I’m working on a accounting question and need an explanation to help me learn.

Susan and Mike Johnson have been happily married for the last 40 years. They reside in Los Angeles. Susan is retired after building a successful shoe design company, “Sassy Susan’s Stilettos” a business that is currently valued at $22,000,000. Sassy Susan’s is classified as a subchapter-S corporation for federal income tax purposes and generates approximately $5,000,000 per year in EBITA.

Current Income/Deductions: Susan and Mike have income or deductions from the following sources each year:

• Grantor Letter from the “Susan and Mike Johnson Irrevocable Trust” (interest income $10,000; qualified dividends $4,000; total dividends $5,000; long-term capital gains $100,000).

• Schedule K-1 from Sassy Susan’s Stilettos (ordinary income $650,000; rental income $10,000; other income $11,000; cash charitable contributions $5,000)

• Schedule K-1 from RHH Active Equity, LP (ordinary loss -$11,000; interest income $23,702; total dividends $44,468; qualified dividends $31,596; royalties $16,000; short-term capital loss -$37,654; long-term capital gain $298,243)

• Schedule K-1s from family partnership MMEM LLC (ordinary income $6,892; interest income $278; net long-term capital gain $1,275)

• Consolidated 1099 from Charles Schwab, which generates significant tax-exempt interest from California bonds (total dividends $78,000; qualified dividends $0; tax exempt interest $72,110; long-term uncovered – basis not provided to IRS – proceeds $292,636 cost $289,692)

• 1099-INT from SunTrust Bank of $10,000 per year

• 1099-Miscellaneous from Susan’s Board Income of $15,000 per year, where all the board meetings occur in Illinois. Not subject to SE tax.

• Social Security of $15,000 per year for Mike (Medicare Part A $3,000 – medical premiums)

• Federal Tax Payments of $240,000 (Q-2 $80,000; Q-3 $80,000; Q-4 $80,000)

• Overpayment applied from prior year federal return of $80,000

• State and local income taxes of $150,000 (CA Q-1 $75,000; CA Q-3 $70,000; IL Q-4 $5,000)

• Charitable contributions of:

•Gift of stock with a fair market value of $10,000 to Salvation Army (omit Form 8283)

•Cash gift of $10,000 to their local community center.

•$1,000 donation for a ticket to the local gala event (two tickets valued at $100 each).

Forms: 1040 (pages one and two); Schedules 1-3; Schedules A, B, D, E (pages one and two)