1. C:11-63Bottle-Up, Inc., was organized on January 8, 2005, and made its S election on January 24, 2005. The necessary consents to the election were filed in a timely manner. Its address is 1234 Hill Street, City, ST 33333. Bottle-Up uses the calendar year as its tax year, the accrual method of accounting, and the first-in, first-out (FIFO) inventory method. Bottle-Up manufactures ornamental glass bottles. It made no changes to its inventory costing methods this year. It uses the specific identification method for bad debts for book and tax purposes. Herman Hiebert and Melvin Jones own 500 shares each. Both individuals materially participate in Bottle-Ups single activity. Herman Hiebert is the tax matters person. Financial statements for Bottle-Up for the current year are shown in Tables C:11-2 through C:11-4. Assume that Bottle-Ups business qualifies as a U.S. production activity and that its qualified production activities income is $90,000. The S corporation uses the small business simplified overall method for reporting these activities (see discussion for Line 12d of Schedules K and K-1 in the Form 1120S instructions). Prepare a 2014 S corporation tax return for Bottle-Up, showing yourself as the paid preparer.

2. C:11-64Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

   • Drs. Bailey and Firth formed the corporation on January 1, 2013, and the corporation immediately elected S corporation status effective at the beginning of 2013.

   • Upon formation of the corporation, Dr. Bailey received common stock worth $1.2 million, and Dr. Firth received common stock worth $2.8 million.

   • The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:

     Common stock	$4,000,000	$4,000,000
     Retained earnings	171,360	91,020

   • The $180,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Baileys salary.

   • Qualified production activities income (QPAI) still equals $2.24 million, but employers W-2 wages allocable to U.S. production activities equal $1.16 million (because of Dr. Baileys salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).

   • Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

   TABLEC:11-2Bottle-Up, Inc. Income Statement for the Year Ended December 31 of the Current Year (Problem C:11-63)

   Sales		$2,500,000
   Returns and allowances		(15,000)
   Net sales		$2,485,000
   Beginning inventory	$ 102,000
   Purchases	900,000
   Labor	200,000
   Supplies	80,000
   Utilities	100,000
   Other manufacturing costs	188,000a
   Goods available for sale	$1,570,000
   Ending inventory	(96,000)	1,474,000b
   Gross profit		$1,011,000
   Salariesc	$ 451,020
   Utilities expense	54,000
   Depreciation (MACRS depreciation is $36,311)	11,782
   Automobile and truck expense	26,000
   Office supplies expense	9,602
   Advertising expense	105,000
   Bad debts expense	620
   Rent expense	30,000
   Interest expensed	1,500
   Meals and entertainment expense	21,000
   Selling expenses	100,000
   Repairs and maintenance expense	38,000
   Accounting and legal expense	4,500
   Charitable contributionse	9,000
   Insurance expensef	24,500
   Hourly employees fringe benefits	11,000
   Payroll taxes	36,980
   Other taxes	2,500
   Penalties (fines for overweight trucks)	1,000	(938,004)
   Operating profit		$ 72,996
   Other income and losses:
   Long-term gain on sale of capital assets	$ 48,666g
   Sec. 1231 loss	(1,100)h
   Interest on U.S. Treasury bills	1,200
   Interest on State of Florida bonds	600
   Dividends from domestic corporations	11,600
   Investment expenses	(600)	60,366
   Net income		$ 133,362
   aTotal MACRS depreciation is $74,311. Assume that $38,000 of depreciation has been allocated to cost of sales for both book and tax purposes so that the book and tax inventory and cost of sales amounts are the same. The AMT depreciation adjustment on personal property is $9,000.
   bThe cost of goods sold amount reflects the Uniform Capitalization Rules of Sec. 263A. The appropriate restatements have been made in prior years.
   cOfficer salaries of $120,000 are included in the total. All are employers W-2 wages.
   dInvestment interest expense is $500. All other interest expense is trade- or business-related. None of the interest expense relates to the production of tax-exempt income.
   eThe corporation made all contributions in cash to qualifying charities.
   fIncludes $3,000 of premiums paid for policies on lives of corporate officers. Bottle-Up is the beneficiary for both policies.
   gThe corporation acquired the capital assets on March 3, 2012 for $100,000 and sold them on September 15, 2014, for $148,666.
   hThe corporation acquired the Sec. 1231 property on June 5, 2013 for $10,000 and sold it on December 21, 2014, for $8,900.

