1120 return project

MIKE'S SPORTING GOODS, INC. A "C" CORPORATION 1120 RETURN PROJECT As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike’s Sporting Goods, Inc. Mike’s Sporting Goods, Inc.

MIKE'S SPORTING GOODS, INC.

A "C" CORPORATION

1120 RETURN PROJECT

 As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike’s Sporting Goods, Inc. 

Mike’s Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports.  Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row.  Mike won the state championship as a sprinter all four years of college.

Starting the company was Mike’s idea, he owns the largest percentage of stock, and is the only owner who works in the business.  The other three investors brought money to the table, but never planned on working in the sporting goods store.  Therefore, no one questioned Mike when he suggested naming the corporation Mike’s Sporting Goods, Inc.  In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation.   

Location

As the old saying goes, Location, location, location.  Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses.  After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts.  As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent.

The building was built just a few years ago, so minimal expense was projected for maintenance and repairs.  In 20Y5, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott. 

Corporate investments

During 20Y5, Mike’s Sporting Goods, Inc. received the following investment incomes:

·         Interest from its own Accounts Receivables = $1,500

·         Interest from corporate bonds = $4,000

·         Interest from tax-exempt state bonds = $5,000

·         Dividends from various U.S. corporations = $10,000 

o Mike’s Sporting Goods, Inc. owns 20% of the stock of one corporation

Since Mike’s Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2. 

Year-end 20Y5, includes a $3,600 capital losses from the sale of securities.

Revenue from Sales

The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,910,000 in gross sales in 20Y5.  Just less than 1% of gross sales were returned, thus bringing net sales to $2,890,000.  Thanks to Mike’s purchasing savvy, cost of goods sold was $2,050,000, which is less than the industry standard of 80% of sales.  

Other Expenses:

Advertising

While the stockholder’s had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development.  

Bad debt expense

 The corporation uses the specific account write off method for uncollectible accounts receivable.  A total of $1,600 in accounts receivable were written off in 20Y5. 

Charitable contributions

During the year, Mike’s Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund. 

Depreciation

On Line 8(a) of the Schedule M of the 1120, Mike’s Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation's books.

Total depreciation from Form 4562 (not illustrated) is $17,600.  $12,400 is included as cost of goods sold in Line 5 of the Form 1125-A.   Enter the balance of $5,200 on line 20.  Book Depreciation is $15,980.

Interest expense:  Mike’s Sporting Goods, Inc. incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up.  Elroy is a securities broker with a national brokerage firm, therefore he handles all corporate investments.  In 20Y5, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.

Salaries

When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow.  Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders.  Thereby, total officers salaries will be $70,000 per year for the first five years. Hint: use Schedule E.  

Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales.  Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC.  Their goal was to keep wages below $50,000 per year.  In 20Y5, Mike managed to keep total wages at $44,000.

All other expenses All other expenses of operating Mike’s Sporting Goods, Inc. totals $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return.  

Taxes and credits

Taxes:

At December 31, 20Y5, the corporation had $55,387 in accrued federal income taxes. 

Mike’s Sporting Goods, Inc. made four estimated tax payments totaling $69,711 as follows: 

·         $17,280 on 4/15/20Y5

·         $17,280 on 6/15/20Y5

·         $17,280 on 9/15/20Y5

·         $17,871 on 1/15/20Y6

See the cancelled checks in Appendix F.  

 Tax Credits: 

The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs.  Given the high unemployment rate of college students, Mike’s Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit.  Hint: use Form 5884.  The credit will then carry over to the Schedule J of the 1120.  

Reconciling Book to Return:

Mike’s Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books: 

Premiums paid on term life insurance on corporate officers   $9,500

Interest paid to purchase tax-exempt state bonds                         850

Nondeductible contributions                                                        500

Reduction of salaries by work opportunity credit                     6,000

Total                                                                                       $16,850

Deductible state and local taxes (not federal income tax) totaled $15,000

If Mike’s Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes.

III.  Steps to Completion:

Prepare IRS Form 1120

1. Prepare Schedules M-1: Reconciliation of Income (Loss) per Books with Income per Return using financial data in the Appendices. 2. Prepare Schedule M-2: Analysis of Unappropriated Retained Earnings per Books using financial data in the Appendices.

IV. Deliverables:

The following forms and schedules, combined as a single PDF document, are required:

! Form 1120 ! Form 4562: Depreciation and Amortization ! Schedule C: Total Special Deductions ! Schedule D: Net Long-Term Capital Gains or Losses ! Schedule J: Total Tax ! Schedule J: Total Payments and Credits ! Schedule K: Accuracy ! Schedule L: End of Tax Year: Total Liabilities and Stockholder’s Equity ! Form 8949: Totals for Proceeds, Basis, & Gain/Loss ! Form 1125-A: Total for Cost of Goods Sold ! Form 3800: General Business Credit: Credit Allowed for the Current Year ! M-1 Income ! M-2 Balance at End of Year ! In addition, each student must separately submit their Group Contribution Report in their Assignment folder.

