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The company uses the cash method of accounting and the calendar year for reporting.

I need help adjusting to tax balances for future work on tax return.

·                    The company uses the cash method of accounting and the calendar year for reporting.

·                    The company claimed $7,119 depreciation for book purposes, but $10,619 for tax purposes (under a MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes. The company is NOT a personal holding company.

·                    All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest.

·                    Compensation was paid to each owner as indicated in the cash disbursements section. There was no distribution of any non-cash property.

·                    The equipment loan is nonrecourse debt to the owners.

·                    The 3 shareholders contributed their funds in exchange for common stock of the corporation in the following amounts:

o  Owner 1 contributed $24,000 for 50% ownership interest

o  Owner 2 contributed $14,400 for a 30% ownership interest

o  Owner 3 contributed $9,600 for a 20% ownership interest

·                    None of the shareholders sold any portion of their ownership interests during the year.

·                    The shareholders were paid dividends from the profits of the company in 2018 as follows:

o  Owner 1 - $45,000

o  Owner 2 - $27,000

o  Owner 3 - $18,000

·                    The company has no available tax credits and is not subject to AMT.

·                    The company's operations are entirely restricted to the local geographic area in Virginia. All owners are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other corporations. The company is not publicly traded.

·                    The company's marketable securities represent small investments (<1%) in a number of publicly traded companies and mutual funds.  

·                    The company sold its holdings of ABC Corporation (carried as Marketable Securities on the balance sheet) on August 10 for $5,000. The corporation purchased this investment several years ago for $9,000. 

(The proceeds from this sale are listed as a cash receipt below. The company has no prior-year capital gains or losses.)

The current income statement for the company reflected book net income of $107,900 AFTER book depreciation has been taken on the equipment, and the loss on the sale of ABC Corporation, and $32,000 of recorded federal income tax expense. The following information was taken from the corporation's financial statements for the current year.

Cash Receipts:

           Fees collected                                                                       $746,000

           Taxable qualified dividend income                                           3,400

           Taxable business interest income                                              2,600

           Tax Exempt interest income                                                      1,600        

           Proceeds from sale of ABC Corp. common stock                 $   5,000

                       Total Receipts                                                           $758,600

Cash Disbursements:

           Compensation to Owner 1                                      $100,000

           Compensation to Owner 2 and 3 ($50K each)                       100,000

           Dividend payments to shareholders                             90,000

           Customer Refunds                                                         8.000

           Office Rent                                                                  28,000

           Utilities                                                                          7,000

           Administrative employee salaries                              280,000

           Federal income tax payments ($8K/Qtr.)                    32,000

           Business & Professional Licenses                                 2,000

           Cash Contribution to United Way                                  2,000

           Business Meals (while traveling) (100%)                      2,600

           Travel                                                                            7,500

           Office supplies & expense                                             9,300

           Accounting (Professional) fees                                     8,500

           Advertising                                                                    5,000

           Taxes (Payroll, State, Local)                                       31,500

           Business interest (on equipment loan)                           3,800

           Principal payments on equipment loan                         20,000

           General Liability Insurance Expense                             3,381

           Equipment rental                                                            4,000

                       Total Disbursements                                      744,581

Journal entries have been made to record regular (book) depreciation in the amount of $7,119. MACRS tax depreciation was not recorded in the financial book records.

Principle payments against the equipment loan amounted to $20,000 for the year.

The balance sheets (book basis) for the company were as follows for the current year:

           Account                                             January 1, 2018        December 31, 2018

Cash                                                               $    86,576                 $             ?

Tax-exempt securities (at cost)                            52,000                       52,000

Marketable Securities (at cost)                          120,000                                ?

Office furniture & equipment                              65,000                       65,000

Accumulated Depreciation                              (  36,576)                 ________?

           Total Assets                                       $  287,000                 $             ?

Nonrecourse Equipment Loan                       $  47,000                   $             ?

Common Stock                                             $  48,000                   $     48,000

Retained Earnings                                          $ 192,000                   $_______?

           Total Liabilities and Equity               $ 287,000                   $              ?

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