   TABLEC:11-3Bottle-Up, Inc. Balance Sheet for January 1 and December 31 of the Current Year (Problem C:11-63)

   Assets:
   Cash	$ 15,000	$116,948
   Accounts receivable	41,500	45,180
   Inventories	102,000	96,000
   Stocks	103,000	74,000
   Treasury bills	15,000	16,000
   State of Florida bonds	10,000	10,000
   Building and equipment	374,600	375,000
   Minus:Accumulated depreciation	(160,484)	(173,100)
   Land	160,000	190,000
   Total	$660,616	$750,028
   Liabilities and equities:
   Accounts payable	$ 36,000	$ 10,000
   Accrued salaries payable	12,000	6,000
   Payroll taxes payable	3,416	7,106
   Sales taxes payable	5,200	6,560
   Due to Mr. Hiebert	10,000	5,000
   Mortgage and notes payable (current maturities)	44,000	52,000
   Long-term debt	210,000	260,000
   Capital stock	10,000	10,000
   Retained earnings	330,000	393,362
   Total	$660,616	$750,028

   TABLEC:11-4Bottle-Up, Inc. Statement of Change in Retained Earnings, for the Current Year Ended December 31 (Problem C:11-63)

   Balance, January 1		$330,000a
   Plus: Net income	$133,362
   Minus: Dividends	(70,000)	63,362
   Balance, December 31		$393,362
   aThe January 1 accumulated adjustments account balance is $274,300.

   Required:Prepare the 2014 S corporation tax return (Form 1120S), including the following additional schedules and forms: Schedule D, Form 4562, and Schedule K-1.

   Optional:(1) Complete Schedule M-2 in Form 1120S even though the company has never been a C corporation. For this purpose, the accumulated adjustments account at the beginning of 2014 is $171,360. (2) Prepare a schedule for each shareholders basis in his or her S corporation stock. For this purpose, Baileys stock basis at the beginning of 2014 is $1,251,408 and Firths is $2,535,952.

Case Study Problem

1. C:11-65Debra has operated a family counseling practice for a number of years as a sole proprietor. She owns the condominium office space that she occupies in addition to her professional library and office furniture. She has a limited amount of working capital and little need to accumulate additional business assets. Her total business assets are about $150,000, with an $80,000 mortgage on the office space being her only liability. Typically,she has withdrawn any unneeded assets at the end of the year. Debra has used her personal car for business travel and charged the business for the mileage at the appropriate mileage rate provided by the IRS. Over the last three years, Debras practice has grown so that she now forecasts $80,000 of income being earned this year. Debra has contributed small amounts to an Individual Retirement Account (IRA) each year, but her contributions have never reached the annual limits. Although she has never been sued, Debra recently has become concerned about legal liability. An attorney friend of hers has suggested that she incorporate her business to protect herself against being sued and to save taxes.

   Required:You are a good friend of Debras and a CPA; she asks your opinion on incorporating her business. You are to meet with Debra tomorrow for lunch. Prepare a draft of the points you feel should be discussed over lunch about incorporating the family counseling practice.

Tax Research Problems

1. C:11-66Cato Corporation incorporated six years ago in California, with Tim and Elesa, husband and wife, owning all the Cato stock. Immediately thereafter, Cato made an S election effective for that year. Tim and Elesa filed the necessary consents to the election. On March 10 of last year, Tim and Elesa transferred 15% of the Cato stock to the Reid and Susan Trust, an irrevocable trust created three years earlier for the benefit of their two minor children. Early in the current year, Tim and Elesas tax accountant learns about the transfer and advises the couple that the transfer of the stock to the trust may have terminated Catos S election. Prepare a memorandum for your tax manager indicating any action Tim and Elesa can take that will permit Cato to retain its S election. Research sources suggested by the tax manager include Secs. 1361(c)(2), 1362(d)(2), and 1362(f).

2. C:11-67One of your wealthy clients, Cecile, invests $100,000 for sole ownership of an electing S corporations stock. The corporation is in the process of developing a new food product. Cecile anticipates that the new business will need approximately $200,000 in capital (other than trade payables) during the first two years of its operations before it starts to earn sufficient profits to pay a return on the shareholders investment. The first $100,000 of this total is to come from Ceciles contributed capital. The remaining $100,000 of funds will come from one of the following three sources:

   • Have the corporation borrow the $100,000 from a local bank. Cecile is required to act as a guarantor for the loan.

   • Have the corporation borrow $100,000 from the estate of Ceciles late husband. Cecile is the sole beneficiary of the estate.

