Tax Return Assistance case study

Tax Return Assistance


The forms can be located through


1) Form 1040

2) Form 1040 Schedule A

3) Form 1040 Schedule B

4) Form 1040 Schedule C

5) Form 1040 Schedule D

6) Form 1040 Schedule SE

7) Form 8949

8) Form 4562




Carrie A. Morgan, age 45, is single and lives with her dependent mother atXXXXX Allentown, PA 18105. Her social security number is NNN-NN-NNNN

1. Carrie is a licensed hairstylist and operates her own business. , PA 18105, the business is conducted under the name of Carrie’s Coiffures. Carrie’s business activity code is 812112. In addition to 10 workstations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the
products Carrie sells (see item 2 below). During the year, Carrie leased nine of the stations to other hairstylists. As is common practice in similar businesses in the area, the other stylists are considered to be self-employed. In fact, the IRS sanctioned the self-employment classification for the stylists in an audit of one of Carrie’s prior tax returns. Each stylist pays Carrie a fixed rent for the use of a workstation, resulting in
$68,000 of rents received during 2012. From her own station, Carrie earned $44,000
(including tips of $12,000) for the styling services she provided to her own clients.

2. Carrie’s Coiffures is the local distributor for several beauty products (e.g., conditioners,
shampoos) that cannot be purchased anywhere else. Carrie 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). Carrie’s Coiffures is also
known for the selection and quality of its hairpieces (i.e., wigs, toupees). Through the
shop, Carrie made the following sales during the year:

Hairpieces and wigs $69,000
Beauty products 48,000

3. Although Carrie operates her business on a cash basis, she maintains inventory
accounts for the items she sells as required by law. Relevant information about the
inventories (based on lower of cost or market) is summarized below.
12/31/11 12/31/12
Hairpieces and wigs $10,700 $12,600
Beauty products 11,400 9,900

5. Carrie’s purchases for 2012 were $30,500 of hairpieces and wigs and $26,100 of beauty

6. Carrie’s Coiffures had the following operating expenses for 2012:

Utilities (i.e., gas, electric, telephone) $12,900
Ad valorem property taxes:
On realty (e.g., shop building and land) $4,200
On personalty (e.g., equipment, inventory) 1,800 6,000
Styling supplies (e.g., rinses, dyes, gels, hair spray) 5,700
Fire and casualty insurance 4,100
Liability insurance 4,000
Accounting services 3,800
Janitorial services 2,400
Sewer service, garbage pickup $ 2,300
Water 2,200
Occupation licenses (city and state) 1,500
Waiting room supplies (e.g., magazines, coffee) 1,300
7. As Carrie prefers to and the payroll tax
complexities, she retains outside agencies to handle her accounting and janitorial

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