Question

Janice Morgan, age 24, is single and has no dependents. Janice works as an employee from Worldwide Publishing and also as a freelance writer. In January 2019, Janice opened her own office located at 2751 Waldham Road, Pleasant Hill, NM 88135. She called her freelance writing business Writers Anonymous (self employed). Both Writers Anonymous and Janice operate on the cash basis. She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her Social Security number is 123-45-6789.

Self Employed Information: Income from sale of articles 75,000

Rent 13,500
Utilities 7,900

Supplies 1,800
Insurance (business liability) 5,000
Travel (assume fully deductible) 2,300
Meals (while on business travel) 600
Meals (while meeting with clients) 600

Country Club (Used to entertain clients) 4,000

Client entertainment expenses 1,000

Personal items:
Wages from Worldwide Publishing 110,000
Interest from checking account from First Bank 4,000

Home mortgage interest paid to First Bank 10,000

(Secured by principal residence, acquisition debt)

Home Equity Line of Credit 3,000

(Secured by principal residence, used to pay off credit cards)

Property taxes on personal residence 4,000

Charitable contributions 10,700
Federal income tax withholding 26,000

State income tax withheld 8,500

During the year, Janice invested $10,000 (tax basis and at-risk basis) into XYZ limited partnership (a passive investment). Her share of the limited partnership income for the year was $6,000, and Janice received a $5,000 distribution from XYZ limited partnership.

During the year, Janice also invested $6,000 (tax basis and at-risk basis) into ABC limited partnership (a passive investment). Her share of the limited partnership loss for the year was $7,000, and Janice received a $1,500 distribution from ABC limited partnership.

In 2012 Janice started DEF Corporation (a small private C corporation) by contributing $40,000. She was the only owner. During the year Janice sold her complete investment for $30,000.

Additionally, Janice had:

1. Janice made a $6,000 contribution to her traditional IRA account. Her employer, Worldwide publishing, offers a 401k that Janice contributes to.

2. Sale of LMN publically traded stock on 8/15/2019 for $11,000 (originally purchased for $4,000 on 1/15/2015)

3. Sale of QRS publically traded stock on 10/15/2019 for $2,000 (originally purchased for $6,000 on 12/15/2018)

4. Sale of a boat on 5/15/2019 for $10,000 used for personal recreation (originally purchased for $20,000 on 6/15/2014)

5. Janice inherited publically traded stock worth $30,000 from a deceased uncle on September 30, 2019

6. Immediately after receiving this stock, Janice sold it for $30,000. This stock was
   originally purchased by his uncle on January 15 , 2016 for $23,000

Prepare the 2019 Federal income tax return for Janice Morgan.

Please submit the following forms:
(1) Cover page with your name (2) 1040, (3) Schedule 1, (4) Schedule 2, (5) Schedule A, (6) Schedule C page 1, (7) explanation (including calculation) for each line item on each form and schedule. This explanation must include loss carryforwards and ending basis for limited partnerships. Additionally, a discussion of each of the above items must be made in the explanations (i.e. items 1 through 6). Normally, this tax return would require additional forms including schedule B, D, E, SE and form 4797, and 6198, etc. However, I do not require them. Instead, the required calculations/explanations will be sufficient.

Schedule 1 Hints:

1. The Net income from the Schedule C (Writers Anonymous) will go on Schedule 1, line 3

2. Schedule 1 line 5 will include the net income/loss from the limited partnerships. These

   are NOT subject to Self-Employment tax as they are passive investments

3. There should be something in line 14 of schedule 1.

4. Schedule 2, line 4 is for the self-employment tax. SE tax is separate from and in addition

   to the tax calculated on form 1040 line 12.

5. The taxpayer has a refund. Form 1040 line 20.

6. The FICA cap for 2019 is 132,900

7. Assume that Janice has adequate health insurance.

8. Do not forget the Qualified Business Income Deduction (new in 2018), line 10 form

   1040. Assume Janice qualifies for this deduction. In Chapter 15, we can discuss the rules in more detail. Assume that the QBID is a deduction equal to 20% of Qualified Business Income (QBI). With QBI being equal to net total of Schedule 1 line 3, 5, and 14. That is line 3 + line 5 – line 14.

9. Net capital gains is positive, and goes on form 1040 line 6.

10. The deductions for traditional IRA is on Schedule 1 line 19.

11. Don’t forget to check the box for filing status (single, MFJ, HOH, or MFS).

Answer 1

sol :

Statement showing Federal Income Tax Return of Ms Janice Morgan for 2020

Particulars	Amt $	Amt $	Explanation if any
Income from sale of articles	75000
Total BusinessIncome		75000
Less Expenses :
Rent of Office	13500
Utilities for Office	7900
Supplies for Office	1800
Insurance	5000
Travel	2300		Assumed fully deductible as per given info
Meals while on business travel	600		Business exps
Meals while meeting with clients	600		Business exps
Country Club	4000		Entertainment exps for business clients
QBID at 20% of $75000	15000
Entertainment Exps	1000	51700	Business exps
Net Income from Self Emoloyment		23300
Self Employment Tax @ 15.3%		3565
Wages from Worldwide Pub	110000
Interest from First Bank	4000	114000
Less Expenses :
Home Mortgage Interest	10000		Qualified home
Home Equity Line of Credit $3000	0		Credit card payments being personal expense not allowed
Property tax	4000		Qualified home
Charity	10700
Fed Income Tax withholding	26000
State IT withhold	8500
IRA contribution	6000	65200
Net Taxable Income		48800
Income Tax 10%	0 -9700	970
12%	9700-39475	3573
22%	39475-48800	2052	Total Tax 970+3573+2052=$ 6595
Passive Income	6000
Passive loss	7000
Passive loss [40000-30000]	10000	11000	7000+10000-6000=11000 loss tobe carried forward as passive loss tobe set off from passive income only as per IRS rules
Capital Gain[11000-4000]		7000
Capital Gain Tax at 15%		1050