   • Have Cecile lend $100,000 to the corporation from her personal funds.

   The S corporation will pay interest at a rate acceptable to the IRS. During the first two years of operations, the corporation anticipates losing $125,000 before it begins to earn a profit. Your tax manager has asked you to evaluate the tax ramifications of each of the three financing alternatives. Prepare a memorandum to the tax manager outlining the information you found in your research.

3. C:11-68Joe Stephens formed Sigma Corporation on January 4 of Year 1, and the corporation immediately made an S election effective for that year. In forming the corporation, Joe contributed $50,000 cash in exchange for 100% of Sigmas stock. Shortly thereafter, the corporation obtained a $75,000 bank loan to assist with operations. Sigmas first two years did not go as well as expected, with Sigma incurring a $60,000 ordinary loss in Year 1 and a $12,000 ordinary loss in Year 2. Moreover, in Year 2, Joe and his wife Marsha divorced. As part of the divorce settlement, on March 31 of Year 2, Joe gave Marsha 50% of the Sigma stock. In Year 3, Sigmas performance improved, with the corporation earning $40,000 of ordinary income. Joe asks your help in determining the tax consequences of these events, particularly the usage of the S corporation losses. At a minimum, you should consider the following resources:

Form 1120S Department of the Treasury Internal Revenue Service U.S. Income Tax Return for an S Corporation OMB No. 1545-0123 Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. 2014 For calendar year 2014 or tax year beginning A S election effective date TYPE B Business activity code number (see instructions) OR PRINT , 2014, ending , 20 Name D Employer identification number Number, street, and room or suite no. If a P.O. box, see instructions. E Date incorporated City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions) C Check if Sch. M-3 attached $ Yes No If \"Yes,\" attach Form 2553 if not already filed G Is the corporation electing to be an S corporation beginning with this tax year? (4) (3) (5) Name change Address change S election termination or revocation Final return (2) Amended return H Check if: (1) I Enter the number of shareholders who were shareholders during any part of the tax year . . . . . . . . . Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. 1a . . . . . . . . . . . . . . 1a . . . . . . . . . . . . . . 1b Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . . Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . Net gain (loss) from Form 4797, line 17 (attach Form 4797) . . . . . . . . . . . . Other income (loss) (see instructionsattach statement) . . . . . . . . . . . . . Total income (loss). Add lines 3 through 5 . . . . . . . . . . . . . . . . Compensation of officers (see instructionsattach Form 1125-E) . . . . . . . . . . Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562) . . . . Depletion (Do not deduct oil and gas depletion.) . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . . Employee benefit programs . . . . . . . . . . . . . . . . . . . . . . Other deductions (attach statement) . . . . . . . . . . . . . . . . . . . Total deductions. Add lines 7 through 19 . . . . . . . . . . . . . . . . Ordinary business income (loss). Subtract line 20 from line 6 . . . . . . . . . . . Excess net passive income or LIFO recapture tax (see instructions) . . 22a Tax from Schedule D (Form 1120S) . . . . . . . . . . . 22b Add lines 22a and 22b (see instructions for additional taxes) . . . . . . . . . . . . 2014 estimated tax payments and 2013 overpayment credited to 2014 23a Tax deposited with Form 7004 . . . . . . . . . . . . 23b Credit for federal tax paid on fuels (attach Form 4136) . . . . . 23c Add lines 23a through 23c . . . . . . . . . . . . . . . . . . . . . . Estimated tax penalty (see instructions). Check if Form 2220 is attached . . . . . . Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed . . Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid . . Enter amount from line 26 Credited to 2015 estimated tax Refunded Gross receipts or sales . Tax and Payments Deductions (see instructions for limitations) Income b Returns and allowances c 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 a b c 23 a b c d 24 25 26 27 22c 23d 24 25 26 27 Paid Preparer Use Only Date Signature of officer Print/Type preparer's name Preparer's signature Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below (see instructions)? Sign Here 1c 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Yes Title Date Check if self-employed Firm's name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H No PTIN Form 1120S (2014) Form 1120S (2014) Schedule B 1 2 3 4 Page 2 Other Information (see instructions) a c See the instructions and enter the: a Business activity Check accounting method: Yes No Cash b Accrual