Chapter 16, Problem 51CP

Ashley Panda lives at 1310 Meadow Lane, Wayne, OH 43466, and her Social Security number is 123-45-6777. Ashley is single and has a 20-year-old son, Bill. His Social Security number is 111-11-1112. Bill lives with Ashley, and she fully supports him. Bill spent 2018 traveling in Europe and was not a college student. He had gross income of $4,655 in 2018. Bill paid $4,000 of lodging expenses that Ashley reimbursed after they were fully documented. Ashley paid the $4,000 to Bill using a check from her sole proprietorship. That amount is not included in the items listed below. Ashley had substantial health problems during 2018, and many of her expenses were not reimbursed by her health insurance.

Ashley owns Panda Enterprises, LLC (98-7654321), a data processing service that she operates as a sole proprietorship. Her business is located at 456 Hill Street, Wayne, OH 43466. The business activity code is 514210. Her 2018 Form 1040, Schedule C for Panda Enterprises shows revenues of $315,000, office expenses of $66,759, employee salary of $63,000, employee payroll taxes of $4,820, business meal expenses (before the 50% reduction) of $22,000, and rent expense of $34,000. The rent expense includes payments related to renting an office ($30,000) and payments related to renting various equipment ($4,000). There is no depreciation because all depreciable equipment owned has been fully depreciated in previous years. No fringe benefits are provided to the employee. Ashley personally purchases health insurance on herself and Bill. The premiums are $23,000 per year.

Ashley has an extensive stock portfolio and has prepared the following analysis:

Note: Ashley received a Form 1099–B from her stockbroker that included the adjusted basis and sales proceeds for each of her stock transactions. The per-share cost includes commissions, and the per-share selling price is net of commissions. Also, the dividends are the actual dividends received in 2018, and these are both ordinary dividends and qualified dividends.

Ashley had $800 of interest income from State of Ohio bonds and $600 of interest income on her Wayne Savings Bank account. She paid $25,000 of alimony to her former husband. His Social Security number is 123-45-6788.

Ashley itemizes her deductions and provides the following information, which may be relevant to her return:

Ashley made a $26,000 estimated Federal income tax payment, does not want any of her taxes to finance presidential elections, has no foreign bank accounts or trusts, and wants any refund to be applied against her 2019 taxes.

Compute Ashley’s net tax payable or refund due for 2018. If you use tax forms for your computations, you will need Form 1040 and its Schedules 1, 4, 5, A, C, D, and SE and Form 8949. Ashley qualifies for the § 199A deduction for qualified business income. Be sure to include that in your calculations. Suggested software: ProConnect Tax Online.

To determine

Calculate the net tax payable or refund for person A.

Explanation of Solution

Calculate the net tax payable or refund.

Particulars	Amount($)	Amount($)
Schedule C income (Note 1)		$135,421
Interest income (Note 2)		600
Dividend income (Note 3)		145
Net long-term capital gain (Note 4)		2,925
Alimony received		–0–
		$139,091
Deductions for adjusted gross income:
50% of self-employment tax (Note 5)	$ 9,567
100% of health insurance premiums (Note 6)	23,000
Alimony paid	25,000
		(57,567)
Adjusted gross income		$ 81,524
Less: Itemized deduction
Medical expenses (Note 7)	$ 5,672
State income tax (Note 11)	1,830
Real estate tax	3,230
Home mortgage interest	8,137
Charitable contributions (Note 8)	940	(19,809)
Less: Deduction for qualified business income (Note 12)		(11,729)
Taxable income		$ 49,986
Tax on taxable income (Note 10)		$ 6,724
Self-employment tax (Note 5)		19,134
Child or dependent tax credit (Note 9)		–0–
Estimated tax payments		(26,000)
Net tax payable (or refund due) for 2018		($ 142)

Table (1)

Notes:

1. 1) Calculate the schedule C net income:

Particulars	Amount($)
Revenue	$315,000
Less:
Office expense	$66,759
Employee salaries	$63,000
Employee payroll taxes	$4,820
Business meal expense (after 50% reduction)	$11,000
Rent expense	$34,000
Schedule C net income	$135,421

Table (2)

1. 2) Interest income ($800) from the bond is excludible from gross income.
2. 3) Calculate the dividend income:

Particulars	Amount($)
B	$30
G	$70
P	$45
Dividend income	$145

Table (3)

1. 4) There is a $495 short-term capital loss and a $3,420 long-term capital gain. These net to a $2,925 long-term capital gain. All of this gain is 0%/15%/20% gain.

