Tax Return 10: S Corporation Instructions: Please complete the required federal corporation income tax return forms for Modern Day Clothing, Inc. for...
Tax Return 10: S Corporation
Instructions:
Please complete the required federal corporation income tax return forms for Modern Day Clothing, Inc. for the 2013 tax year based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations or reporting.
Modern Day Clothing, Inc. (MD) is organized as a corporation in the state of North Carolina and is taxed as an “S” corporation with a calendar year-end. MD operates four small boutique clothing outlet stores (family clothing stores) in the cities of Charlotte, Durham, Raleigh, and Winston-Salem North Carolina. MD’s address, employer identification number, date of incorporation, and effective date of its S corporation election are as follows:
Modern Day Clothing, Inc.
1515 North Lincoln Highway
Charlotte, North Carolina 28201
EIN: 14-2953556
Date Incorporated- February 2, 1997
Effective date of the S election was July 1, 2012.
MD has been at the same address since inception.
MD has only common shares issued. There are currently 10,000 shares of MD common stock outstanding and issued. There were no stock transfers during the current tax year.
MD is owned by the following four shareholders:
Jennifer Lyons
85 Shady Elm
Charlotte, North Carolina, 28201
SSN 524-31-3493
Number of common shares owned 4,300
Chief Executive Officer
2013 W-2 wages $112,000
Robert Newberry
RD Route 843
Rural Hall, North Carolina 27045
SSN 482-26-5241
Number of common shares owned 2,300
Chief Financial Officer
2013 W-2 wages $90,000
Lamar Taylor
35 S. Main Street
Mt. Airy, North Carolina 27030
SSN 545-16-4239
Number of common shares owned 2,200
Chief Operations Officer
2013 W-2 wages $80,000
Lacrecia Williams
9851 Old Colonial Highway
Charlotte, North Carolina, 28201
SSN 429-82-9384
Number of common shares owned 1,200
Not an officer of the company
MD reported the following information for the current year:
MD uses the accrual method of accounting.
MD is not a subsidiary nor is it in an affiliated group with any other entity.
MD does not own directly 20%, or, directly and indirectly, 20% or more of any other entity (including corporations or partnerships).
MD has never issued any restrictive stock
MD has never been required to file an Form 8918
MD has never issued any publicly traded debt
MD was taxed as a C corporation from inception through the effective date of the S election.
MD had net unrecognized built-in gain from prior years of $400,000 as of January 1, 2013. The entire gain was attributable to unimproved land that MD owned. The land was originally purchased for $250,000 on June 16, 1998. On August 1, 2013, MD sold the unimproved land for a sales price of $850,000 (net of selling commissions). MD did not receive a Form 1099-B reflecting the sale. The land was held by MD as an investment asset only and was not connected with its clothing business.
MD has $500,000 of Accumulated Earnings and Profits as of 12/31/2012.
MD has an Accumulated Adjustments Account balance at 12/31/2012 of $125,000.
MD has an Other Adjustments account balance at 12/31/2012 of $7,000.
MD did not have any non-shareholder debt that was cancelled or was forgiven nor had the terms modified so as to reduce the principal amount of the debt during the current tax year.
MD has never made nor caused to be made a qualified subchapter S subsidiary election (Qsub).
MD has never caused a Qsub election to be revoked or terminated.
MD did make payments in the current year that required the filing of Forms 1099. All of those Forms 1099 were filed timely.
Additional information:
None of the expenses incurred by MD during the current year relate to the production of or the carrying of the tax-exempt securities held in portfolio. The tax-exempt securities are maintained in a separate brokerage account distinct from other holdings.
MD maintains it inventory on the cost method. MD has never has never changed it inventory method. MD uses specific identification for its inventory. MD has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to MD.
MD leases all of its real property.
On December 1, 2013, MD made a distribution to all common stockholders of $85 per common share owned as of that date.