Other (specify) b Product or service At any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation . . At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If \"Yes,\" complete (i) through (v) below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Name of Corporation (ii) Employer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage of Stock Owned (v) If Percentage in (iv) is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If \"Yes,\" complete (i) through (v) below . . . . . . . (i) Name of Entity (ii) Employer Identification Number (if any) (iv) Country of Organization (iii) Type of Entity (v) Maximum Percentage Owned in Profit, Loss, or Capital 5 a At the end of the tax year, did the corporation have any outstanding shares of restricted stock? . . . . . . . If \"Yes,\" complete lines (i) and (ii) below. (i) Total shares of restricted stock . . . . . . . . . (ii) Total shares of non-restricted stock . . . . . . . . b At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? If \"Yes,\" complete lines (i) and (ii) below. (i) Total shares of stock outstanding at the end of the tax year (ii) Total shares of stock outstanding if all instruments were executed 6 7 . . Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? . . . . . . . . . . . . . . . . . . . . . . . . Check this box if the corporation issued publicly offered debt instruments with original issue discount . . . . If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. If the corporation: (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset (or the basis of any other property) in the hands of a C corporation and (b) has net unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years (see instructions) . . . . . . . . . . . . . . . $ $ 9 Enter the accumulated earnings and profits of the corporation at the end of the tax year. 10 Does the corporation satisfy both of the following conditions? a The corporation's total receipts (see instructions) for the tax year were less than $250,000 . . . . . . . . . . b The corporation's total assets at the end of the tax year were less than $250,000 . . . . . . . . . . . . If \"Yes,\" the corporation is not required to complete Schedules L and M-1. 8 11 During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or had terms modified so as to reduce the principal amount of the debt? . . . . . . . . . . . . . . . . If \"Yes,\" enter the amount of principal reduction $ 12 During the tax year, was a qualified subchapter S subsidiary election terminated or revoked? If \"Yes,\" see instructions 13 a Did the corporation make any payments in 2014 that would require it to file Form(s) 1099? . . . . . . . . . b If \"Yes,\" did the corporation file or will it file required Forms 1099? . . . . . . . . . . . . . . . . the . . . . Form 1120S (2014) Form 1120S (2014) Credits Deductions Income (Loss) Schedule K Ordinary business income (loss) (page 1, line 21) . . . . . . . . . . . . . Net rental real estate income (loss) (attach Form 8825) . . . . . . . . . . . Other gross rental income (loss) . . . . . . . . . . 3a Expenses from other rental activities (attach statement) . . 3b Other net rental income (loss). Subtract line 3b from line 3a . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . Dividends: a Ordinary dividends . . . . . . . . . . . . . . . . . . b Qualified dividends . . . . . . . . . . 5b 6 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S)) . . . . . . . 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S)) . . . . . . . b Collectibles (28%) gain (loss) . . . . . . . . . . . 8b c Unrecaptured section 1250 gain (attach statement) . . . . 8c 9 Net section 1231 gain (loss) (attach Form 4797) . . . . . . . . . . . . . 10 Other income (loss) (see instructions) . . Type 11 Section 179 deduction (attach Form 4562) . . . . . . . . . . . . . . . 12a Charitable contributions . . . . . . . . . . . . . . . . . . . . b Investment interest expense . . . . . . . . . . . . . . . . . . . c Section 59(e)(2) expenditures (1) Type (2) Amount d Other deductions (see instructions) . . . Type 13a Low-income housing credit (section 42(j)(5)) . . . . . . . . . . . . . . b Low-income housing credit (other) . . . . . . . . . . . . . . . . . c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) . d Other rental real estate credits (see instructions) Type e Other rental credits (see instructions) . . . Type Foreign Transactions Alternative Minimum Tax (AMT) Items Biofuel producer credit (attach Form 6478) Other credits (see instructions) . . . . Name of country or U.S. possession . . 3 Total amount 1 2 3a b c 4 5 f g 14a b c Items Affecting Shareholder Basis Page Shareholders' Pro Rata Share Items . . . . Type . . . . . . . . 1 2 . . . 3c 4 5a . . . 6 7 8a . 9 10 11 12a 12b . . . 12c(2) . . . 