It has been 3 years since you have seen your client, Tim Smith (SSN: XXX-YY-ZZZZ), and he has made an appointment today to have his tax return prepared. During the appointment, he informed you that he started his self-service car wash a few years ago, and his business is a success. During the conversation, you gather the following information about the business:
• Business Name: The Car Wash
• Business address: 1046 Broadway Street, Huntington Beach, CA 92605
• Business description: Self-Service Car Wash
• Employer identification number: 99-8877665
• Date the business started: January 1, 2008
When you ask for the financial records of the business, he provides you with an income statement that he generated. You also ask for the general ledger so you can see the detail that was recorded in each of his accounts. Mr. Smith informs you that he uses the cash basis of accounting for his business.
December 31, 20XX
|Licenses and fees||$7,260|
|Salaries and wages||$67,460|
|Repairs and maintenance||$20,674|
|Net Income Before Taxes||$26,835|
The general ledger detail provides you with the following information about what is recorded under Miscellaneous expenses.
|Meals and entertainment||$2,074|
|Total miscellaneous expenses||$4,074|
When you ask the client about the lease payment, he tells you that he takes care of his mother and pays for her car lease payment with cash from the business. You confirm with Mr. Smith that his mother is not involved with his business in any way.
The depreciable property is the car wash building that cost $555,000. In your research, you learn that car wash buildings are depreciated over 15 years under the half-year convention using the Modified Accelerated Cost Recovery System (MACRS). This building is in its third year of service.
To properly prepare the tax return, please use your textbook, the Internal Revenue Code, and the Treasury Regulations to review the following tax law commonly referred to in preparing tax returns for sole proprietorships:
• § 61(a), § 1.61-1(a)
• § 162(a), § 1.162-1(a)
• § 167(a), § 1.167-1(a)
• § 168(a), § 1.168-1(a)
• § 262(a), § 1.262-1(a)
• § 274(n)(1)
Mr. Smith operates the Car Wash as a Sole Proprietorship. Prepare the tax return for your client’s business on Form 1040 Schedule C. Complete Form 1040 Schedule SE.
Obtain the appropriate tax forms at the following Web site (this is the search page, so enter the name of each form you need), and save them to your computer: https://apps.irs.gov/app/picklist/list/formsPublications.html
Instructions for how to prepare the applicable forms are available at the same Web site. You may directly input text and numbers on to these forms through your computer using Reader. The forms do not self-calculate. Once complete, submit the following:
• Form 1040 (Schedule C)
• Form 1040 (Schedule SE)
Please submit your assignment.
For assistance with your assignment, please use your text, Web resources, and all course materials.