Business 123A Corporate Tax Return Project - Ver. 1.4 Facts You (The Paid Tax Preparer) Your name is Robin Yount. You are a CPA and Senior Tax Manager in the CPA firm of Rosen and Craig, LLP. Your preparer tax identification number (PTIN) is P00384264. Your Firm (Who You Work For) Rosen and Craig's address is 490 Jamestown Avenue - San Francisco, CA 94123 and its phone number is (650) 555-5555. The firm's EIN is: 20-3941936. The Client Your client is Royal Crown Toys Inc. Its address is: 1001 Tenth Avenue - Columbus, GA 31901. Its phone number is: (305) 555-5555. Royal Crown Toys is a seller of toys at the wholesale level. Its Employer Identification Number is 46-3938374. It was incorporated in Georgia on 02/15/1995. It is a non-publicly traded (private) corporation. The only corporate officer authorized to sign its tax returns is Patricia Sheridan. Her social security number is 342-10-3940 and she is a citizen of the United States. She is the President of the corporation. Patricia owns 72% of the shares of the corporation. She has owned 72% of the shares since the corporation was formed in 1995. She spent 2,465 hours working for the corporation in 2019. She was paid base wages of $1,483,000 as well as a $94,000 cash bonus in 2019 (the cash bonus was paid to her in 2019, but it related to the financial success of the corporation for 2018). She received no other bonuses or other incentive-based compensation in 2019. For years the corporation had an employment contract in place with Patricia since she was hired back in 1995. It was the same employment contract for many years. However, the contract was completely changed, with material changes, on December 31, 2018. 1 Patricia's home address is 19847 Pebble Beach Court - Atlanta, GA 30303. Her phone number is (470) 555-5555. The Chief Financial Officer of the corporation is Amy Jing. She spent 2,233 hours working for the corporation in 2019. She was paid base wages of $593,397 in 2019. Amy's social security number is 257-25-9741 and her home address is 123 Peachtree Way - Atlanta GA 30301. Amy does not own any shares in the corporation. She is also a citizen of the United States. She is also the interim Treasurer and Secretary of the corporation until they can find individuals to fill those officer positions. Neither Patricia nor Amy worked anywhere else other than at Royal Crown in 2019. There are no other officers for the corporation. In addition, the only shares in the corporation are in the form of common stock. There are no preferred shares. There is one other shareholder in the corporation: Jose Uribe. Jose owned 28% of the shares of the corporation throughout the year. He has owned the same percentage of the corporation's stock since it was incorporated in 1995. He is a citizen of the United States. Jose's social security number is 938-39-3927 and his home address is 1967 Chopper Way - Atlanta, GA 30301. His phone number is (404) 555-5555. Royal Crown uses the cash basis of accounting for both financial accounting and tax return purposes. It has a December 31 year-end for both financial accounting and tax purposes. Its 2019 financial accounting-based income statement and balance sheet starts on the following page. 2 2019 Income Statement Revenues Gross sales: $14,023,000 Less: Customer returns (141,600) Dividends: $185,000 Interest (from Bank Accounts): $297 Interest on U.S. Treasury Bonds: $1,394 Interest on Bolt Corp. Bonds $937 State of Georgia Bond Interest: $193 City of Atlanta, GA Bond Interest $307 Cost of Goods Sold Inventory as of 1/1/19 of $3,093,452 Inventory purchased during 2019: $9,423,679 Inventory as of 12/31/19 of $2,930,490 [Note: All inventory figures are valued based on original cost and using the specific identification method because their computer systems can track the cost of each individual item sold. IRC Sect. 263A (UNICAP) does not apply to the corporation; there were no changes in the method of valuing inventories; and there were no writedowns of subnormal goods in 2019.] 3 Expenses (Other than Cost of Goods Sold) Warehouse rent: $160,248 Accounting Services: $24,125 Office Supplies: $34,392 Repairs and maintenance: $7,581 Depreciation: $1,600 Mortgage Interest Expense: $1,250 $11,2001 Lobbying Entertainment: $ 20,400 Meals: $7,926 (meals: by employees, while out of town on business trips) Travel: $30,130 (travel: by employees, while out of town on business trips - includes airfare and hotels) Charitable Contributions (cash) Wages - Officers: $57,433 $2,170,397 $739,292 2 & 3 Wages (other employees): 1 Amounts paid to an outside lobbyist who went to various members of Congress to ask for support of legislation to relax the Federal rules on toy safety. No legislation was even written in 2019 by any member of Congress. 