Question

John Rivera, age 31, is single and has no dependents. At the beginning of 2022, John started his own excavation business and named it Earth Movers. 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's Social Security number is 111-11-1111, and the business identification number is 11-1111111. John is a cash basis taxpayer. During 2022, John reports the following items in connection with his business.

Fee income for services rendered $912,000 Building rental expense 36,000

Office furniture and equipment rental expense 9,000

Office supplies 2,500

Utilities 4,000

Salary for secretary 34,000

Salary for equipment operators 42,000

Payroll taxes 7,000

Fuel and oil for the equipment 21,000

Purchase of three new front-end loaders on January 15, 2021 560,000

Purchase of a new dump truck on January 18, 2021 80,000

During 2021, 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, 2022, 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, 2022, 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 2022 adjusted gross income.

Write a letter to John in which you present your calculations. Ignore any Federal self-employment tax implications.

Answer 1

To maximize net annual and monthly income, John should focus on maximizing his fee income from services rendered.

Step-by-step explanation:

To calculate the Net Annual Income for each job position, we need to deduct the taxes and other expenses from the fee income. Let's calculate the net annual income for each position:

1. Net Annual Income for services rendered: $912,000 - (6.2% Social Security + 1.45% Medicare + 15% federal and state taxes) = $759,516.85
2. Net Annual Income for Secretary salary: $34,000 - (6.2% Social Security + 1.45% Medicare + 15% federal and state taxes) = $28,489.30
3. Net Annual Income for Equipment Operators salary: $42,000 - (6.2% Social Security + 1.45% Medicare + 15% federal and state taxes) = $35,009.55

To calculate the monthly income for each position, we divide the net annual income by 12:

• Monthly income for services rendered: $759,516.85 / 12 = $63,292.24
• Monthly income for Secretary salary: $28,489.30 / 12 = $2,374.11
• Monthly income for Equipment Operators salary: $35,009.55 / 12 = $2,917.46

Based on the calculations, the best option for John would be to focus on maximizing his fee income from services rendered, as it provides the highest net annual and monthly income.

Answer 2

To determine John Rivera's 2022 adjusted gross income, we calculate his business income, subtract expenses, add other income sources, factor in cost recovery deductions, and account for the sale of inherited IBM stock. The cost recovery deductions from purchasing the Acura ZDX for business use may further decrease his taxable income.

Step-by-step explanation:

Dear John,

To determine the impact on your 2022 adjusted gross income (AGI) of selling the IBM stock and purchasing the Acura ZDX for business, we must first calculate the income from your business and other sources, then consider the cost recovery deductions available to you. The fee income for your services rendered was $912,000. Your expenses, including building rental, equipment rental, supplies, utilities, salaries, payroll taxes, and fuel amount to $153,500. Depreciation on the front-end loaders and dump truck can be taken into account according to the IRS guidelines for the appropriate recovery period or using the Section 179 expense deduction and additional first-year depreciation if applicable.

The interest income and dividends you received in 2021 are $19,500 combined. For the inherited IBM stock, if you sell it at $125,000, you would realize a capital gain of $15,000 because the stock was valued at $110,000 for estate tax purposes. If you opt to purchase the Acura for business purposes, you may be eligible for a Section 179 deduction and/or bonus depreciation on the vehicle, which would further reduce your taxable income. Remember to consult the latest IRS guidelines or a tax professional to fully maximize these deductions.

Your income before taxes would be the sum of your fee income, interest, and dividends less the business expenses. Then we will subtract any cost recovery deductions you take. Your AGI would be your income before taxes minus any deductions and will not include your quarterly estimated tax payments, as these are payments towards your expected tax liability rather than deductions from income.