Samantha A. Cranston, age 37, is single and lives with her dependent mother at 426 Grouse Avenue, Allentown, PA 18105. Her Social Security number is 111-21-1113.
- Samantha is a licensed hairstylist. She owns and operates a salon called Turning Heads, located at 480 Laurel Street, Allentown, PA 18105. Samanthaâ€™s business activity code is 812112. In addition to 10 work stations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the products she sells (see item 2 below). During the year, Samantha leased nine of the stations to other hairstylists who are considered self-employed. The IRS sanctioned the self-employment classification for the stylists in an audit of one of Samanthaâ€™s prior tax returns. Samantha collected $68,000 in rents from the stylists who leased the work stations. From her own station, Samantha earned $44,000 (including tips of $8,000) for the styling services she provided to her own clients.
Turning Heads is the local distributor for several beauty products (e.g., conditioners, shampoos) that cannot be purchased anywhere else. Samantha buys these items from the manufacturers and sells them to regular patrons, walk-in customers, and other beauticians (including those who lease chairs from her). Turning Heads is also known for the selection and quality of its hairpieces (i.e., wigs, toupees). The shop made the following sales during 2018:
Hairpieces and wigs $69,000 Beauty products 48,000
- Although Samantha operates her business using the cash method of accounting, she maintains inventory accounts for the items she sells. Relevant information about the inventories (based on lower of cost or market) is summarized as follows:
12/31/17 12/31/18 Hairpieces and wigs $10,700 $12,600 Beauty products 11,400 9,900
Samanthaâ€™s purchases for 2018 were $30,500 of hairpieces and wigs and $26,100 of beauty products.
Turning Heads had the following operating expenses for 2018:
- In early 2018, Samantha decided to renovate the waiting room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps, coffee bar, etc. Samantha follows a policy of claiming as much depreciation as soon as possible. The old furnishings were thrown away or given to customers. For tax purposes, the old furnishings had a zero basis.
- Turning Heads is located in a building Samantha had constructed at 480 Laurel Street in March 2004. The shop was built for a cost of $300,000 on a lot she purchased earlier for $35,000. Except for a down payment from savings, the cost was financed by a 20-year mortgage. For tax purposes, MACRS depreciation is claimed on the building. During 2018, the following expenses were attributable to the property:
Repainting (both exterior and interior) $8,000 Repairs (plumbing and electrical) 1,900
In May (after her accident settlement discussed in item 10 below), Samantha paid the outstanding principal on the business mortgage. To do so, she incurred a prepayment penalty of $4,400. Prior to paying off the mortgage, she paid regular interest on the mortgage in 2018 of $6,000.
- In February 2018, Turning Heads was cited by the city for improper disposal of certain waste chemicals. Samantha questioned the propriety of the proposed fine of $2,000 and retained an attorney to represent her at the hearing. By pleading nolo contendere, the attorney was able to get the fine reduced to $500. Samantha paid both the fine of $500 and the attorneyâ€™s fee of $600 in 2018.
- In August 2018, Samantha saw an ad in a trade publication that attracted her attention. The owner of a well-respected styling salon in Reading (PA) had died, and his estate was offering the business for sale. Samantha traveled to Reading, spent several days looking over the business (including books and financial results), and met with the executor. Samantha treated the executor to dinner and a music concert. Immediately after the concert, Samantha made an offer for the business, but the executor rejected her offer. Her expenses in connection with this trip were as follows:
Car rental $140 Motel (August 6â€“7) 220 Entertainment of executor (concert) 160 Dinner with the executor 120 Personal meals while traveling 110
- Joan Myers, one of Samanthaâ€™s best stylists, left town in March 2017 to get away from a troublesome ex-husband. In order to help Joan establish a business elsewhere, Samantha loaned her $7,000. Joan signed a note dated March 3, 2017, that was payable in 1 year with 4% interest. On December 30, 2018, Samantha learned that Joan had been declared bankrupt and was awaiting trial on felony theft charges. Samantha never received any payments from Joan, nor does she expect to receive any payments in the future.
- At Christmas, Samantha gave each of her 35 best customers a large bottle of body lotion. Each bottle had a wholesale cost to Samantha of $12 but a retail price of $24. Samantha also spent $3 to have each bottle gift wrapped. (Note: The lotion was special order merchandise and was not part of the businessâ€™s inventory or purchases for the yearâ€”see item 2 above.) She also gave each of the nine stylists who leased chairs from her a fruit basket that cost $30 plus a $5 delivery cost.
- In March 2018, the Pennsylvania Department of Revenue audited Samanthaâ€™s state income tax returns for 2015 and 2016. She was assessed additional state income tax of $340 for these years. No interest was included in the assessment. Samantha paid the back taxes in early April.
