John Smith, age 31, is unmarried with one dependent child. John owns and operates his own excavation business, Earth Movers (taxed as a Sole Proprietorship). John lives at 1045 Center Street, Lindon, UT, and his business is located at 381 State Street, Lindon, UT. The zip code for both addresses is 84042. John is a cash basis taxpayer. John's dependent child is named Ashley Smith, she is 14 years old. Self Employed Information (Schedule C): Fee income for services rendered 322,000
Building rental expense 36,000
Office Supplies 2,475
Utilities 4,000
Salary for secretary 34,000
Salary for equipment operators 42,000
Wages for John 40,000
Payroll taxes 7,000
Fuel and Oil for equipment 21,000
Computers and other office equipment 9,000
Placed in service on Dec 15, 2020
Purchase of a new front-end loader 150,000
Placed in service on Jan 15, 2020
During 2018, John recorded the following additional items.
Interest income from First National Bank $10,000
Dividends from ExxonMobil 9,500
Quarterly estimated tax payments 11,500
John wants to maximize his cost recovery deductions (including taking any § 179 expense and any available additional first-year depreciation).
On October 8, 2018, John inherited IBM stock from his Aunt Mildred. John had been her favorite nephew. According to the data provided by the executor of Aunt Mildred's estate, the stock was valued for estate tax purposes at $110,000. John is considering selling the IBM stock for $125,000 on December 29, 2018, and using $75,000 of the proceeds to purchase an Acura ZDX. He would use the car 100% for business. John wants to know what effect these transactions would have on his 2018 adjusted gross income.
Write a letter to John in which you present your calculations, and prepare a memo for the tax files. Ignore any Federal self-employment tax implications.