Comprehensive Problem (Tax Return Problem). John Stantus, single, is the sole owner of Stantus Accounting Services, Co. He started the company, which is organized as a sole proprietorship, on February 10 of the current year. For this year, Stantus Accounting Services reported the following amounts of income and expenses:
Fee revenues $840,000
Expenses: Employee wages (125,000)
Payroll taxes (9,563)
Advertising (3,600)
Insurance (2,400)
Utilities (7,200)
Rent (10,000)
Supplies (5,000)
Selling expenses (35,000)
John purchased a car on February 1 of the current year for $24,000. He uses the car for both business and personal purposes. Mileage logs indicate that John put 40,000 miles on the car this year. Of that total, 28,000 miles were business related and the remaining 12,000 were related to personal travel. John wants to deduct the maximum amount allowable for business use of his car.
John also purchased office equipment, computers and other five-year property for use in the business. He purchased $625,000 worth of such depreciable assets in March. He wants to deduct the maximum amount allowable under Code Sec. 179 and depreciate the remaining cost (if any) under the MACRS system.
Selling expenses include $6,000 spent for meals and entertainment incurred on John’s sales calls during the year.
Selling expenses also include $12,000 in illegal payments to city officials paid to secure a lucrative contract with the city. John was uncomfortable making this payment, but reasoned that the contract was important to get his business off to a good start.
Selling expenses also include gasoline, parking fees, and other documented auto expenses totaling $2,500 attributable to John’s sales calls.
Assume that John reports the revenue and expenses of Stantus Accounting Services on Schedule C, that he uses the cash method of accounting, and that he has no other taxable income, deductions or credits other than the items listed above. As noted above, he is single, with no dependents. He lives at 105 1st Street in Jackson, Mississippi (zip code = 39201). His social security number is 555-33-4444. His business address is 501 19th Street, Jackson, MS 39201. Skipping Schedule SE (on which you would ordinarily calculate the self-employment tax), prepare John’s 2017 Individual Income Tax Return. (Note: you may have to use 2016 forms.)