On July 1, 2013, MD purchased $640,000 of equipment (5-year MACRS property) that it used to expand its Charlotte store. Not including the $640,000 of new year additions, MD’s calculated tax depreciation for the current year is $275,000. MD desires to maximize its current year cost recovery deductions relating to the equipment additions.
Book depreciation (including all assets) for 2013 was $180,000.
Other than the unimproved land, MD did not dispose of any assets during the year.
MD maintains a life insurance policy on the life of the CEO, Jennifer Lyons. MD is the beneficiary of that policy.
During the current year, MD gave $25,000 in cash to the Red Cross to assist with hurricane disaster clean-up in the North Carolina area.
All of the accrued wage amounts on the balance sheet as of December 31, 2013 were paid on January 15, 2014.
The accrued bonus amounts on the balance sheets as of December 31, 2012 and 2013, respectively, were paid on July 1, 2013 and July 1, 2014, respectively.
As of December 31, 2012 and 2013, respectively, MD had accrued vacation on its books of $19,000 and $21,000. As of March 15, 2013 and March 15, 2014, respectively, MD had paid $3,000 and $9,000 of those accrued amounts. None of these accrued amounts relate to officers’ compensation.
MD paid $140,000 ($35,000 each on 4/15/2013, 6/15/2013, 9/15/2013 and 12/15/2013) to the U.S. Treasury for current year estimated federal tax payments and $20,000 to the state of North Carolina for current year estimated state income tax payments.
Financial Statements (kept on a GAAP basis):
Modern Day Clothing, Inc.
Balance Sheet
Assets: 1/01/2013 12/31/2013
Cash $ 340,000 $ 385,000
Accounts Receivable-Credit Cards 205,000 232,000
Accounts Receivable-Trade 63,000 58,000
Less: Allowance for Bad Debts (13,000) (11,500)
Inventory 2,908,000 3,010,000
Tax-exempt Securities 100,000 100,000
U.S. Treasury Bonds 200,000 200,000
Fixed Assets 4,010,000 4,650,000
Less: Acc. Depreciation (2,875,000) (3,055,000)
Land-Unimproved (tax and GAAP basis) 250,000 0
Prepaid Rent 165,000 168,000
Total Assets: $5,353,000 $5,736,500
Liabilities and Shareholders’ Equity:
Accounts Payable 99,000 93,000
Accrued Employee Wages 27,000 31,000
Accrued Officer Bonuses 110,000 145,000
Accrued Employee Vacation 19,000 21,000
Note Payable-First Bank of NC (Credit Line) 536,000 812,000
Note Payable-First Bank of Charlotte 3,655,000 3,139,750
Capital Stock 1,000 1,000
Additional paid-in Capital 99,000 99,000
Retained Earnings 807,000 1,394,750
Total Liabilities and Shareholders’ Equity $5,353,000 $5,736,500
Income Statement for the year ending December 31, 2013
Item Amount
Income:
Gross Sales $8,936,500
Less: Returns (354,000)
Net Sales 8,582,500
Cost of Goods Sold (4,910,500)
Gross Profit 3,672,000
Gain on Sale of Unimproved Land 600,000
Interest Income -Bank 3,750
Interest Income-U.S. Gov’t 6,000
Municipal Bond Interest Income 2,650
Total Income: 4,284,400
Expenses:
Officer Salaries 317,000
Employee Salaries 437,000
Repairs and Maintenance 12,600
Bad Debts 22,000
Rent 765,000
Payroll Taxes 84,500
Licensing Fees 10,750
Property Taxes 12,500
Interest Expense 175,500
Depreciation 180,000
Office Supplies 5,300
Employee Training 13,750
Key Man Life Insurance 12,000
Advertising 58,500
Employee Benefit Programs 133,000
Meals and Entertainment 3,750
Travel 8,500
Charitable Contribution 25,000
Federal Income Taxes (built-in gains tax) 140,000
State Income Taxes (built-in gain tax) 20,000
Insurance 25,000
Utilities 243,000
Telephone 142,000
Total Expenses: $2,846,650
Net Income: $1,437,750