2 Three of the employees were certified by a designated local agency as being a member of a targeted WOTC group. Employee #1, Anna Howe, worked 2,300 hours for the year and was paid $23,000 in wages. She is in within the \"regular\" WOTC group. Employee #2, Mei Zheng, worked 243 hours for the year and was paid $3,920 in wages. She is also in within the \"regular\" WOTC group. Employee #3, Val Kilmer, worked 2,000 hours for the year and was paid $36,000 in wages. He is certified to be in the longterm family assistance recipients WOTC category . Anna and Mei were hired and started work on January 1, 2019. Val was hired and started work the prior year on January 1, 2018. 3 One of its employees, Anna Zheng (Social Security number 599463210), was paid $3,500 in specially designated paid family leave for four weeks so she could take care of her sick mother who had a very serious health condition. Anna's normal salary is $1,000 per week and she has worked for the company since 2000. She earned $40,500 of wages in the prior tax year (2018). Royal Crown's family and medical leave program meets all of the requirements of IRC Sect. 45S and the guidance set forth in IRS Notice 201871. None of the $3,500 was paid out of Anna's sick 4 Federal Payroll Taxes: $103,970 Fines and Penalties $9,700 Other Income/Expense Gain on sale of Government Debt Investments4 $5,052 Loss on sale of corp. debt investments5 ($300) Gain on the Sale of Business Assets6 $33,000 Gain on the exchange of real property7 $200,000 ////////\\\\\\\\\\\\\\\\ $?????? NET INCOME (The client was too busy to calculate this figure and they have asked you to complete this for them as a separate engagement from the preparation of the tax returns.) time or vacation time. It was specifically paid through the terms of the company's written family and medical leave plan. The $3,500 paid under the plan is already included in the total amount of wages paid to nonofficers of the corporation for the year. Royal Crown's written Family and Medical leave program/policy complies with the \"non interference\" language requirement under pertinent laws. 4 Sold some of its State of Georgia bonds on 8/1/19 for $9,252 to an unrelated party. The bonds that were sold were purchased on 12/06/14 for $4,200. Royal Crown received an IRS Form 1099B showing the sale of these bonds, but the tax basis of these bonds was not provided to the IRS on the 1099B. 5 Sold some of its Bolt Corp. bonds on 10/1/19 for $700 (its fair market value) to Patricia Sheridan. The bonds that were sold were purchased on 12/26/12 for $1,000. Royal Crown did not receive an IRS Form 1099B showing the sale of these bonds. 6 The $33,000 gain on the sale of business assets in 2019 refers to the sale of the forklift to an unrelated party on 4/3/19 for $36,000. Royal Crown paid a $3,000 commission expense to a broker related to the sale of the forklift. See additional details on the forklift in footnote #9 below. 7 See additional details in footnote #8 below. 5 12/31/2018 Year-End Balance Sheet Cash: $4,284,189 Inventory: $3,093,452 Land8 $400,000 Stock in Jadis Corp. $50,000 U.S. Treasury Stock $19,000 State of Georgia Bonds $70,000 City of Atlanta, GA Bonds $10,000 Bolt Corp. Bonds $13,500 Forklift (Cost)9 $123,000 Less: Accumulated Depreciation on Personal Property ($123,000) Fixed Assets (Personal Property) - Net Book Value $0 Liabilities Mortgage Payable $25,000 Shareholders' Equity Common Stock $1,000,000 Retained Earnings - Unappropriated10 $6,915,141 8 While Royal Crown rents the warehouse in which it operates, it owned a vacant piece of property 3 miles away for many years. The property was used to store some of its excess packaging in case they did not have room in their warehouse. The property was originally purchased for $400,000 on 9/13/2012. The address for this property was 16 Bracket Way - Atlanta, GA 30302. On March 25, 2019 this property was exchanged with another, unrelated taxpayer, for another vacant lot that will also be used as a place to store excess packaging. The fair market value of the 16 Bracket Way property at the time of the exchange was $600,000. The replacement property is located at 5888 Hydrox Way Atlanta, GA 30309. The fair market value of the Hydrox Way property at the time of the exchange was $575,000. There were no expenses related to the exchange and the other party assumed the mortgage on the Bracket Way property (a $25,000 liability at the time of the exchange). 