- On a morning walk in November 2014, Samantha was injured when she was sideswiped by a delivery truck. Samantha was hospitalized for several days, and the driver of the truck was ticketed and charged with DUI. The owner of the truck, a national parcel delivery service, was concerned that further adverse publicity might result if the matter went to court. Consequently, the owner offered Samantha a settlement if she would sign a release. Under the settlement, her medical expenses were paid and she would receive a cash award of $200,000. The award specified that the entire amount was for the physical pain she suffered as a result of the accident. Since she suffered no permanent injury, Samantha signed the release in April 2018 and received the $200,000 settlement late that summer.
- In January 2018, Samantha was contacted by the state of Pennsylvania regarding a tract of land she owned in York County. The state intended to convert the property into a district headquarters, barracks, and training center for its highway patrol. Samantha had inherited the property from her father when he died on August 11, 2017. The property had a value of $140,000 on that date and had been purchased by her father on March 3, 1980, for $30,000. On July 25, 2018, after considerable discussions including the stateâ€™s threat to initiate condemnation proceedings, she sold the tract to the state for $158,000. This transaction was not reported on a Form 1099-B. Since Samantha is not comfortable with real estate investments, she does not plan to reinvest any of the proceeds in another piece of realty.
- When her father died, Samantha did not know that he had an insurance policy on his life (maturity value of $50,000) in which she was named the beneficiary. When her mother told her about the policy in July 2018, Samantha filed a claim with the carrier, Falcon Life Insurance Company. In November 2018, she received a check from Falcon for $51,500 which included $1,500 interest.
- Upon the advice of a client who is a respected broker, Samantha purchased 1,000 shares of common stock in Grosbeak Exploration for $40,000 on March 4, 2018. In the months following her purchase, the share value of Grosbeak plummeted. Disgusted with the unexpected erosion in the value of her investment, Samantha sold the stock for $28,000 on December 23, 2018. This transaction was reported on Form 1099-B with Samanthaâ€™s basis correctly reported to the IRS.
- While on her way to work in 2017, Samantha was rear-ended by a hit-and-run driver. Thankfully, she was not injured in the accident. The damage to her Lexus was covered by her insurance company, General Casualty, except for the $1,000 deductible she was required to pay. In 2018, the insurance company located the driver who caused the accident and was reimbursed by his insurer. Consequently, Samantha received a $1,000 refund check from General Casualty in May 2018 to reimburse her $1,000 deductible.
- After her fatherâ€™s death, Samanthaâ€™s mother (Mildred Cranston, Social Security number 123-54-3789) moved in with her. Mildredâ€™s persistent back trouble made it difficult for her to climb the stairs to the second-floor bedrooms in Samanthaâ€™s house. So, Samantha had an elevator installed in her personal residence at a cost of $12,000 in January 2018. A qualified appraiser determined that the elevator increased the value of the personal residence by $5,000. The appraisal cost $400. The operation of the elevator during 2018 increased Samanthaâ€™s electric bill by $300.
- As a favor to a long-time client who is a drama professor at a local state university, Samantha spent a weekend as a stylist for the principal actresses in the annual Theater Department fund-raising event. The drama professor provided all of the resources that Samantha needed to provide her services. Samantha estimates that she would have charged $800 for the services she donated to this charitable event.
- In addition to the items already noted, Samantha had the following receipts during 2018:
- In addition to the items already noted, Samantha had the following expenditures for 2018:
The $10,000 contribution to the pension plan is to a Â§ 401(k) type of plan she established in 2018. Previously, she had contributed to an H.R.10 (Keogh) plan but found that the Â§ 401(k) retirement arrangement provides more flexibility and is less complex. The medical insurance policy covers Samantha and her dependent mom and was issued in the name of the business (i.e., Turning Heads). It does not cover dental work or capital modifications to a residence (see item 15 above).
- During 2018, Samantha made total estimated tax payments with respect to her 2018 tax returns as follows:
Federal estimated income tax payments $16,000 Pennsylvania estimated income tax payments 4,800 Allentown City estimated income tax payments 800
Prepare a 2018 Federal income tax return with appropriate supporting forms and schedules for Samantha. In doing this, follow these guidelines:
- Make necessary assumptions for information not given but needed to complete the return.
- Samantha is preparing her own return.
- Samantha has the necessary written substantiation (e.g., records, receipts) to support the transactions reported in her tax return.
- Samantha has itemized deductions ever since she became a homeowner many years ago. The sales tax option was not chosen in 2017, and Samantha had no major purchases that qualify for the sales tax deduction in 2018.
- If Samantha has an overpayment of tax, she wants it refunded to her.
- Samantha does not wish to contribute to the Presidential Election Campaign Fund
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