Tax return-problem 7: C corporation Instructions: Please complete the Express Catering, Inc.’s 2014 tax return based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations and do not prepare any AMT related forms. Express Catering, Inc. (EC) is organized in the state of New York as a corporation and is taxed as a “C” corporation with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY that specializes in mobile food catering for events and gatherings within the tri-state area. EC’s address, employer identification number (EIN), and date of incorporation are as follows: Express Catering, Inc. 257 West 55th Avenue New York City, NY 10027 EIN- 13-9823459 Date Incorporated: March 17, 2009 EC’s address has not changed since its inception. EC has only common shares issued (no preferred stock). There are currently 10,000 shares of EC common stock issued and outstanding. EC is owned by four shareholders from the same family: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. Their personal information is provided below: Raphael Giordano 160 West 57th Avenue New York City, NY 10027 SSN: 356-87-4322 Shares owned 5,500 Silvia Giordano Costa 250 South Main Hoboken, New Jersey 07030 SSN: 284-58-4583 Shares owned 1,500 Andrea Giordano 65 East 55th Avenue New York City, NY 10027 SSN: 423-84-2343 Shares owned 1,500 Marco Giordano 160 West 57th Avenue New York City, NY 10027 SSN-487-27-4797 Shares owned 1,500 EC uses the accrual method of accounting and follows GAAP. EC is not a subsidiary nor is it in an affiliated group with any other entity. EC is not audited by a CPA firm and has never had a restatement of its income statement. EC reported the following information for the year: · EC did not pay dividends in excess of its current and accumulated earnings and profits. · None of the stock of EC is owned by non U.S. persons. · EC has never issued publicly offered debt instruments. · EC is not required to file a Form UTP. · EC made several payments in the current year that required the filing of federal Forms 1099. These Forms 1099 were filed timely by EC. · During the year, none of the shareholders of EC changed. · EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax-deferred transaction. · EC did not receive any assets in Section 351 transfers during the year. · All of the questions on Schedule B, Form 1120 should be checked “no” for the year. Additional information: EC has been rapidly expanding its catering business. This expansion has required a significant amount of new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on debt to fund these purchases. Further, EC invested heavily in its catering business by significantly increasing its advertising budget. EC and its officers expect that revenue increases from these expenditures will begin next year. Despite being profitable the past few years, EC does not want to carryback net operating loss (if any) generated in the current year. EC believes the next few years will be far more profitable and the losses will be of a greater tax benefit in the future. The dividends received by EC during the year were paid by Apple, Inc. EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC originally purchased the New York City bonds on February 1, 2011 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2014 for $100,000. EC received a Form 1099-B to reflect the transaction. Box 6b of the 1099-B was checked. EC purchased 200 shares of Apple, Inc. on October 10, 2011 for $100,000 (including commission). On July 10, of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share (including commission). EC received a 1099-B reporting the sale proceeds. Box 6b was checked on the Form 1099-B. During the year EC contributed $8,000 to the American Lung Association. On December 10, EC paid Madison Advertising $27,500 to design a new catering advertisement campaign for next year. This money represented half of the total $55,000 contract price. EC expects that the services will be provided and delivered to EC on about June 30, 2015. EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2014 through September 30, 2015 EC’s regular tax depreciation for the year is correctly calculated as $350,000 before considering the current year fixed asset additions of $840,000 (see table below). EC wants to claim the fastest recovery method(s) possible on these