lucrative contracts with numerous aerospace companies and during 2019 it earned $702,000.

b) NE rents an office downtown where they meet with clients and conducts business. The rent includes all utilities. NE paid $38,000 in rent expense in 2019. In December 2019 the landlord offered to maintain the same yearly rent cost and Tony could receive an additional month's rent for free if he prepaid his 2020 year rent in advance. Tony agreed and paid an additional $38,000 on December 1, 2019 to cover January 2020 through January 2021 rent.

c) NE obtained a business loan from SunTrust Bank and paid $2,400 in prepaid interest for June 1, 2019 through May 30, 2020.

d) NE has a few employees, including an electrical engineer, a part-time engineering intern and an office manager. The combined wages for these employees is $196,000. Payroll taxes including for these employees is $15,000.

e) Tony took different business clients to see several home Miami Heat games followed by dinners at nearby restaurants where business was discussed. The meals were not considered lavish. The total cost for the Heat tickets and accompanying meals were $1,200 and $800, respectively.

f) In March 2019, Tony flew to a two-day engineering convention held in Phoenix, AZ requiring a two-night hotel stay. While there, Tony noted that the convention dress code was formal when he thought it would be casual. Tony immediately purchased a business suit for $300 (not considered lavish) at a nearby department store. All food costs were covered by the convention organizers. Other trip costs that Tony paid were airplane ticket $400 and hotel lodgings cost $200/night.

g) The depreciation for the year on the fixed assets owned by NE are estimated to total $3,400. Exam 2 – Take Home 2 h) All of NE’s business transactions are properly documented and supported by receipts/invoices. In addition to deductible portion of the items listed above the business will have an additional $4,400 of deductible other expenses.

Answer 1

	Revenues		702,000.00	Remark / Basisi
Less:	Office Rent	38,000.00
Less:	Interest	1,400.00		2400/12*7
Less:	Wages for employees	196,000.00
Less:	Payroll tax for employees	15,000.00
Less:	Deduction for meal with Client	400.00		800*50%
Less:	Conference expenses	800.00		400+200*2
Less:	Depreciation	3,400.00
Less:	Other deductible expenses	4,400.00
	Total Expenses		259,400.00
	Net Income		442,600.00
Less:	2019 Standard deduction for married filing jointly		24,400.00
	Adjusted Gross Income		418,200.00
	Tax due		96,757.00	19400*10%+(78950-19400)*12%+(168400-78950)*22%+(321450-168400)*24%+(408200-321450)*32%+(418200-408200)*35%

Note :

a) No deduction allowed for taking client to sporting event or concert. While for meals 50% deduction is allowed when meal expense is separately charged from entry to event

b) Pursuant to US court ruling, expense on professional or business attire is not allowable

c) It is assumed business follows accrual principles & hence the prepaid expense is expense of 2020 and onward hence no deduction for that needs to be considered