Sample Company and Its Business Deductions for Taxes

Jen Greene is a single mom with two children and files head of household on her 2011 tax return; her social is 432-15-1242. Her son, Seth, was born September 28, 2005; his social is 435-46-8923. And her daughter, Gracie, was born December 30, 2011; her social is 438-48-1234. Although Gracie was born at the end of the year, Jen may still claim her as a dependent for the entire year. A taxpayer may claim a dependent as long as they were born by December 31 of the tax year taxes are filed in. Both children lived with Jen all year. Jen also supports her mother Dee whose income for 2011 was $2,000; her social is 430-55-9901. Dee resides in the home with Jen and her two children. Jen is able to claim her mother as a dependent because Jen supports her mother and her mother's income is less than $3,700 (Altus-Buller & Whittenburg, 2012, p. 1-15 & 1-17). Jen divorced her son's father in 2010 and receives $400 per month in alimony and $600 per month in child support payments. She must include the alimony payments in her total income but not the child support payments (Altus-Buller & Whittenburg, 2012, p. 2-6 & 2-9).

Jen operates an accounting and tax business (Jen's Tax & Accounting Services) in an office in her home. She bought her home on April 28, 2009 for $375,000 and began business operations in her home office immediately. The land cost was $125,000, and she has made no home improvements. The cost basis of her home is still $375,000; the land is not included in the adjusted basis. However, a home is not depreciable like a business building would be. The land is also not depreciable. Jen's house has a total square footage of 2,200 feet; her office uses 1,000 square feet.

2

Her tax service is her full-time job; she does not bring in wages on a W-2. Jen employees three people in her business and uses her personal vehicle for business transportation. She uses the cash method of accounting. Below is a list of personal and business expenses she incurred for 2011:

Employee wages $12,000

Utilities 4,000

Cell phone 800

Advertising 250

Supplies 2,000

License fees 200

AICPA subscription 65

CPE class fees 600

Office expense 1,000

Insurance 1,200

Travel 1,300

Maid services 3,000

3

Repairs & maintenance 750

Property taxes 2,000

Mortgage interest 2,500

Meals & entertainment 2,350

Miscellaneous 350

Some of these expenses are self-explanatory and are fully deductible such as cell phone expense, advertising, supplies, license fees, office expense, employee wages, insurance, and miscellaneous (including carpet cleaning in the office only and printing of business cards). Jen's travel expense of $1,300 included her airplane ticket and hotel room for 3 days while she attended business meetings in Houston, Texas. This expense is deductible because it was a trip made in pursuit of her business (Altus-Buller & Whittenburg, 2012, p. 3-14). The mortgage interest is deducted under itemized deductions on Schedule A. The AICPA subscription is deductible because it pertains to the field of accounting and Jen is a Certified Public Accountant (CPA) (Altus-Buller & Whittenburg, 2012, p. 3-20). The CPE class fees are also deductible because these classes are required to maintain her CPA license (Altus-Buller & Whittenburg, 2012, p. 3-18). Jen was able to find CPE courses online. If she were required to travel to another city in order to attend these courses, she would have been able to deduct her travel expenses including lodging, transportation, meals, and the fees for the

...