asset additions without electing any §179 expensing. Total current year asset additions are as follows (all the equipment purchased was new): Description Date Purchased Amount 5-year MACRS Property October 2, 2014 $480,000 7-year MACRS Property September 10, 2014 $320,000 Delivery Truck (over 6,000 lbs): 5-year MACRS Property October 12, 2014 $40,000 EC officer information for the year is as follows (compensation amounts included in total wages on the income statement for all employees): Name Social Security number Percent of time devoted to business Percent of stock owned Amount of compensation Raphael Giordano 356-87-4322 100% 55% 150,000 Silvia Costa 284-58-4583 100% 15% 130,000 Andrea Giordano 423-84-2343 100% 15% 130,000 Marco Giordano 487-27-4797 100% 15% 120,000 As reported on the balance sheet (see below), on December 31, 2013 the accrued wages were $44,500 and the accrued bonuses were $45,000. The wages and bonuses were payable to Raphael, Silvia, Andrea, and Marco. These accrued wages and bonuses were paid on January 20, of 2014. Also as reported on the balance sheet, on December 31, 2014, the accrued wages were $51,500. The wages were owed to Raphael, Silvia, Andrea, and Marco. The accrued wages were paid on January 22, 2015. All of the other employees’ wages and bonuses were paid on December 31, 2014. As of December 31, 2013 and December 31, 2014, respectively, EC had accrued vacation payable on its books of $62,500 and $73,000. All of the 2013 vacation accrual was paid during the period from April 1 through November 30, 2014. As of March 15, 2015 EC had paid none of its 2014 accrual. All of the vacation accrual amounts for both years were owed to employees other than Raphael, Silvia, Andrea, and Marco. None of the officers had accrued vacation at December 31, 2013 or 2014. On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2015 at the insurance company’s annual meeting in New York City. The money is fully refundable up until January 15, 2015. Thereafter, half of the deposit becomes non-refundable. EC maintains an inventory of several items. Inventory is valued at cost. EC has never has never changed it inventory method. EC uses specific identification for its inventory. EC has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to EC. EC did not pay a dividend in the current year. EC made no estimated tax payments during the current year. Financial Statements (kept on a GAAP basis): Express Catering, Inc. Balance Sheet Assets: 1/01/2014 12/31/2014 Cash $ 62,500 $ 44,000 Accounts Receivable 145,000 177,000 Less: Allowance for Bad Debts (32,000) (41,000) Inventory 59,000 96,000 Publicly traded securities 100,000 0 Tax-exempt bond 100,000 0 U.S. Treasury Bonds 125,000 125,000 Fixed Assets 2,115,000 2,955,000 Less: Acc. Depreciation (436,500) (715,000) Prepaid Insurance 0 15,750 Prepaid Rent 38,500 39,500 Prepaid Advertising 0 27,500 Total Assets: $2,276,500 $2,723,750 Liabilities and Shareholders’ Equity: Accounts Payable 102,000 131,000 Accrued Bonuses 45,000 0 Accrued Vacation 62,500 73,000 Accrued Wages 44,500 51,500 Event Deposits 0 100,000 Deferred Tax Liability 45,910 14,000 Note Payable-First Bank of NY (Credit Line) 424,000 657,000 Note Payable-EG Capital Equipment Leasing 1,243,000 1,415,000 Capital Stock 1,000 1,000 Additional paid-in Capital 99,000 99,000 Retained Earnings-Unappropriated 209,590 182,250 Total Liabilities and Shareholders’ Equity: $2,276,500 $2,723,750 Income Statement for the period ending December 31, 2014 Item Amount Income: Gross Sales $ 2,925,000 Less: Returns (8,500) Net Sales 2,916,500 Cost of Goods Sold (1,129,850) Gross Profit 1,786,650 Dividend Income 2,800 Interest Income -Bank 150 Interest Income-U.S. Treasury 3,000 Municipal Bond Interest Income 1,400 Capital Loss-Apple, Inc. (30,000) Total Income: 1,764,000 Expenses: Employee Salaries 743,500 Repairs and Maintenance 19,000 Bad Debts 44,000 Rent 230,000 Payroll Taxes 60,000 Licensing Fees 4,500 Property Taxes 12,500 Interest Expense 140,000 Depreciation 278,500 Office Supplies 5,400 Employee Training 3,600 Employee Benefits 24,000 Charitable Contribution 8,000 Advertising 70,000 Meals and Entertainment 3,400 Travel 600 Insurance 19,750 Utilities 142,000 Telephone 14,500 Federal income tax expense/(benefit) (31,910) Total Expenses: 1,791,340 Net Income (Loss): ($27,340

