C Corporate taxation homework

1 ACC 404 Spring 2017 Corporate Tax Return Project Instructions: When you began your own business, you quickly decided to incorporate to obtain limited liability. At that time, you joined together with a college acquaintance, who brought additional expertise and needed capital to the business. With both of you as owners, business is booming. Please choose one person from the class as your business partner for this project. Choose one company (yours or your partner’s) to represent the company name and busine ss product for this project. Each team project should represent the work of only that team. The 201 4 financial statements for your business were recently completed (see attached). 1. Using the taxable income from the spreadsheet in Part I, prepare the tax year 201 6 Form 1120 Corporate Federal Income Tax Return.  If you have a question about any line item of the tax form, you should download and read the instructions to the forms. You can get these from www.irs.gov . If you still have a question after reading the instructions and all of the helpful hints at the end of the project, please feel free to ask me. 2. Prepare a list (bullet point is fine) of any carryforwards and/or carrybacks the company has and to what years eac h item may be carried forward or back. 3. Perform a self -review:  The numbers on page 1 of your tax return should equal the numbers on the last column of your spreadsheet (the taxable income column).  Taxable income ( before NOLs and DRDs from page 1, line 28 of the tax return ) should appear on Schedule M -1, line 10. Book income from your financial statements (after tax) should appear on Schedule M -1, line 1. If one of these numbers is off, then your adjustments on Schedule M -1, lines 2 through 9, were not entered correctly. Make sure all of the adjustments from the middle column on your spreadsheet from Part I (except DRDs) are entered correctly. Helpful Information for preparing the tax return forms:  You will need to calculate “purchases” for Schedule 1125 -A, line 2, of Form 1120 based on the information you have for beginning and ending inventory.  You should complete and attach Form 4562 to report the tax depreciation. The total tax depreciation will also be reported on line 20 of Form 1120. 2  You sho uld complete and attach Form 4797 to report the gains or losses from the sale of business assets. The total of these gains or losses will also be reported on line 9 of Form 1120. Pay close attention to page 1 of the instructions for Form 4797 and where to first report the sale – Part I, Part II, Part III.  You should complete and attach Schedule D to report the gains or losses from the sale of capital assets. The total of these gains or losses will also be reported on line 8 of Form 1120.  You should comple te and attach Schedule 8903, Domestic Production Activities Deduction, to report the DPAD deduction on line 25 of Form 1120. Your company’s information: Your company is owned equally by you and your partner. One of you is the president and the other is th e vice president. You both devote 100 percent of your time to the business, an d you each earn a salary of $ 225 ,000. Assume your company’s employer identification number is 35 - 4545454, and the calendar year is used for tax purposes. The date of in corporati on was January 15, 201 4. Please use 111 -11 -1111 and 222 -22 -2222 for social security numbers. The corporation files its tax return on the accrual method. Assume you have inventory. This inventory is determined using the lower of cost or market method. Se ction 263A rules do not apply. Assume costs of labor and other costs are zero for purposes of the cost of goods sold schedule. LIFO was not used, and there were no changes in determining opening and closing inventory. Your company has no interest in or aut hority over any foreign bank account or other foreign assets. 