9 Originally purchased for $123,000 and placed in service on 03/15/2008. Was fully depreciated for financial accounting and tax purposes prior to 2019. Sold for $36,000 on 4/3/19. This was the only fixed asset for the corporation as of 12/31/18 other than the land. 10 All retained earnings are unappropriated. 6 12/31/2019 Year-End Balance Sheet Assets Cash: $5,109,946 Inventory: $2,930,490 Land: $575,000 Stock in Jadis Corp. $50,000 U.S. Treasury Stock $19,000 State of Georgia Bonds $65,800 Bolt Corp. Bonds $12,500 City of Atlanta, GA Bonds $10,000 Pre-Paid Federal Inc. Tax11 $400,000 (Cost) 12 New Copier $30,000 ($1,500) Less: Accumulated Depreciation New Desk for Amy (Cost)13 $5,000 ($100) Less: Accumulated Depreciation Fixed Assets (Personal Property) - Net Book Value $33,400 Liabilities None $0 11 2019 Federal estimated taxes were paid in 2019. They were paid in four installments as follows: $100,000 on 4/11/19; $100,000 on 6/14/19; $100,000 on 9/13/19 and $100,000 on 12/13/19. 12 Purchased and placed in service on 5/04/19. Royal Crown elects to take the maximum cost recovery on this asset in 2019 under IRC Sect 179, and if applicable, they do not elect out of firstyear bonus depreciation. 13 Purchased and placed in service on 7/4/19. Royal Crown does not elect to take any cost recovery on this asset in 2019 under IRC Sect 179. However, if applicable, they do not elect out of firstyear bonus depreciation. 7 Shareholders' Equity Common Stock $ 1,000,000 Retained Earnings - Unappropriated ?????? (The client was too busy to calculate this figure and they have asked you to complete this for them as a separate engagement from the preparation of the tax returns) Detailed Task 1) After completing the few items that Royal Crown was not able to provide to you in its prepared draft financial statements, using only the blank forms available at: www.IRS.gov, prepare Royal Crown's Federal income tax return (Form 1120) for the 2019 Tax Year - including the following schedules and forms (you must attach these forms in the required order as detailed by the IRS): Schedule D Form 1125-A Schedule G Form 1125-E Form 3800 Form 4562 Form 4797 Form 5884 Form 8824 Form 8949 Form 8994 2) For any part of the tax return where a statement is required, you must attach a statement to the end of the tax return as the last attachment to the 1120 return (before the information returns) - with a reference to what form and line of the return it applies to, as well as the name of the taxpayer and the EIN of the taxpayer on the top of each statement page. 3) You do not need to prepare any 1099-series forms, but your team will need to research when 1099-series forms apply. For this project you will only need to research Forms 1099-MISC and 1099-DIV. If you believe that either of these forms would be been required to be filed by Royal Crown for 2019, then check the applicable YES boxes 8 (both of them) on Form 1120. Otherwise, check no for the first 1099-related box on Form 1120. 4) All of the repairs and maintenance services were performed to Royal Crown by another corporation (Repairs R Us, Inc. - 578 Culture Drive - Atlanta, GA 30301; EIN - 771581297; Phone (470) 555-5556. 5) The entertainment expenses were for tickets for the Atlanta Hawks NBA basketball team. Royal Crown took out its biggest clients and vendors to discuss business matters at all of the games. 6) In addition to signing the tax return as the paid preparer, for purposes of this project also actually sign the return as the taxpayer (keeping in mind you would not do this in real practice). 7) You do not need to prepare any payroll tax returns or forms (such as the W-2 or W-3) for the client (Amy handles the payroll tax returns herself for the corporation). Other Important Items: 1) The landlord for the store that Royal Crown rents is Dane Iorg. Dane's address is 578 Jay Way - Menlo Park, CA 94025. His tax ID is 20-1484863 and his phone number is (650) 555-8888. 2) All of the amounts paid in 2019 for accounting services was paid to Rosen and Craig, LLP. 3) Royal Crown Corporation is not a subsidiary in an affiliated group or a parent-subsidiary group. 4) Royal Crown Corp. purchased 5,000 shares in Jadis Corporation, a U.S.based corporation that specializes in the management of junkyards on October 5, 2012 for $50,000. Jadis Corp. had 19,500 shares outstanding throughout 2019. On October 31, 2019, Royal Crown received a $185,000 dividend check from Jadis Corporation. Jadis Corporation's Employer Identification Number is 77-2573648. 