Tax Return 4SP 2024
Tax 1
Name ________________________________________________________________________
Due April 18, 2024 at 2pm
Tentative Profit or Loss from Schedule C, line 29 _____________________________________
Business income on Schedule C generates two types of taxes. What are these taxes and how are they
calculated?
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I worked for approximately _____________________ hours on this return.
I worked with the following classmates on this return:
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Luke’s Diner in 2023
Luke Danes inherited the building housing his diner after the death of his father. It was originally
a hardware store. The activity for 2023 is detailed in the following income statement, along with the
explanations for expenses from Luke. First, some facts about the diner.
Luke’s is a cash basis business. He started the business in 2010. The EIN for Luke’s is 534564987. He uses the EIN for various business purposes, including filing the 1099’s for his servers (the
only other regular workers except Luke). The diner does pretty well money wise, although Luke would
say that Lorelai and Rory drink most of his profits. He decided to keep track of the supplies he uses for
them separately just to see how much they were costing him in coffee and stuff. There really is no other
reason to keep these costs separate. This year, it looks like Luke spend $844 on Lorelai and Rory’s
habit.
Luke purchased some new furniture for the diner in 2023. This furniture consists of new tables
and chairs to replace some that were worn out last year. He has included the total of this purchase in the
income statement. Luke’s prior accountant depreciated all of the other diner furniture using straight line
over 5 years and assuming $0 salvage value.
Lorelai needed some money to start her own bed and breakfast. (She plans to call it the
Dragonfly Inn.) Since Luke took money from the business account to loan to Lorelai, he recorded this
loan on his income statement as a business expense. In order to pay for his own living expenses, Luke
has taken a total of $40,000 in draws over the course of the year. Since he feels this is the equivalent of
his wages, he has deducted all $40,000 as an expense of the business.
There were multiple expenses Luke incurred that he just didn’t know how to record. He ended up
putting them in the “Other Expense” account. He’d like you to figure out what to do with them as you
complete his business tax return. One of these expenses, the baseball hats with logo, Luke uses for his
servers, but also as gifts to some of his favorite customers. He bought 10 hats for $17 each, and had
them embroidered with the diner logo for $9 each. He also bought seven flannel shirts for his own
uniform, so that he wouldn’t have to keep doing laundry. The newspaper delivery is so that there is
always a newspaper around for customers to read, in an effort to keep them off their cell phones. A
complete list of the expenses in the Other Expenses account follows:
Other expenses
Speeding tickets for delivery man
Contribution to campaign for Stars Hollow mayor
Extra uniform (flannel) shirts
Baseball hats with logos
Newspaper delivery
Total Other expenses
$
500
1,000
182
260
1,040
2,982
Luke’s Diner tried providing limited delivery services during 2023. He simply converted his old
truck into a delivery vehicle. When the deliveries started, the truck had 132,256 miles on it. At the end
of the year, the truck odometer showed 164,856 miles. It was only used for business purposes during
2023 and Luke had another vehicle available all year. However, the truck was available for personal use
outside diner hours.
Luke recorded the cost of his purchases for inventory in his income statement. Here are the
beginning and ending inventory numbers in case you need them.
Beginning Inventory: $
3,925
Ending Inventory:
2,879
$
During February of 2023, Luke decided to get out of cold, snowy Connecticut for a few days. He
decided to attend a conference, The Joys of Coffee (translated from Italian) and as a surprise, to take
Lorelai with him. This prestigious conference is held annually in Milan, Italy. Although Luke isn’t really
interested in improving the diner and what it serves, he knew Lorelai would enjoy the conference and
the warmer temperatures, and he figured this would be a good way to take her on a “vacation” and let
his company pay for things and get a tax deduction at the same time. Luke arranged for them both to
fly to Italy, and stay at the conference hotel, the Crowne Plaza Milan City, part of the IHG network. Le
Gioie del Caffè is an annual four-day conference. Luke and Lorelai ended up staying a total of seven
days and incurred the following costs. (All costs are for both of them since they did everything together
that week and all lodging and meal costs cover seven days.)
Travel
Airfare to Italy
Hotel (7 nights)
Meals in cafes (3 meals/day, 7 days)
Coffee tastings
Conference fees
Cab (hotel/airport)
scooter rental
museum entry fees
3,000
1,050
1,092
500
450
100
200
400
Total travel
6,792
Luke has provided the complete income statement from his QuickBooks program for you, with
all of his costs and revenues included. Remember that Luke is not an accountant and may have made
some mistakes as he recorded costs. He is counting on you to fix them as you complete his Schedule C
for Luke’s Diner. Since he is paying your high hourly rate to complete this work for him, be sure to give
clear explanations in your workpapers about which things he can actually deduct and which things he
cannot. As you complete the income statement on Schedule C, you should also remember that it is not
your job to audit your client as you work, although you should also not knowingly break the law. Luke
is trusting you to know how to lower his taxable income legally as much as possible. He realizes that
you will most likely need to look up multiple issues to be able to complete the form since no one can
know everything! If you have questions about items on the provided income statement, please ask me so
that I can pass your questions onto the client.
In addition to completing the Schedule C for the diner, Luke needs to know how income from his
diner affects his and Lorelai’s overall tax return. Earning income from self-employment is taxable, just
like earning wages from an employer. However, it also entails a few details that employees do not have
to deal with, so be sure to include those items in your workpapers.
You do not have to include any forms other than the Schedule C, but be sure to provide any
explanations of items included elsewhere in Luke and Lorelai’s return so that they understand the whole
impact of including the diner in their Form 1040. Remember that people who are self employed are
allowed to deduct items on Schedule 1 that employees are not allowed to deduct so be sure to look at
Schedule 1 for those deductions. Explanations for Schedule 1 items can be found in Chapter 6.
Time to get started! Use the income statement from Luke, provided below, as your starting place.
REQUIRED (in this order and STAPLED):
1. Attached cover sheet or equivalent (Feel free to remove the pictures before printing)
2. Schedule C
3. Client income statement and ending tax basis income statement presented side by side for
comparison purposes. The ending tax basis income statement is the information presented on the
Schedule C tax form.
4. A list of items related to Luke’s Diner included in the Form 1040 somewhere OTHER than the
Schedule C (Hint: you may want to check out Chapter 8 in addition to Chapter 6)
5. Workpapers with complete explanations of items that you have changed from Luke’s original
income statement and of course, all calculations
Luke’s Diner
Income Statement
for the year ended December 31, 2023
Revenue
Food sales
Coffee for addicts
Total Operating Revenue
Interest income
Investment income
Total Revenue
Expenses
Food inventory purchases
Supplies for Lorelai
Coffee beans
Milk
Cream
Sugar
Sweetener
Blueberries
Pickles
Mayonnaise
Cleaning service
Server pay
Restaurant mainenance
Diner furniture
Depreciation expense
Loan to Lorelai
Health insurance for Luke
Distribution to Luke
Retirement for Luke
Travel
Other expenses
$
172,500
10,000
182,500
50
100
182,650
50,000
275
60
30
25
26
105
212
111
11,444
7,561
5,555
9,000
4,650
30,000
4,300
40,000
3,875
6,792
2,982
Total expenses
177,003
Net Income
5,647
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