Tax Return Problem 6 -Individual (after Chapter 14)
Instructions:
Please complete the 2018 federal income tax return for Carlos and Maria Gomez. Ignore the requirement to attach the form(s) W-2 to the front page of the Form 1040. If required information is missing, use reasonable assumptions to fill in the gaps.
Carlos and Maria Gomez live in Lubbock, Texas. The Gomezes have two children: Luis (age 14) and Amanda (age 12). Both children qualify as federal income tax dependents of Carlos and Maria. The Gomezes provided the following information:
· Luis’s social security number is XXXXXXXXXX
· Amanda’s social security number is XXXXXXXXXX
· The Gomez’s current mailing address is 543 West La Patera, Lubbock, Texas 79401
Carlos is a civil engineer. For the first two months of the year, he was employed by West Texas Engineering (WTE). However, he resigned his position with WTE to start his own engineering firm called Gomez Professional Engineers (GPE). GPE is conducted as a sole proprietorship with Carlos being the sole owner. GPE started business on January 1, 2018 and is located at 1515 West Industrial Road Lubbock, Texas XXXXXXXXXXEIN XXXXXXXXXXMaria is self-employed as a part-time bookkeeper.
Carlos provided the following W-2 from WTE.
Carlos reported the following information for GPE’s business activities (GPE uses the cash method of accounting):
Revenues:
Credit card receipts $352,000
Cash receipts 648,000
Total revenue $1,000,000
Expenses:
Advertising $5,450
Insurance-professional 15,750
Office building rent 62,000
Equipment leases 6,050
Travel 14,200
Meals and entertainment 2,980
Wages 498,725
Taxes and licenses 44,875
Employee health insurance 42,000
Employee benefit programs 14,500
Utilities 37,425
Office supplies 18,900
Legal and professional fees 15,550
Repairs and maintenance 10,000
Total Expenses $ 788,400
GPE purchased and placed in service the following fixed assets in 2018:
Item | Date Purchased | Amount |
Laptop computers | March 1 | $20,500 |
Printers | June 1 | $6,500 |
Office furniture | October 10 | $19,000 |
GPE does not want to claim any Section 179 expensing on any of these assets, but would like to take bonus depreciation, if available, on all the assets.
Carlos worked part-time on GPE business activities until he finished his employment with WTE early in the year. Carlos worked full-time on GPE business activities for the rest of the year.
GPE filed Forms 1099 for payments made to contractors when required to do so. His business is not a specified service business for purposes of the Qualified Business Income Deduction.
Carlos and Maria paid $22,000 for health insurance for his family (for the time he was working at GPE). This amount is not included in the GPE expenses listed above. Neither Carlos nor Maria had access to employer-provided health insurance during the year while they were paying the premiums for this policy. The entire Gomez family was covered by minimum essential health insurance during each month in 2018.
In need of cash, in February, Carlos withdrew $20,000 from his 401(k) account. He received the following Form 1099-R:
In addition, Carlos has established a SEP-IRA (self-employed retirement plan) using his business earnings from GPE. He would like to make the maximum deductible contribution to this plan for 2018. Assume that Carlos will file his tax return by April 15, 2019 and Carlos will contribute to his SEP IRA the full amount allowable by the date he files the return.
Maria received the following Form 1099-MISC from her bookkeeping activities for her largest client:
Maria received an additional $4,000 from clients who were not required to issue Maria a Form 1099-MISC.
During the year, Maria paid the following business-related expenses:
· Paper $365
· Toner $450
· Meals $580
Maria purchased and placed in service the following fixed assets for her business in 2018:
Item | Date Purchased | Amount |
New laptop computers | March 1 | $1,850 |
New laser printers | March 1 | $ 840 |
New computer software | April 2 | $ 400 |
Maria would like to recover the cost of these business assets as soon as possible through Section 179 expensing.
Maria owns a 2015 Acura. She started to use the Acura for her business on January 1, 2017. She drove 2,050 business miles during 2018 (she has documentation to verify). She drove the vehicle for a total of 10,000 miles during the year (7,950 personal miles). She also has access to another vehicle that she can use for personal purposes.
