Alice J. and Bruce M. Jones are married taxpayers who file a joint return. Alice’s birthday is September 21, 1961, and Bruce’s is June 27, 1960. Bruce is the office manager for Ames Dental Clinic. Alice is the CPA at Lehman, York & Hunter CPA, LP.
The Jones provide over half of the support of their two children, Cynthia (born January 25, 1994, Social Security number (017-44-9126) and John (born February 7, 1995, Social Security number (017-27-4148), who live with them. Both children are full-time students and live with the Jones except when they are away at college. Cynthia is in her third year of college, and earned $8,750 from a summer internship in 2016, and John is in his first year of college and he earned $6,500 from a part-time job in 2016. In 2016, the Jones’ paid $4,500 for Cynthia’s college tuition and $7,500 for John’s college tuition. The Jones also provided all the support for their 26-year-old son Ryan who recently graduated from law school but cannot find employment. Ryan lives in DC.
According to Mr. Jones on July 01, 2016, he and his wife exchanged their two-family house in Westchester County (378 Pinebrook Blvd, New Rochelle, NY), which they rented entirely from January 01, 2005 to July 01, 2016, for a four family rental property located at 581 Atlantic Avenue, Brooklyn, NY. At the time of the exchange, the FMV of the two-family house was $900,000, and the adjusted basis was $275,000. The four-family house had an adjusted basis of $600,000 and a FMV of $800,000. The two-family home was subject to a $100,000 mortgage, which the buyer assumed. The Jones also owned and rented a two-unit commercial retail building located at 1560 Avenue A, New York NY, which they purchased on December 01, 2015 and placed in service on January 01, 2016. Information for all three of the rental properties is listed below.
In March 2016, Bruce decided to start his own business; a retail bicycle shop to be located in NYC near Central Park called “Bruce’s Bikes.” On April 20, 2016, Bruce signed a 10-year lease at a monthly rental rate of $10,000, effective May 01, 2016, for retail space on 110th Street and CPW. The lease provided that Bruce was responsible for the costs of improving the retail space for its intended use. The terms of the lease also provided that the first three months were rent-free so that Bruce could complete the construction needed to operate a retail bike shop. When Bruce executed the lease he paid the landlord $30,000 as a security deposit. On May 01, 2016, Bruce paid a contractor $225,000 to provide all construction work relating to the build-out, which included electrical, plumbing, and carpentry. On June 01, 2016, Bruce purchased the following assets for the business:
Equipment $ 35,000
Furniture & Fixtures $ 10,000
Computer Equipment $ 12,500
Although Bruce planned on a grand opening on July 01, 2016, the construction was not completed until July 21, 2016, causing Bruce to delay the grand opening until August 01, 2016.
On August 01, 2016, Bruce purchased a new truck for $32,500, which weighs 9,500 pounds, to be used 100% in the business for pickups and deliveries.
Bruce planned to finance the new business with the $125,000 inheritance he received on 03/01/2016, from his late father’s estate. Bruce also planned to use $50,000 of savings he had invested with Madoff Investment Securities (MIS) but learned on 3/29/2016, that his entire savings was lost as a result of a massive ponzi scheme. In order to come up with the additional funds needed to finance the construction, equipment, and inventory, Bruce’s grandfather loaned him $75,000 on 05/15/2016. On December 25, 2016, Bruce received a letter from his grandfather stating that he forgives the entire $75,000 loan effectively immediately.
For 2016, the bike shop generated the following revenues and incurred the following expenses:
Sales, Rental, & Service Revenue $ 255,000.00
Inventory purchased 125,000.00
Inventory on hand at December 31, 2016 60,000.00
Rent from (August 01 – December 31, 2016) 50,000.00
Promotional expense 5,000.00
Travel to Trade Shows 1,000.00
Meals & Entertainment 1,100.00
Postage and Delivery 1,000.00
Attorney fees 2,500.00
Pre-startup investigative expense 53,000.00
Other relevant information:
• Bruce has decided that he wants to minimize his tax as much as legally possible and has requested your assistance in preparing his 2016 Federal income tax return.
