Carrie Morgan

The forms can be located through http://www.irs.gov/. 1) Form
1040 2) Form 1040 Schedule A 3) Form 1040 Schedule B 4) Form 1040 Schedule C 5)
Form 1040 Schedule D 6) Form 1040 Schedule SE 7) Form 8949 8) Form 4562 Carrie
A. Morgan, age 45, is single and lives with her dependent mother atXXXXX
Allentown, PA 18105. Her social security number isNNN-NN-NNNN 1. Carrie is a
licensed hairstylist and operates her own business. Located atXXXXX Allentown,
PA 18105, the business is conducted under the name of “Carrie’s Coiffures.”
Carrie’s business activity code is 812112. In addition to 10 workstations
(i.e., stylist chairs) and a small reception area, the shop has display and
storage areas for the products Carrie sells (see item 2 below). During the
year, Carrie leased nine of the stations to other hairstylists. As is common
practice in similar businesses in the area, the other stylists are considered
to be self-employed. In fact, the IRS sanctioned the self-employment
classification for the stylists in an audit of one of Carrie’s prior tax
returns. Each stylist pays Carrie a fixed rent for the use of a workstation,
resulting in $68,000 of rents received during 2012. From her own station,
Carrie earned $44,000 (including tips of $12,000) for the styling services she
provided to her own clients. 2. Carrie’s Coiffures is the local distributor for
several beauty products (e.g., conditioners, shampoos) that cannot be purchased
anywhere else. Carrie buys these items from the manufacturers and sells them to
regular patrons, walk-in customers, and other beauticians (including those who
lease chairs from her). Carrie’s Coiffures is also known for the selection and
quality of its hairpieces (i.e., wigs, toupees). Through the shop, Carrie made
the following sales during the year: Hairpieces and wigs $69,000 Beauty
products 48,000 3. Although Carrie operates her business on a cash basis, she
maintains inventory accounts for the items she sells as required by law.
Relevant information about the inventories (based on lower of cost or market)
is summarized below. 4. 12/31/11 12/31/12 Hairpieces and wigs $10,700 $12,600
Beauty products 11,400 9,900 5. Carrie’s purchases for 2012 were $30,500 of
hairpieces and wigs and $26,100 of beauty products. 6. Carrie’s Coiffures had
the following operating expenses for 2012: Utilities (i.e., gas, electric,
telephone) $12,900 Ad valorem property taxes: On realty (e.g., shop building
and land) $4,200 On personalty (e.g., equipment, inventory) 1,800 6,000 Styling
supplies (e.g., rinses, dyes, gels, hair spray) 5,700 Fire and casualty
insurance 4,100 Liability insurance 4,000 Accounting services 3,800 Janitorial
services 2,400 Sewer service, garbage pickup $ 2,300 Water 2,200 Occupation
licenses (city and state) 1,500 Waiting room supplies (e.g., magazines, coffee)
1,300 7. As Carrie prefers to avoid employer-employee arrangements and the
payroll tax complexities, she retains outside agencies to handle her accounting
and janitorial needs. 8. In early 2012, Carrie decided to renovate the waiting
room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps,
coffee bar, and other furnishings. Carrie follows a policy of claiming as much
depreciation as soon as possible. The old furnishings were thrown away or given
to customers. For tax purposes, the old furnishings had a zero basis. 9.
Carrie’s Coiffures is located in a building Carrie had constructed atXXXXXin
March 1998. The shop was built for a cost of $300,000 on a lot she purchased
earlier for $35,000. Except for a down payment from savings, the cost was
financed by a 20- year mortgage. For tax purposes, MACRS depreciation is
claimed on the building. During 2012, the following expenses were attributable
to the property: Repainting (both exterior and interior) $8,000 Repairs
(plumbing and electrical) 1,900 10. In May (after her accident settlement discussed
in item 11 below), Carrie paid the balance due on the business mortgage. To do
so, she incurred a prepayment penalty of $4,400. Prior to paying it off, she
paid regular interest on the mortgage in 2012 of $6,000. 11. In February 2012,
Carrie’s Coiffures was cited by the city for improper disposal of certain waste
chemicals. Carrie questioned the propriety of the proposed fine of $2,000 and
retained an attorney to represent her at the hearing. By pleading nolo
contendere, the attorney was able to get the fine reduced to $500. Carrie paid
both the fine of $500 and the attorney’s fee of $600 in 2012.12. In August 2012, Carrie saw an ad in a trade publication
that attracted her attention. The owner of a well-respected styling salon in
Reading (PA) had died, and his estate was offering the business for sale.
Carrie traveled to Reading, spent several days looking over the business
((including books and financial results), and met with the executor. Carried treated the executor to dinner and a music
concert. Immediately after the concert, Carrie made an offer for the business, but the
executor rejected it. Her expenses in connection with this trip were as follows: Car rental $140 Entertainment of executor 280 Motel (August 6-7) 220 Meals 110 13. In March 2011, Joan Myers, one of Carrie’s best
stylists, left town to get away from a troublesome ex-husband. In order to help Joan establish a
business elsewhere, Carrie loaned her $7,000. Joan signed a note dated March 3, 2011,
that was payable in one year with 6% interest. On December 30, 2012, Carrie learned
that Joan had declared bankruptcy and was awaiting trial on felony theft charges.