Appendices: Table of Contents

• Appendix A: Basic corporate information

• Appendix B: List of select Accounts and Balances per Book o (Financial basis, NOT tax basis)

 • Appendix C: Income Statement per Books  o (Financial basis, not tax)

 • Appendix D: Comparative Balance Sheet per Books  o (Financial basis, not tax)

 • Appendix E: General Ledger Retained Earnings account in T-account format.

• Appendix F: Cancelled checks to the Internal Revenue Service for estimated quarterly tax payments 

 APPENDIX A:  Basic corporate information

Corporate Name Mike’s Sporting Goods, Inc. Corporate Address 422 Bruce Lane Annapolis, MD 21401

Federal Tax ID 52-9746858 Corporate officers:      President/CEO Michael S. Duke     Vice President Juan Delaross     Treasurer Elroy Mulcane     Secretary Scott Barnett

APPENDIX B:  List of select Accounts and Balances per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120. Hint:  You will need these items to prepare Schedule M of the 1120.

Account Account Balance Advertising 8,700 Bad debts 1,600 Charitable Contributions to Not-for-Profit organizations 24,000 Charitable Contributions to political campaigns               500 Compensation of officers 70,000 Cost of goods sold 2,050,000 Depreciation--indirect 3,580 Dividends received 10,000 Federal income tax accrued 55,387 Interest expense on note to buy tax-exempt state bonds 850 Interest expense on note to buy corporate bonds 27,200 Interest income on tax exempt state bonds 5,000 Interest income on taxable corporate bonds 5,500 Loss on securities 3,600 Maintenance and Repairs 800 Net income per books after tax 517,783 Other operating expenses 78,300 Premiums on life insurance 9,500 Proceeds from life insurance 9,500 Rental expense 9,200 Salaries and wages--indirect 44,000 Sales - gross 2,910,000 Sales returns and allowances 20,000 State and Local Taxes 15,000

 APPENDIX C:  Income Statement per Book (financial, not tax)

 Mike’s Sporting Goods, Inc. Income Statement (per Books) Year ending 20Y5     Revenue:    Gross sales   $    2,910,000      Less: Returns & allowances  20,000  Net sales  2,890,000  Cost of goods sold  2,050,000  Gross Margin   840,000     Operating expenses:    Advertising   8,700  Bad debt  1,600  Charitable contributions:         Deductible 24,000        Non-deductible 500 24,500  Depreciation  3,580  Equipment rental  9,200  Life insurance   9,500  Maintenance & repairs  800  Officers compensation  70,000  Salaries and wages   44,000  Total operating expenses   171,880 Operating Income   668,120 Other revenue and gains:    Dividend income  10,000  Interest income: Maryland bonds  5,000  Interest income: All other bonds  5,500  Proceeds from life insurance   9,500  Total other revenue and gains   30,000     Other expenses and losses:    Accrued federal income taxes  55,387  Other operating expenses  78,300  Loss on investments  3,600  Total other expenses and losses   137,287 Total income before interest and taxes   560,833 Interest expense on note to purchase taxexempt bonds 850    Interest expense on all other notes 27,200 28,050  Income before tax   532,783 Less: State & Local Income tax   15,000 Net income per books after tax   517,783

APPENDIX D: Comparative Balance Sheet per Books (financial, not tax)

Mike’s Sporting Goods, Inc. Balance Sheet per Books December 31, 20Y4 and 20Y5

 Year Ending 20Y4 Year ending 20Y5 Assets Cash  114,700  329,564 Accounts receivable (net)  98,400  235,001 Inventory  426,000  495,479 Tax-exempt securities  100,000  120,000 Other current assets   26,300  17,266 Other investments   100,000  80,000 Buildings 272,400  296,700  Accumulated depreciation 88,300 184,100 104,280 192,420 Land  20,000  20,000 Other assets  14,800  19,300 Total assets  1,084,300  1,509,030      Liabilities & Stockholder’s Equity Accounts payable  428,500  334,834 Notes payable (short term)   4,300  4,300 Other current liabilities  6,800  7,400 Notes payable (long term)  176,700  264,100      Stockholder’s Equity Common stock  200,000  200,000 Retained earnings: Appropriated  30,000  40,000 Retained earnings: Unappropriated  238,000  658,396 Total liabilities & Stockholder’s equity  1,084,300  1,509.030

APPENDIX E: General ledger Retained Earnings account in T-account format

General Ledger Retained Earnings Account Explanations: Debits Credits Explanations: Contingencies 10,000 238,000 Beg balance Accrued income tax 55,387 532,783 Net Income before tax Dividends paid 65,000 18,000 Income tax refund Ending balance   658,396         

APPENDIX F: Canceled checks