• Bruce has asked you to depreciate as much of the capital expenditures as legally possible, but he does not want to use IRC Sec 179 expense or first year bonus depreciation.
• The company has adopted the accrue method of accounting for inventory and cash method for all other purposes.
• On March 15, 2016, York Technology Inc. filed for bankruptcy resulting in a total loss for its’ only two shareholders. Bruce and a friend founded the company on May 15, 2013, with each owning 50% of the outstanding shares. Both Bruce and his friend each initially contributed $25,000 in exchange for their 50% interest in the company.
• Bruce and Alice earned $2,500.00 interest income from savings in 2016.
• Bruce earned $3,000 in interest income from US Treasury Bonds in 2016.
• On October 18, 2016, Bruce received $1,500 of dividend income from JP Morgan Chase Stock, which he purchased on September 01, 2016.
• On November 15, 2016, Bruce sold some of his JP Morgan Stock for $48,000, which he purchased on July 01, 2015 for $38,000.
• Bruce was named as the sole beneficiary on his late mother’s life insurance policy, and on December 31, 2016, Bruce received a check for $100,000 from the insurance company, which he held and deposited on January 02, 2017.
• On June 13, 2016, Bruce sold 1,000 shares Citibank Stock for $25,000. He purchased the stock on May 17, 2015 for $24,000.
• On November 04, 2016, Alice received a settlement award for injuries sustained in 2015. The settlement award included the following amounts:
o Reimbursements of medical expenses which were not deducted on previous tax returns $10,000
o Loss income $15,000
o Punitive damages $30,000
o Compensatory relating to a broken leg $25,000
• On October 15, 2016, the truck purchased by Bruce and used exclusively for the business was totally destroyed in an auto accident. Bruce sued the driver of the automobile and received a damage award in December 2016 of $30,000. Bruce used the money to invest in the stock market. Since 2016 was the year of acquisition, no depreciation on the truck was previously taken.
• On November 03, 2016, Bruce determined that a personal loan to a friend was uncollectible because his friend had recently and unexpectedly died. The amount of the loan was $4,200.
• Bruce collected $8,000.00 per month for three months (October – December) in rental income on 581 Atlantic Avenue. For 2016 Bruce paid mortgage interest of $5,000 and real estate taxes of $5,750.00. Bruce paid no other expenses in 2016 for 581 Atlantic Avenue. The property was placed in service on October 01, 2016.
• Other Rental Income and Expenses included:
Pinebrook Property Avenue A Property
Rental Income $35,000.00 $72,000.00
Mortgage Interest Expense $10,000.00 $12,000.00
Real Estate Taxes $6,000.00 $9,000.00
Utilities $2,000.00 $3,000.00
Insurance $1,000.00 $2,000.00
Water & Sewer $1,200.00 $1,500.00
Place in Service 01/01/2006 01/01/2016
Purchase Price $449,000.00 805,000.00
• Bruce and Alice 2016 W-2 statement shows the following wages and withholdings:
1) Wages $65,000 $30,000
2) FWT 12,500 8,000
3) SWT 7,000 5,000
4) CWT 6,000 5,000
• The Jones also paid the following personal expenses in 2016:
a. Contributions to Museum of Modern Art:
i. Cash $55,000
ii. JP Morgan Chase Stock -FMV $60,000 (Long Term) -A/B $45,000
b. Real Estate Taxes on primary residence $14,000
c. Mortgage Interest on primary residence $20,000
d. Unreimbursed medical expenses $17,000
e. Student loan Interest $3,000
Instructions: Make realistic assumptions about any missing or inconsistent data and state your assumptions on a separate typed schedule.
i. Prepare form 1040, including all schedules and forms for 2016. (Do not prepare NYS or NYC tax returns).
ii. All work must be typed onto approved IRS forms (no hand written forms will be accepted).
iii. Read chapter 8 to determine how to handle depreciation/amortization and IRC section 179.
iv. Only hand in the appropriate forms and schedules.