   Short-term: B$\left[\left(\text{10 shares × \$74}\right)\text{ - }\left(\text{10 shares × \$80}\right)\text{ = \$60 loss}\right]$  + P $\left[\left(\text{15 shares × \$33}\right)\text{ - }\left(\text{15 shares × \$62}\right)\text{ = \$435 loss}\right]$  = $495 short-term loss.

       Long-term: G $\text{[}\left(\text{30 shares × \$157}\right)\text{ - (30 shares ×\$43)] = \$3,420}$ long-term gain.

1. 5) The self-employment tax is $19,134$\text{[}\left(\text{\$135,421 Schedule C net income × }\text{.9235 × }\text{.153}\right)$ ; net earnings from self-employment $\left(\$135,421\times .9235=\$125,061\right)$ are less than the $128,400 cap for the combined Social Security and Medicare tax rate of 15.3%]. The deduction for AGI associated with the self-employment tax is $9,567 $\left(\$19,134\times 50\%\right).$
2. 6) The AGI deduction for Ashley’s health insurance deduction is $23,000 ($23,000 premiums × 100%). Ashley can deduct the medical insurance related to bill, even though he is not a dependent (see Note 9). The gross income test is waived for medical expense purposes.
3. 7) Calculate the deductible medical expense.

Particulars	Amount($)
Medical expense	$11,786
Less: 7.5% of AGI$\left(7.5\%\times \$81,524\right)$	(6,114)
Deductible medical expense	$5,672

Table (4)

1. 8) The $459 of cash provided directly to homeless persons is not deductible because it was not made to a charitable organization.
2. 9) B does not qualify as A dependent because he is not her qualifying child. He is over age 18 and is not a full-time student. Thus, he fails the age test for a qualifying child. He is a potential qualifying relative, but fails the $4,150 gross income test because his gross income was $4,655. Even though B lives with A and is fully supported by her, he must qualify as her dependent for A to have head-of-household filing status. As B is not A dependent, A is not entitled to a dependent tax credit for B.
3. 10) Ashley qualifies for single filing status. Of the $49,986 of taxable income, $3,070 ($2,925 of net long-term capital gain and the $145 of qualifying dividend income) is taxed at 15% because other taxable income exceeds $38,600, the point at which Ashley is no longer eligible for the 0% alternative tax.

Calculate the tax savings from alternative computation.

Particulars	Amount($)
Tax liability on $46,916 ($49,986 − $3,070) other taxable income from the 2018 Tax Tables (Single)	$ 6,263
Tax liability on LTCG and qualified dividend income ($3,070 × 15%)	461
Total tax liability using the alternative tax computation	$ 6,724
Total tax liability on $49,986 taxable income [from the 2018 Tax Tables (Single)]	(6,934)
Tax savings from alternative tax computation	$ 210

Table (5)

1. 11) The state income tax of $1,830 is fully deductible (and it is greater than the $619 state and local sales tax deduction). The combined state income tax and real property tax deduction cannot exceed $10,000. $1,830 state income tax + $3,230 real property tax = $5,060.
2. 12) Calculate the A qualified business income.

Particulars	Amount($)
Schedule C net income	$135,421
Less:
Self employment tax deduction	$9,567
Self employment health insurance	$23,000
Qualified business income	$102,854

Table (6)

Her § 199A deduction for qualified business income is $11,729, the lesser of:

1. a) 20% of A $102,854 qualified business income ($102,854 × 20% = $20,571),
2. b) 20% of A taxable income before the deduction for qualified business income ($61,715; $81,524 AGI − $19,809 itemized deductions) minus the net capital gain and qualified dividend income $\left(\$3,070\right).\$61,715-\$3,070=\$58,645;\$58,645\times 20\%=\$11,729.$