Tax return-problem 7: C corporation

 

Instructions:

Please complete the Express Catering, Inc.’s 2014 tax return based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations and do not prepare any AMT related forms.

 

Express Catering, Inc. (EC) is organized in the state of New York as a corporation and is taxed as a “C” corporation with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY that specializes in mobile food catering for events and gatherings within the tri-state area. EC’s address, employer identification number (EIN), and date of incorporation are as follows:

 

Express Catering, Inc.

257 West 55th Avenue

New York City, NY 10027

EIN- 13-9823459

 

Date Incorporated: March 17, 2009

 

EC’s address has not changed since its inception.

 

EC has only common shares issued (no preferred stock). There are currently 10,000 shares of EC common stock issued and outstanding.

 

EC is owned by four shareholders from the same family: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. Their personal information is provided below:

Raphael Giordano

160 West 57th Avenue

New York City, NY 10027

SSN: 356-87-4322

Shares owned 5,500

 

Silvia Giordano Costa

250 South Main

Hoboken, New Jersey 07030

SSN: 284-58-4583

Shares owned 1,500

 

Andrea Giordano

65 East 55th Avenue

New York City, NY 10027

SSN: 423-84-2343

Shares owned 1,500

 

Marco Giordano

160 West 57th Avenue

New York City, NY 10027

SSN-487-27-4797

Shares owned 1,500

 

EC uses the accrual method of accounting and follows GAAP. EC is not a subsidiary nor is it in an affiliated group with any other entity. EC is not audited by a CPA firm and has never had a restatement of its income statement.

 

EC reported the following information for the year:

 

  • EC did not pay dividends in excess of its current and accumulated earnings and profits.
  • None of the stock of EC is owned by non U.S. persons.
  • EC has never issued publicly offered debt instruments.
  • EC is not required to file a Form UTP.
  • EC made several payments in the current year that required the filing of federal Forms 1099. These Forms 1099 were filed timely by EC.
  • During the year, none of the shareholders of EC changed.
  • EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax-deferred transaction.
  • EC did not receive any assets in Section 351 transfers during the year.
  • All of the questions on Schedule B, Form 1120 should be checked “no” for the year.

 

Additional information:

 

EC has been rapidly expanding its catering business. This expansion has required a significant amount of new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on debt to fund these purchases. Further, EC invested heavily in its catering business by significantly increasing its advertising budget. EC and its officers expect that revenue increases from these expenditures will begin next year.

Despite being profitable the past few years, EC does not want to carryback net operating loss (if any) generated in the current year. EC believes the next few years will be far more profitable and the losses will be of a greater tax benefit in the future.

The dividends received by EC during the year were paid by Apple, Inc.

EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC originally purchased the New York City bonds on February 1, 2011 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2014 for $100,000. EC received a Form 1099-B to reflect the transaction. Box 6b of the 1099-B was checked.

EC purchased 200 shares of Apple, Inc. on October 10, 2011 for $100,000 (including commission). On July 10, of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share (including commission). EC received a 1099-B reporting the sale proceeds. Box 6b was checked on the Form 1099-B.

During the year EC contributed $8,000 to the American Lung Association.

On December 10, EC paid Madison Advertising $27,500 to design a new catering advertisement campaign for next year. This money represented half of the total $55,000 contract price. EC expects that the services will be provided and delivered to EC on about June 30, 2015.

EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2014 through September 30, 2015

EC’s regular tax depreciation for the year is correctly calculated as $350,000 before considering the current year fixed asset additions of $840,000 (see table below). EC wants to claim the fastest recovery method(s) possible on these asset additions without electing any §179 expensing.

Total current year asset additions are as follows (all the equipment purchased was new):

Description Date Purchased Amount
5-year MACRS Property October 2, 2014 $480,000
7-year MACRS Property September 10, 2014 $320,000
Delivery Truck (over 6,000 lbs): 5-year MACRS Property October 12, 2014 $40,000

 

EC officer information for the year is as follows (compensation amounts included in total wages on the income statement for all employees):

Name Social Security number Percent of time devoted to business Percent of stock owned Amount of compensation
Raphael Giordano 356-87-4322 100% 55% 150,000
Silvia Costa 284-58-4583 100% 15% 130,000
Andrea Giordano 423-84-2343 100% 15% 130,000
Marco Giordano 487-27-4797 100% 15% 120,000

 

As reported on the balance sheet (see below), on December 31, 2013 the accrued wages were $44,500 and the accrued bonuses were $45,000. The wages and bonuses were payable to Raphael, Silvia, Andrea, and Marco. These accrued wages and bonuses were paid on January 20, of 2014. Also as reported on the balance sheet, on December 31, 2014, the accrued wages were $51,500. The wages were owed to Raphael, Silvia, Andrea, and Marco. The accrued wages were paid on January 22, 2015.

All of the other employees’ wages and bonuses were paid on December 31, 2014.

