Instructions:
The extra credit exercise involves a collective review of much of the material that we have covered in this course. Your task is to review a set of facts and a taxpayer’s transactions for one year. Then, you will answer some questions about the tax consequences and prepare the taxpayer’s Federal income tax return for the year as support for your conclusions.
Your score on the extra credit exercise is based on the percentage of correct conclusions with respect to the taxpayer’s transactions.
Score Extra credit awarded
90 or higher 3.0%
80-89 2.5%
70-79 2.0%
50-69 1.5%less than 49 1.0%*
- A significant amount of the exercise must be completed with evidence of thoughtful effort in order to earn 1% credit.
Extra credit earned will be added to your overall course average at the end of the semester. For example, if your course average is 84.7% (equivalent to a B letter grade) and you earn 2% of extra credit, your letter grade will be awarded based on 86.7% (equivalent to a B+ letter grade).
You should complete this exercise based on your own efforts (i.e., it is a violation of the SMU Honor Code to consult other students or to use tax preparation software). I am available to answer questions. The extra credit assignment is due on Monday, May 3 at 11:59pm. Please submit your answer to the practice quiz labeled “Submit your extra credit assignment here”.
I recommend that you complete the analysis first on paper or in Excel, using the tax formulas and concepts that we learned in this class. Then once you feel confident about the flow of the tax outcomes within the taxpayer’s taxable income formula, you can transfer the different components to the appropriate tax forms.
- Calculate the following items and submit your answers on a separate sheet or in a separate document. Show all of your calculations as support for your answer.
a) Russell and Amy’s taxable income for 2020.
b) Use the tax rate schedule to compute Russell and Amy’s tax for 2020. Do they owe additional tax or will they receive a refund?
c) Russell’s outside basis in the partnership interest at the end of 2020.
- Submit the following tax forms as support for your answers above. All of the tax forms and associated instructions are available on the IRS website (www.irs.gov):
• Form 1040
• Schedule 1
• Schedule C – complete Parts I and II through line 31
• Schedule D – complete Parts I, II and III through line 21
• Form 4797 – complete Parts I, II, and III through line 32
• Form 8824 – complete Parts I and III
Note: You are not required to complete Schedule E for Russell’s partnership interest. Enter Russell’s share of the partnership’s activity on the following lines: ordinary loss (line 5 of Schedule 1), interest income (line 2b of Form 1040), net short-term capital gain (line 5 of Schedule D), net long-term capital gain (line 12 of Schedule D). The cash distribution is not reported.
Comprehensive review exercise
Russell and Amy Jones live in Oklahoma City, Oklahoma. Russell and Amy are married and they have a daughter, Sara. Sara lives with Russell and Amy and they provide all of her support. The family’s address is 123 Sooner Way, Oklahoma City, OK 73102.
Name Date of birth Social Security #
Russell Jones 2/13/1991 123-45-6789
Amy Jones 4/1/1993 234-56-7890
Sara Jones 5/20/2017 345-67-8910
During 2020, Russell’s main source of income was his salary of $110,000 for his work as an Information Technology specialist. He also received a $10,000 bonus from his employer. Russell’s employer withheld $15,000 of federal income tax from his wages in 2020. Amy did not earn any income in 2020.
Russell and Amy reported the following cash expenditures in 2020:
• $5,400 primary residence mortgage interest
• $3,100 real estate taxes for primary residence
• $18,000 cost of groceries for the year
• $3,200 contribution to United Methodist Church
• $1,000 purchase of personal-use computer
• $2,900 Oklahoma state income tax
• $10,000 purchase of personal-use boat
Russell and Amy own a sizable portfolio of investments. The following transactions occurred during 2020.
Item Method of Acquisition Date acquired Original cost Adjusted basis Date of sale Sales proceeds, net of commission
A Co. stock
Purchase 5/12/2020 $4,200 $4,200 10/10/2020 $3,000
B Co. stock
Purchase 3/20/2017 $23,000 $23,000 6/21/2020 $10,000
C Co. stock
Purchase 2/1/2014 $200,000 $200,000 6/3/2020 $202,000
Russell also owns a business that operates as a sole proprietorship. The business keeps its tax records according to the cash method. The sole proprietorship operates in an industry that is eligible for the QBI deduction. During 2020, Russell’s business recorded the following:
Cash received for services rendered $60,000
Cash received from sales of property (see below) $26,500
Depreciation expense $3,000 + ?
Cash expenditures:
Supplies $10,000
Salaries $21,000 The amount of depreciation expense for the assets that were sold in 2020 is $3,000. In addition, Russell owns two other business-use assets in addition to the warehouse he received in the like-kind exchange transaction. Additional information about Russell’s business use depreciable assets:
• Computer, purchased in 2018, original cost $2,000, half-year MACRS
• Furniture, purchased in 2020, original cost $8,000, half-year MACRS
Additional information on the business’ property sales:
Item Method of Acquisition Date acquired Original cost Adjusted basis Date of sale Sales proceeds
Equipment Purchase 5/2/2020 $12,000 $7,500 8/1/2020 $10,000
Building Purchase 1/3/2020 $120,000 $120,000 7/22/2020 Warehouse
Machine Purchase 1/20/2015 $5,600 $3,000 7/13/2020 $9,000
Land Purchase 2/3/2015 $8,000 $8,000 9/30/2020 $7,500
• The building was sold to a local business in a transaction structured as a like-kind exchange. The buyer gave Russell a warehouse (FMV = $160,000, adjusted basis = $80,000) in exchange for Russell’s building (FMV = $160,000, adjusted basis $120,000).
Russell also received a Schedule K-1 from his ownership interest in Maverick, LLC. Russell’s outside basis in his partnership interest is $18,000 at the beginning of 2020. The Schedule K-1 reported the following information:
Ordinary income/(loss) ($10,500)
Interest income 600
Net short-term capital gain 8,100
Net long-term capital gain (0/15/20) 4,200
Cash distribution 2,000