9 5) The two shareholders in Royal Crown Inc. had the same ownership in the corporation throughout the year. 6) Royal Crown has an $8,000 NOL carryover into the 2019 tax year. 7) For Schedule K of Form 1120, you are given that the answers to question nos. 14, 17, 18, and 19 are \"no\" and the checkbox to no. 8 is to be unchecked. 8) Your client has asked you to file the return with the fewest number of required schedules filled-out on the 1120 form as legally possible. 9) $50,000 of cash distributions from Royal Crown Corp. were made in 2019. Each of the two shareholders received cash distributions based on their percentage ownership in the corporation. All cash distributions were paid on December 30, 2019. 10) On 2/15/1995, the corporation issued common stock to its two initial (and still current) shareholders - with the two shareholders paying the following amounts for the stock: $720,000 for Patricia and $280,000 for Jose. 11) If there is an amount due for the year on the 1120, the client (as a corporation) will need to pay the IRS electronically (i.e., not via check). However, for purposes of this tax return project, if tax is due for the year you do not need to prepare any payment documentation - simply show the amount due on the appropriate line(s) of the 1120 tax return accordingly. Also, if tax is due for the year, you do not need to calculate any penalties or interest - just the base tax due. On the other hand, if there is a refund due to the client on the 1120 tax return for the year, the client wants to receive the refund in the form of a check (i.e. they do not want any portion of the refund credited to next year's Federal income taxes). 10 12) All amounts contributed to charitable organizations for the year were made in cash, all of the charities were IRS-qualified charities and the charities all provided the client with the required documentation in a timely manner. 13) All wages paid to shareholders are ordinary, necessary and reasonable in amount , with none being disguised dividends. 14) All expenses - including wages paid to shareholders - are ordinary, necessary and reasonable, with none being disguised dividends. 15) None of the entertainment expenses are lavish or extravagant. 16) None of the wages are includable in cost of goods sold. 17) All of the corporate bonds that were owned either at the beginning of the year or at the end of the year mature more than five years after the end of the 2019 tax year and the client did not expect to sell them or convert any of them into cash until they mature. The small sale of corporate bonds in 2019 was unexpected and it was not easy to sell these particular bonds as they were not readily traded on an exchange (they were not liquid assets that were readily convertible into cash). 18) For Schedule K of Form 1120, you are given that the answers to question nos. 14, 17, 18, 19, 20, 21, 22, 23, and 25 are \"No\" and the checkbox to no. 8 is to be unchecked. Mark \"Yes\" for question no. 24 of Schedule K. 19) For Schedule J, you can skip lines 3; 5a; 5b; 5d; 5e; 9a-9f; 10; 12; 13; 15; 17; 18; 20a-20d; 21and 22. Any other parts that are applicable in Schedule J must be completed. For a non-skip line in Schedule J, you will need to determine if a figure goes on that line. There is a possibility that at least one 11 non-skip line in Schedule J is still not applicable. If not applicable, simply put \"0\" for that line. 20) For Form 3800, you skip: all of Part I (but put down \"0\" for line 6); Lines 10a-c, 18-26 and 31-35 of Part II 21) Your client allows you to discuss its tax return with the IRS. Final Project Notes: VERY IMPORANT: Your group must e-mail an electronic copy of the project to me by the due date and time (at the beginning of class) either through Canvas or at: joel.busch@sjsu.edu 1) 2) Please have the group member names included in the e-mailed submission. 3) VERY IMPORTANT - You are to only work on this project only with your fellow group members. 4) Late submissions (after 11:59 p.m on Monday, 5/11) of the project are subject to a significant reduction of points. 5) A peer-review report may potentially be required for the project. If so, your team must include that report as well. 6) Finally, EACH MEMBER MUST INDIVIDUALLY EMAIL ME THROUGH CANVAS AND DESCRIBE, IN ONE PARAGRAPH, DETAILS OF THEIR SPECIFIC CONTRIBUTIONS TO THE PROJECT. 12