Question

Janice Morgan, age 24, is single and has no dependents. Janice works as an employee from Worldwide Publishing and also as a freelance writer. In January 2018, Janice opened her own office located at 2751 Waldham Road, Pleasant Hill, NM 88135. She called her freelance writing business Writers Anonymous. Both Writers Anonymous and Janice operate on the cash basis. She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her Social Security number is 123-45- 6789. During 2018, Janice reported the following income and expense items connected with her business Writers Anonymous (a sole proprietorship):

Income from sale of articles 75,000

Rent 23,500

Utilities 7,900

Supplies 1,800

Insurance 5,000

Travel (assume fully deductible) 2,300

Meals (client meetings) 600

Meals (Used by Janice while on business travel) 600

Country Club (Used to entertain clients) 4,000

Client entertainment expenses 1,000

Janice has the following personal items:

Wages from Worldwide Publishing $110,000

Interest from checking account from First Bank 4,000

Home mortgage interest paid to First Bank 10,000

(Secured by principal residence, acquisition debt)

Home Equity Line of Credit 3,000

(Secured by principal residence, used to pay off credit cards)

Property taxes on personal residence 4,000

Charitable contributions 10,700

Federal income tax withholding 27,000

State income tax withheld 8,500

During the year, Janice invested $15,000 (tax basis and at-risk basis) into XYZ limited partnership (a passive investment). Her share of the limited partnership income for the year was $6,000, and Janice received a $8,000 distribution from XYZ limited partnership.

During the year, Janice also invested $4,000 (tax basis and at-risk basis) into ABC limited partnership (a passive investment). Her share of the limited partnership loss for the year was $6,000, and Janice received a $1,000 distribution from ABC limited partnership.

Prepare the 2018 Federal income tax return for Janice Morgan and the following items:

(1) 1040,

(2) Schedule 1,

(3) Schedule 4,

(4) Schedule A,

(5) Schedule C page 1,

(6) calculation/explanation of the taxable portion from the limited partnerships (must include loss carryforwards as well as their classification (passive vs. at-risk)),

(7) calculation of self-employment tax,

(8) calculation of tax.

Normally, this tax return would require additional forms (Schedule B, Schedule E, Schedule SE, Etc.). However, I do not require them. Instead, the required calculations/explanations will be sufficient.

Schedule 1 Hints:
1) The Net income from the Schedule C (Writers Anonymous) will go on line 12
2) Line 17 will include the net income/loss from the limited partnerships. These are NOT
subject to Self-Employment tax.
3) There should be something in line 27
Other Hints:
4) Schedule 4, line 57 is for the self-employment tax. SE tax is separate from and in addition
to the tax calculated on form 1040 line 11.
5) The taxpayer has a refund.
6) The FICA cap for 2018 is 128,400, not 132,900
7) Assume that Janice has adequate health insurance.
8) Do not forget the Deduction for Qualified Business Income (new in 2018), line 9 form
1040. Assume Janice qualifies for this deduction. In Chapter 15, we can discuss the rules
in more detail. Assume that the QBI is a deduction equal to 20% of Qualified Income.
This deduction will go on 1040 line 9. Qualified income includes the net total of
Schedule 1 line 12, 17, and 27. That is line 12 + line 17 – line 27.

Answer 1

(1) 1040

(2) Schedule 1

(3) Schedule 4

(4) Schedule A

(5) Schedule C page 1

(6) Calculation of the taxable portion from limited partnerships is ZERO because Janice have $6,000 income from XYZ limited partnership bu she had also losses of $6,000 from ABC limited partnership. So, she had no longer income from partnership

- Passive activities :

Passive activity losses are limited to passive activity income. Losses not allowed under these rules are carried forward to following tax years. Exception : certain taxpayers can offset up to $25,000 of non-passive income with rental losses.

- At Risk rules :

At-risk rules apply to activities carried on as a trade or business or for the production of income. Exceptions : The rules do not apply to losses from holding real estate placed in services before 19987 or to losses from a pass-through entity engaged in holding such property to the extent the entity was acquired before 1987.

(7) Calculation of Self-employment tax

As per calculation $1,595 is SE tax which is flow in 1040 through schedule 1 Line 27.

(8) Calculation of tax

   For income tax calculation see above 1040 return.