Reference no: EM132670724
Problem - Devon Bishop, age 45, is single. He lives at 1507 Rose Lane, Albuquerque, NM 87131. His Social Security number is 111-11-1117. Devon does not want $3 to go to the Presidential Election Campaign Fund.
Devon's wife, Ariane, passed away in 2014. Devon's son, Tom, who is age 18, resides with Devon. Tom's Social Security number is 123-45-6788.
Devon owns a sole proprietorship for which he uses the accrual method of accounting and maintains no inventory; the business operates as Devon's Copy Shop, 422 E. Main Street, Albuquerque, NM 87131, IRS business activity code: 453990. His revenues and expenses for 2018 are as follows:
Sales revenue $740,000
Cost of goods sold (based on purchases for the year) 405,000
Salary expense 88,000
Rent expense 30,000
Utilities 8,000
Telephone 6,500
Advertising 4,000
Bad debts 5,000
Depreciation* 21,000
Health insurance** 26,000
Accounting and legal fees 7,000
Supplies 1,000
*New office equipment ($21,000); Devon uses the immediate expense election.
**$18,000 for employees and $8,000 for Devon.
Other income received by Devon includes the following:
Dividend income (qualified dividends):
Swan, Inc. $10,000
Wren, Inc. 2,000
Interest income:
First National Bank 11,000
Second City Bank 2,500
County of Santa Fe, NM bonds 17,000
During the year, Devon and his sole proprietorship were involved in the following property transactions. Stock transactions were reported to Devon on Form 1099-B; basis was not reported to the IRS.
a. Sold Blue, Inc. stock for $45,000 on March 12, 2018. He had purchased the stock on September 5, 2015, for $50,000.
b. Received an inheritance of $300,000 from his uncle, Henry. Devon used $200,000 to purchase Green, Inc. stock on May 15, 2018, and invested $100,000 in Gold, Inc. stock on May 30, 2018.
c. Received Orange, Inc. stock worth $9,500 as a gift from his aunt, Jane, on June 17, 2018. Her adjusted basis for the stock was $5,000. No gift taxes were paid on the transfer. Jane had purchased the stock on April 1, 2012. Devon sold the stock on July 1, 2018, for $22,000.
d. On July 15, 2018, Devon sold one-half of the Green, Inc. stock for $40,000.
e. Devon was notified on August 1, 2018, that Yellow, Inc. stock he purchased from a colleague on September 1, 2017, for $52,500 had become worthless. Although he understood that investing in Yellow was risky, Devon did not anticipate that the corporation would declare bankruptcy.
f. On August 15, 2018, Devon received a parcel of land in Phoenix worth $220,000 in exchange for a parcel of land he owned in Tucson. Because the Tucson parcel was worth $245,000, he also received $25,000 cash. Devon's adjusted basis for the Tucson parcel was $210,000. He originally purchased it on September 18, 2015.
g. On December 1, 2018, Devon sold the condominium in which he had been living for the past 20 years (1844 Lighthouse Lane, Albuquerque, NM 87131) and moved into a rented townhouse. The sales price was $480,000, selling expenses were $28,500, and repair expenses related to the sale were $9,400. Devon purchased the condominium for $180,000.
Devon's potential itemized deductions, exclusive of the aforementioned information, are as follows:
Medical expenses (before the 7.5% floor) $9,500
Property taxes on residence 5,800
State income taxes 4,000
State income taxes 10,000
Mortgage interest on residence (First National Bank) 9,900
Sales taxes paid 5,000
During the year, Devon makes estimated Federal income tax payments of $35,000.
Compute Devon's lowest net tax payable or refund due for 2018 assuming that he makes any available elections that will reduce the tax. If you use tax forms for your computations, you will need Form 1040 and its Schedules 1, 4, 5, A, B, C, D, and SE and Forms 4562, 8824, and 8949.