Davison Co. is in its first year of operations as a hardware and software retail

Question

Davison Co. is in its first year of operations as a hardware and software retailer (with occasional consulting jobs). Davidson reports the following2017 results (without respect to the type of entity):

“Business” Income:

Sales (net of returns and allowance)

$645,000

Gross Consulting Fees Collected

$30,000

Dividend Income (5% investment in Surreal Software Co.)

$4,000

Loss on Sale of Surreal Stock ($28,000 - $33,000, held 9 months)

($5,000)

“Business” Expenses and Costs:

Cost of Goods Sold

(142,200)

Salaries of five employees other than owner Dave Davidson ($50,000 each)

(250,000)

Payroll taxes paid on employees [(250,000 x 0.0765) + (35,000 x 0.060)]

(21,225)

Health Insurance contributions for employees ( 10% of salaries)

(25,000)

Interest Expense - Business Loans

(30,746)

MACRS depreciation on various company assets

(10,154)

Utilities, insurance, supplies, deliveries, and miscellaneous expenses

(54,185)

Contribution to public charities

(13,300)

Compensation of owners of “Business”

Reasonable salary compensation to Dave Davidson

(75,000)

Other cash payment to owner

(50,000)

Health Insurance coverage for Dave Davidson

(3,000)

Retirement plan contribution for owner (10% of “reasonable salary”)

(7,500)

Dave and Ellen Davidson (both age 43) file a joint federal income tax return in 2017. They do not have any dependents. In addition to any compensation/income from the business describes above, Ellen received a salary of $71,300 from ED Industries. Dave and Ellen also received $1,400 personal interest on a joint account, $1,200 personal dividends from jointly held Thomson Co. stock, and $9,200 from the sale of 100 shares of Thomson stock (originally acquired five years ago for $3,100).

Dave and Ellen’s personal expenses for 2017 include $14,000 state income taxes, $9,300 charitable contributions (not including the amounts mentioned above), $8,300 interest on personal home mortgage, and $4,181 of unreimbursed employee expenses by Ellen.

Required:

a. Assuming that Davidson Co is operated as a sole proprietorship, determine the Davidson’s final federal income tax liability (including any self-employment tax).

Please complete Form 1040 Schedule A, Schedule C, Schedule D and Schedule SE.

Please complete the line 7 through the line 43 on Form 1040.

Please complete the line 1 through the line 29 on Schedule A.

Please complete the line 1 through line 31 on Schedule C.

Please complete the line 1 through line 6 on section A of short Schedule SE.

Please complete the line 1 through line 21 on Schedule D.

Sales (net of returns and allowance)

$645,000

Gross Consulting Fees Collected

$30,000

Dividend Income (5% investment in Surreal Software Co.)

$4,000

Loss on Sale of Surreal Stock ($28,000 - $33,000, held 9 months)

($5,000)

“Business” Expenses and Costs:

Cost of Goods Sold

(142,200)

Salaries of five employees other than owner Dave Davidson ($50,000 each)

(250,000)

Payroll taxes paid on employees [(250,000 x 0.0765) + (35,000 x 0.060)]

(21,225)

Health Insurance contributions for employees ( 10% of salaries)

(25,000)

Interest Expense - Business Loans

(30,746)

MACRS depreciation on various company assets

(10,154)

Utilities, insurance, supplies, deliveries, and miscellaneous expenses

(54,185)

Contribution to public charities

(13,300)

Compensation of owners of “Business”

Reasonable salary compensation to Dave Davidson

(75,000)

Other cash payment to owner

(50,000)

Health Insurance coverage for Dave Davidson

(3,000)

Retirement plan contribution for owner (10% of “reasonable salary”)

(7,500)

Explanation / Answer

Solution:

Determining the Davidson's Final Fedral Income Tax Liability (Including Self- Employment Tax) by Assuming that Davidson Co is Operated as a Sole Proprietorship:

Schedule C Sale Proprietorship Income: Gross Profit - Sales ($645,000 - $142,200) $502,800 Consulting fees collected $30,000 Expenses: Salaries paid to 5 employees other than Dave Davidson ($50,000 each) ($250,000) Payroll taxes paid on employees [($250,000 * 0.0765) + ($35,000 * 0.06)] ($21,255) Pension plan contribution on behalf of employees ($250,000 * 0.10) ($25,000) Health Insurance coverage for employees ($3,000 * 5) ($15,000) Interest expense - Business Loans ($30,746) MACRS depreciaton of company assets ($10,155) Rent, Utilities, insurance, supplies, deliveries, and miscellaneous expenses ($54,185) Schedule C Sole Proprietorship Income $126,490 Self-employment tax [(126,490 * 0.9235 * 0.153)] $17,872 Form 1040 Personal Tax Return: Schedule C Income $126,490 Salary ( Ellen Davidson) $71,300 Interest (joint saving account) $1,400 Dividend income $5,200 LT Gain on sale of Thomson Publishing Co. stock $6,100 ST Loss on sale of Surreal Stock ($5,000) Gross Income $205,490 Deductions for Adjusted Gross Income: SEP-IRA retirement plan contribution ($7,500) One-Half of self-employment tax paid ($8,936) 100% of self-employes health insurance ($3,000) Adjusted Gross Income $186,054 Personal Exemption Deductions ($8,100) Itemized Deductions: Medical $0 State and Local Taxes ($14,000) Qualifying home mortgage interest ($8,300) Charitable contributions ($22,600) Miscellaneous expenses[$4,181 - ($186,054 * 0.02)] ($460) Taxable Income $132,594 Gross federal income tax liability $24,060 Self-employment tax [(126,490 * 0.9235 * 0.153)] $17,872 Total taxes paid as a sole proprietor entity (federal income tax plus self-employment tax) $41,932

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