As of December 31, 2013 and December 31, 2014, respectively, EC had accrued vacation payable on its books of $62,500 and $73,000. All of the 2013 vacation accrual was paid during the period from April 1 through November 30, 2014. As of March 15, 2015 EC had paid none of its 2014 accrual. All of the vacation accrual amounts for both years were owed to employees other than Raphael, Silvia, Andrea, and Marco. None of the officers had accrued vacation at December 31, 2013 or 2014.

On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2015 at the insurance company’s annual meeting in New York City. The money is fully refundable up until January 15, 2015. Thereafter, half of the deposit becomes non-refundable.

EC maintains an inventory of several items. Inventory is valued at cost. EC has never has never changed it inventory method. EC uses specific identification for its inventory. EC has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to EC.

EC did not pay a dividend in the current year.

EC made no estimated tax payments during the current year.

 

 

Financial Statements (kept on a GAAP basis):

 

Express Catering, Inc.

 

Balance Sheet

 

Assets:                                                                                    1/01/2014                                            12/31/2014

 

Cash                                                                                      $     62,500                                            $    44,000

Accounts Receivable                                                           145,000                                                  177,000

Less: Allowance for Bad Debts                                          (32,000)                                              (41,000)

Inventory                                                                                 59,000                                                96,000

Publicly traded securities                                                     100,000                                                             0

Tax-exempt bond                                                                 100,000                                                             0

U.S. Treasury Bonds                                                              125,000                                              125,000

Fixed Assets                                                                       2,115,000                                          2,955,000

Less: Acc. Depreciation                                                     (436,500)                                            (715,000)

Prepaid Insurance                                                                            0                                                    15,750

Prepaid Rent                                                                               38,500                                                  39,500

Prepaid Advertising                                                                             0                                                  27,500

 

Total Assets:                                                                      $2,276,500                                         $2,723,750

 

 

Liabilities and Shareholders’ Equity:

 

Accounts Payable                                                                   102,000                                                131,000

Accrued Bonuses                                                                      45,000                                                            0

Accrued Vacation                                                                      62,500                                                  73,000

Accrued Wages                                                                          44,500                                                   51,500

Event Deposits                                                                                     0                                                 100,000

Deferred Tax Liability                                                                45,910                                               14,000

Note Payable-First Bank of NY (Credit Line)                  424,000                                               657,000

Note Payable-EG Capital Equipment Leasing            1,243,000                                        1,415,000

 

Capital Stock                                                                                   1,000                                                     1,000

Additional paid-in Capital                                                         99,000                                                 99,000

Retained Earnings-Unappropriated                                209,590                                                182,250

 

Total Liabilities and Shareholders’ Equity:                 $2,276,500                                           $2,723,750

 

 

 

Income Statement for the period ending December 31, 2014

 

Item                                                                                                      Amount

 

Income:

 

Gross Sales                                                                                         $ 2,925,000

Less: Returns                                                                                           (8,500)

Net Sales                                                                                            2,916,500

 

Cost of Goods Sold                                                                          (1,129,850)

 

Gross Profit                                                                                             1,786,650

 

Dividend Income                                                                                       2,800

Interest Income               -Bank                                                                              150

Interest Income-U.S. Treasury                                                            3,000

Municipal Bond Interest Income                                                                       1,400

Capital Loss-Apple, Inc.                                                                    (30,000)

 

Total Income:                                                                                       1,764,000

 

Expenses:

 

Employee Salaries                                                                               743,500

Repairs and Maintenance                                                                    19,000

Bad Debts                                                                                                    44,000

Rent                                                                                                             230,000

Payroll Taxes                                                                                             60,000

Licensing Fees                                                                                             4,500

Property Taxes                                                                                         12,500

Interest Expense                                                                                 140,000

Depreciation                                                                                         278,500

Office Supplies                                                                                         5,400

Employee Training                                                                                  3,600

Employee Benefits                                                                                 24,000

Charitable Contribution                                                                          8,000

Advertising                                                                                                70,000

Meals and Entertainment                                                                     3,400

Travel                                                                                                                600

Insurance                                                                                                   19,750

Utilities                                                                                                       142,000

Telephone                                                                                                14,500

Federal income tax expense/(benefit)                                       (31,910)

 

Total Expenses:                                                                                   1,791,340

 

Net Income (Loss):                                                                            ($27,340

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