3 The corporation’s balance sh eet and income statement for 201 6 are included below: Balance Sheet As of December 31, 201 6 Assets January 1, 201 6 December 31, 201 6 Cash 275,000 310,000 Accounts Receivable 475,000 327,000 Inventory 975,000 945,000 Investments 13,250 10,000 Buildings and Machinery 446,500 432,500 Land 200,000 200,000 Accumulated Depreciation (75,255) (102,850) Other Assets 304, 505 761,198 Total Assets 2,614,000 2,882,848 Liabilities and Equity Accounts Payable 410,000 375,000 Notes Payable - current 100,000 100,000 Notes Payable - noncurrent 550,000 475,000 Common Stock 500,000 500,000 Additional paid in capital 800,000 800,000 Retained Earnings 254,000 632,848 Total Liabilities and Equity 2,614,000 2,882,848 4 Income Statement for the year ending December 31, 201 6 Sales 5,743,921 (1) Cost of goods sold 4,020,745 Gross Profit 1,723,176 Operating Expenses Officer Salaries 450,000 Other Salaries 368,000 Interest expense 24,000 Penalty for late filing of tax return 500 Advertising expense 30,000 Cha ritable contributions 80,000 (2) Depreciation 27,595 (3) Payroll taxes 62,577 Repairs and Maintenance 6,450 Meals and Entertainment expense 6,500 Insurance 7,500 (4) Total operating expenses (1,063,122) Net income for m operations 660,054 Other income or loss Interest Income 7,500 (5) Dividend income 3,755 (6) Gain/(Loss) on sale of equipment 2,500 (7) Gain/(Loss) on sale of business automobile (179) (7) Gain/(Loss) on sale of investment in s tock 6,000 (8) Total other income or loss 19,576 (9) Net income (loss) before tax 679,630 Federal income tax expense (210,782) (10) Net Income 468,848 Additional information pertaining to the company: 1. Your company had $ 5,743,921 of income from qualified domestic production activities, and $ 4,416,340 of expenses (COGS, salaries other than officers, and depreciation) related to these activities. 2. Your contributions were to qualified charities and were made in cash. 5 3. You calculate tax depreciation for the year to be $ 23,743 . The detail for depreciation is provided below: Asset Cost Placed in Service Convention TAX Depreciation 201 5 TAX Accumulated Depreciation as of 12/31/1 4 BOOK Depreciation 201 5 Building 310,000 2/ 15/1 2 MM 7,949 22,863 7,750 Automobile 1 27,000 2/15/1 2 HY 888 10,910 2,571 (100% business) Automobile 2 30,000 1/15/1 4 HY 3,160 - 4,286 (100% business) Software 3,500 2/15/1 2 SL 97 3,403 700 Computer s 25,000 2/15/1 2 HY 2,880 17,800 3,571 (not listed property) Equipment 1 17,000 2/15/1 2 HY 979 12,104 1,417 Equipment 2 21,000 2/15/1 2 HY 2,419 14,952 3,000 Furniture 43,000 2/15/1 2 HY 5,371 24,196 4,300 Total 476,500 23,743 27,595 * The company bought one asset in 201 6, an automobile. Also, note that some of your equipment and an automobile were also sold in the current year (see number 7). 4. Included in insurance expense is $ 3,0 00 in premiums on y ou and your partner’s lives. 5. Included in the $ 7,500 of interest income is $2,1 00 interest income from The City of Coral Gables bonds . 6. Dividend income is from the company’s <20% ownership of Pfizer stock. 7. The company sold the following business assets during the current year: Asset Purchase Date Sales Date Sales Price Original Cost BOOK Accumulated Depreciation BOOK Gain or Loss Automobile 1 2/15/1 2 8/15/1 6 13,000 27,000 13,821 (179) Equipment 1 2/15/1 2 7/15/1 6 11,000 17,000 8,500 2,500 * You must calculate the TAX gain or loss on these assets and you may have a book -tax difference for the gain/loss. 8. The gain on th e sale of stock was due to the 3 /15/1 6 sale of shares of Delta Airlines common stock for $9,250. T he stock h ad been purchased on 2/20 /10 for $ 3,25 0. 9. The company has a capital loss carryforward from 201 5 in the amount of $8,000. 6 10. The tax expense is the amount that was accrued for financial statement (book) purposes. This is not a check figure (i.e. it does not indicate the amount of tax you will compute on your tax return.) 11. Your company made equal quarterly estimated tax payments for 201 6 totaling $ 216 ,000 ($54,0 00 each quarter). This estimate was based on 100% of its prior year’s tax. 12. You and your partner (the shareholders) withdrew $ 45 ,000 each during the year. These payments are properly classified as dividends, and the amounts were not in excess of the company’s earnings and profits.