Wade (SS# XXXXX) and Maddy (SS# XXXXX) Brown are married and file a joint income tax return. Their address isXXXXX Melrose, Florida. They have a six-year old child, Linda (SS# XXXXX) who is a full-time first-grader and they provide 100% of her support. Wade is employed as a steelworker, and Maddy operates a small, unincorporated tee-shirt printing business (EIN 59-1234567, Business Identification Code 541130). She rents a small office at 1313 MockingBird Lane, Lowell, Florida. Wade and Maddy come to your office to have their 2011 federal income tax return completed. They provide you with the following information:

1. Wade's W-2 showed gross income of $50,000, with $8,200 withheld for federal income tax, and $2,100 withheld for social security taxes (FICA).

2. Maddy's business generated gross receipts of $150,000. During the year, she wrote checks for
$104,994 related to her business. Maddy uses the cash method of accounting and she keeps a separate bank account for her business. An Excel spreadsheet that includes a detailed list of Maddy's expenditures (and a template for computing tax depreciation) is available on my web page.

3. Additional business-related information:
• She received $4,000 on November 11th, from the sale of an old printing machine (the machine was purchased in February 2008).

4. Maddy began her tee-shirt printing business in 2008 and purchased several assets during that year. She did not elect Section 179 expensing (and she elected out of bonus depreciation) at that time because her business was just beginning (with little cash inflow) and her accountant advised her that it would be better to stretch out the deductions over the depreciable lives of the assets. She did not make any capital purchases during 2009 or 2010. The following assets, purchased in 2008, are used 100% for business and have been depreciated using MACRS:
• Printing machine purchased in February 2008 for $16,000 (7-year property).
• Office furniture purchased in April 2008for $5,500 (7-year property).
• Office computer purchased in August 2008, for $3,800 (5-year property).

5. In April, Maddy purchased a light-duty delivery truck (less than 6,000 pounds) to be used exclusively for the business. She did not make any modifications to the truck. The cost of the truck was $24,000. She financed the entire purchase price and has been making $483/month payments since May. Of the total payments made during the year, $875 was for interest. For the current year, they wish to take the maximum Sec. 179 deduction, but do not wish to claim any additional first year depreciation.

6. In July, she purchased a new printing machine for $7,000 cash - see assumptions for #5 which also apply here.

7. The Brown's investment activities during the year resulted in the following items of income (or loss):
• Interest received on Ocean Trust Savings Bank account 78
• Interest received on State of Florida Water District bonds 100
• "Qualified" dividends received on Sterling International stock 1,200
These dividends are also ordinary dividends that should be reported on line 9a of Form 1040

8. Wade's father died during the year. Wade and Maddy collected the $100,000 face value from a life insurance policy on Wade's father.

9. Maddy's parents gave $25,000 to Maddy, and $15,000 to Linda.

10. The Brown's itemized deductions totaled $16,700 (do not prepare Schedule A).

11. During the year, the Brown's sold the following capital assets:

Asset Acquired Sold Selling price Adjusted Basis
A stock 2-15-11 8-13-11 5,000 11,500
B stock 3-2-05 7-7-11 22,400 21,700
C stock 6-8-01 4-10-11 9,000 12,000
D Stock 2-17-05 12-7-11 5,000 4,500
E Stock 5-11-11 10-11-11 5,000 4,000
Sail boat 12-3-04 3-3-11 2,000 8,500

Note1: The C stock was sold to Maddy's brother.
Note2: The sail boat was used for personal recreation.

Required:
Prepare the Brown's 2011 federal income tax return. They have asked you to minimize their tax liability to the extent legally possible. Round numbers to the nearest dollar. Clearly state any assumptions made in completing the tax return. Include a depreciation schedule and any supporting schedules. The following 2011 tax forms are required:
• Form 1040: U.S. Individual Income Tax Return
• Schedule C: Profit or Loss from Business
• Schedule D: Capital Gains and Losses
• Schedule SE: Self-Employment Taxes
• Form 4562: Depreciation and Amortization (remember to include a supporting schedule)

Optional Information:
State/Country relating to problem: Florida

More info:

Client: Maddy (& Wade) Brown
Schedule: Cash disbursements
Date: December 31, 2011

Description Amount
Purchases of T-shirts $50,000
Purchases of printing supplies 14,000
Purchase of new printing machine (July 2011) 7,000
Advertising 1,750
Telephone & utilities 1,495
Gas, oil, insurance, repairs & maintenance on truck 3,500
Truck payments ($483 x 8 months) 3,864
Office rent 9,500
Liability & property insurance 1,300
Purchases of miscellaneous office supplies 1,960
Routine repairs made to old printing machine 650
Wages paid to part-time workers 7,000
Payroll taxes (for part-time employees) 500
Business Meals (with customers) 2,400
Estimated federal tax payments 7,000
Contribution to political campaign of friend who is running for city council 1,500
Contibution to National Libertarian Party 2,000
Occupational license 525
Total cash disbursements $115,944