Carrie never received payment from Joan, nor did she receive any interest on the
loan. 14. At Christmas, Carrie gave each of her 35 best customers
a large bottle of body lotion. Each bottle had a wholesale cost to Carrie of $12 but a
retail price of $24. Carrie also spent $3 to have each bottle gift wrapped. (Note: The lotion
was special order merchandise and was not part of the business’s inventory or
purchases for the year—see item 2 above.) She also gave each of the nine
stylists who leased chairs from her a basket of fruit that cost $30 (not including $5 delivery
cost). 15. In March 2012, the Pennsylvania Department of Revenue
audited Carrie’s state income tax returns for 2009 and 2010. She was assessed additional
state income tax of $340 for these years. Surprisingly, no interest was included in
the assessment. Carrie paid the back taxes promptly. 16. On a morning walk in November 2011, Carrie was injured
when she was sideswiped by a delivery truck. Carrie was hospitalized for several days,
and the driver of the truck was ticketed and charged with DUI. The owner of the truck, a
national parcel delivery service, was concerned that further adverse publicity might
result if the matter went to court. Consequently, the owner offered Carrie a settlement
if she would sign a release. Under the settlement, her medical expenses were paid and she
would receive a cash award of $200,000. The award specified that the entire
amount was for physical pain and suffering. Because she suffered no permanent injury as a
result of the mishap, she signed the release in April 2012 and received the $200,000
settlement. 17. In January 2012, Carrie was contacted by the state of
Pennsylvania regarding a tract of land she owned in York County. The state intended to convert
the property into a district headquarters, barracks, and training center for its
highway patrol. Carrie had inherited the property from her father when he died on
August 11, 2011. The property had a value of $140,000 on that date and had been purchased
by her father on March 3, 1980, for $30,000. On July 25, 2012, after considerable
negotiation and after the state threatened to initiate condemnation proceedings, she
sold the tract to the state for $158,000. Since Carrie is not comfortable with real
estate investments, she does not plan to reinvest any of the proceeds received in another
piece of realty. 18. When her father died in 2011, Carrie did not know that
he had an insurance policy on his life (maturity value of $50,000) in which she was named
as the beneficiary. When her mother told her about the policy in July 2012, Carrie
filed a claim with the carrier, Falcon Life Insurance Company. In August 2012, she received
a check from Falcon for $51,500 (including $1,500 interest). 19. Upon the advice of a client who is a respected broker,
Carrie purchased 1,000 shares of common stock in Grosbeak Exploration for $40,000 on March 4,
2012. In the months following her purchase, the share value of Grosbeak
plummeted. Disgusted with the unexpected erosion in the value of her investment, Carrie
sold the stock for $28,000 on December 23, 2012. 20. While on her way to work in 2011, Carrie was rear-ended
by a hit-and-run driver. The damage to her Lexus was covered by her insurance company,
General Casualty, except for the $1,000 deductible she was required to pay. In 2012,
the insurance company located the driver who caused the accident and was
reimbursed by his insurer. Consequently, Carrie received a $1,000 refund check from
General Casualty in May 2012 to reimburse her for her $1,000 deductible. 21. After her father’s death, Carrie’s mother (Mildred
Morgan, Social Security number NNN-NN-NNNN moved in with her. Mildred’s
persistent back trouble made it difficult for her to climb the stairs to the second-floor bedrooms in
Carrie’s house. So Carrie had an elevator installed in her personal residence at a cost of
$12,000 in January 2012. A qualified appraiser determined that the elevator increased
the value of the personal residence by $7,000. The appraisal cost $400. The operation
of the elevator during 2012 increased Carrie’s electric bill by $300. 22. As a favor to a long-time client who is a drama professor
at a local state university, Carrie spent a weekend as a stylist preparing hairdos for
the key actresses in the annual Theater Department fund-raising event. The
drama professor supplied all of the resources that Carrie needed to provide her services. Carrie
estimates that she would have charged $800 for the services she donated to this
charitable event. 23. In addition to the items already mentioned, Carrie had
the following receipts during 2012: Interest income— CD at Scranton First National Bank $900 City of Lancaster general purpose bonds 490 Money market account at Allentown State Bank 340 $1,730 Qualified dividends on stock investments— General Motors $470 AT&T common 380 850 Federal income tax refund (for tax year 2011) 791 Pennsylvania state income tax refund (for tax year 2011) 205
24. Expenditures for 2012, not previously noted, are
summarized below. Contribution to pension plan $10,000 Medical— Premiums on medical insurance $4,800 Dental bills 1,400 6,200 Property taxes on personal residence 3,800 Interest on home mortgage 3,200 Professional expenses— Subscriptions to trade journals $ 180 Dues to beautician groups 140 320 25. The $10,000 contribution to the pension plan is to a §
401(k) type of plan she established in 2011. Previously, she had contributed to an
H.R. 10 (Keogh) plan but found that the § 401(k) retirement arrangement provides more
flexibility and is less complex. The medical insurance policy covers Carrie and her
dependents and was issued in the name of the business (i.e., “Carrie’s
Coiffures”). It does not cover dental work or capital modifications to a residence (see item 16
above). 26. During 2012, Carrie made the following total estimated
tax payments with respect to her 2012 tax returns: Federal estimated income tax payments $20,800 Pennsylvania estimated income tax payments 2,400 Allentown City estimated income tax payments 800 RequirementsPrepare an income tax return (with appropriate schedules)
for Carrie for 2012. In doing this, use thefollowing guidelines:1) Make necessary assumptions for information not given in
the problem.2) Carrie has itemized deductions ever since she became a
homeowner many years ago.3) The sales tax option was not chosen in 2011, and Carrie
had no major purchases thatqualify for the sales tax deduction in 2012.4) Carrie has substantiation (e.g., records, receipts) to
support the transactions involved.5) If a refund results, Carrie wants it sent to her.6) Carrie is preparing her own return (i.e., no preparer is
involved).

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