Maria started her bookkeeping service in 2015 and she uses the cash method of accounting. She is the only person performing services in the business. She did not make any payments that would have required her to file a Form 1099.
Maria’s business is a specified service business for purposes of the Qualified Business Income Deduction.
On January 3, 2018, the Gomezes sold their prior principal residence. They purchased that residence on January 31, 2013 and had lived there full-time until they sold it this year. They originally purchased the home for $310,000. The Gomez family has never claimed any tax depreciation (nor were they allowed to) on the home. The sales price of the home was $405,000. The home is located at 45 East Entrada Trail, Lubbock Texas 79401.
The Gomez family purchased (and moved into) their current residence at 543 West La Patera, Lubbock, Texas 79401 in late January of 2018. The La Patera residence is 2,000 square feet. The purchase price of the residence was $500,000 (building value was $350,000 and the lot value was $150,000). The mortgage on the purchase was $300,000. Expenses relating to the La Patera residence were as follows:
Property taxes $10,750
Utilities $3,000
Insurance $2,000
Maria utilized a room in the La Patera home for her bookkeeping business. The room was used exclusively on a regular basis as Maria’s principal place of business. Maria wants to maximize her home office deduction related to this use. The room she uses is 200 square feet.
In the summer of 2018, the Gomez family rented out the La Patera residence to another family. The La Patera residence is situated along the ninth green of the famous Lubbock Country Club (LCC). The LCC hosted the U.S. Senior Open golf tournament this year. The Gomez family rented their residence to a golfer participating in the event for $1,200 per day for 10 days (the home office remained locked and off limits to the renters, however). During this time the Gomez family went on vacation touring the west coast of the United States. The Gomez family incurred $1,500 of cleaning and other expenses associated with the 10-day rental period.
Maria owns 20 acres of vacant ground within the city limits of Lubbock. Maria acquired the land as a gift from her parents on July 1, 2011. The land was valued at $4,000 per acre on the date of the gift. Her parents purchased the land in 1995 at a price of $500 per acre. Maria has held this land as an investment since she received it. On September 15, 2018 Maria exchanged this land with a development company that plans to develop the 20 acres (Maria and the development company are not related parties). In exchange for the 20 acres, Maria received a condominium in Lubbock that was valued at $160,000. The building was valued at $120,000 and the land was valued at $40,000. The condominium is located at 990 El Mar, Unit A, Lubbock Texas 79401.
Maria first rented out the El Mar unit on October 1, 2018. The revenue and expenses from the rental unit from October through December are as follows:
Rental revenue $3,600
HOA fee expense $300
Property taxes paid $225
Utilities expense $350
No Form(s) 1099 were required to be filed for this rental. Maria is not considered an active participant and the rental activity does not produce Qualified Business Income.
The Gomezes also received the following Forms 1099 for the year:
The Grand Junction City bond was issued in 2014.
The Lubbock Texas School District bond was issued in 2014.
The Gomezes did not own, control, or manage any foreign bank accounts, nor were they grantors or beneficiaries of a foreign trust during the tax year.
The Gomezes paid the following expenses during the year (in addition to the personal residence-related items listed above):
Dentist (unreimbursed by insurance) $ 500
Doctors (unreimbursed by insurance) $1,750
Prescriptions (unreimbursed by insurance) $ 425
Personal behicle property tax based upon value $ 1,950
Contribution to qualified charities $9,500
The Gomezes did not pay any state income taxes during the year.
Other Information
The Gomezes made timely federal estimated tax payments for 2018 as follows:
April 15, 2018 $7,000
June 15, 2018 $7,000
September 15, 2018 $7,000
January 15, 2019 $7,000
The Gomezes want to contribute to the Presidential Election Campaign Fund. The Gomezes would like to receive a refund (if any) of tax they may have overpaid for the year. Their preferred method of receiving the refund is by check.