12d 13a 13b 13c 13d 13e 13f 13g . . . . Gross income from all sources . . . . . . . . . . . . . . . . Gross income sourced at shareholder level . . . . . . . . . . . . Foreign gross income sourced at corporate level d Passive category . . . . . . . . . . . . . . . . . . . . e General category . . . . . . . . . . . . . . . . . . . . f Other (attach statement) . . . . . . . . . . . . . . . . . . Deductions allocated and apportioned at shareholder level g Interest expense . . . . . . . . . . . . . . . . . . . . . h Other . . . . . . . . . . . . . . . . . . . . . . . . Deductions allocated and apportioned at corporate level to foreign source income i Passive category . . . . . . . . . . . . . . . . . . . . j General category . . . . . . . . . . . . . . . . . . . . k Other (attach statement) . . . . . . . . . . . . . . . . . . Other information l Total foreign taxes (check one): Paid Accrued . . . . . . . m Reduction in taxes available for credit (attach statement) . . . . . . . . n Other foreign tax information (attach statement) 15a Post-1986 depreciation adjustment . . . . . . . . . . . . . . . b Adjusted gain or loss . . . . . . . . . . . . . . . . . . . c Depletion (other than oil and gas) . . . . . . . . . . . . . . . d Oil, gas, and geothermal propertiesgross income . . . . . . . . . . e Oil, gas, and geothermal propertiesdeductions . . . . . . . . . . . f Other AMT items (attach statement) . . . . . . . . . . . . . . . 16a Tax-exempt interest income . . . . . . . . . . . . . . . . . b Other tax-exempt income . . . . . . . . . . . . . . . . . . c Nondeductible expenses . . . . . . . . . . . . . . . . . . d Distributions (attach statement if required) (see instructions) . . . . . . . e Repayment of loans from shareholders . . . . . . . . . . . . . . . . . . . . 14b 14c . . . . . . . . . 14d 14e 14f . . . . . . 14g . . . . . . . . . 14i 14j 14k . . . . . . 14l 14m . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15a 15b 15c 15d 15e 15f 16a 16b 16c 16d 16e 14h Form 1120S (2014) Form 1120S (2014) ReconOther ciliation Information Schedule K Page 17a b c d Investment income . . . . . . . . . . . . . . . Investment expenses . . . . . . . . . . . . . . Dividend distributions paid from accumulated earnings and profits Other items and amounts (attach statement) 18 Income/loss reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14l Schedule L Balance Sheets per Books . . . . . . . . . . . . . . . . . . . . . 17a 17b 17c . . . Beginning of tax year Assets (a) 1 2a b 3 4 5 6 7 8 9 10a b 11a b 12 13a b 14 15 Cash . . . . . . . . . . . . Trade notes and accounts receivable . . Less allowance for bad debts . . . . . Inventories . . . . . . . . . . U.S. government obligations . . . . . Tax-exempt securities (see instructions) . Other current assets (attach statement) . . Loans to shareholders . . . . . . . Mortgage and real estate loans . . . . Other investments (attach statement) . . Buildings and other depreciable assets . . Less accumulated depreciation . . . . Depletable assets . . . . . . . . Less accumulated depletion . . . . . Land (net of any amortization) . . . . . Intangible assets (amortizable only) . . . Less accumulated amortization . . . . Other assets (attach statement) . . . . Total assets . . . . . . . . . . Liabilities and Shareholders' Equity 16 17 18 19 20 21 22 23 24 25 26 27 Accounts payable . . . . . . . . . Mortgages, notes, bonds payable in less than 1 year Other current liabilities (attach statement) . . Loans from shareholders . . . . . . . Mortgages, notes, bonds payable in 1 year or more Other liabilities (attach statement) . . . . Capital stock . . . . . . . . . . . Additional paid-in capital . . . . . . . Retained earnings . . . . . . . . . Adjustments to shareholders' equity (attach statement) Less cost of treasury stock . . . . . . Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . 4 Total amount Shareholders' Pro Rata Share Items (continued) 18 End of tax year (b) (c) (d) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Form 1120S (2014) Form 1120S (2014) Schedule M-1 Page 5 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) 1 Net income (loss) per books 2 Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14l (itemize): Depreciation $ Travel and entertainment $ a b 4 Add lines 1 through 3 Schedule M-2 . . . . . . . . . . . . . . 5 Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ 6 Deductions included on Schedule K, lines 1 through 12 and 14l, not charged against book income this year (itemize): a Depreciation $ 7 Add lines 5 and 6 . . . . . 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders' Undistributed Taxable Income Previously Taxed (see instructions) (a) Accumulated adjustments account 1 2 3 4 5 6 7 8 Balance at beginning of tax year . . . . . Ordinary income from page 1, line 21 . . . Other additions . . . . . . . . . . ( Loss from page 1, line 21 . . . . . . . ( Other reductions . . . . . . . . . . Combine lines 1 through 5 . . . . . . . Distributions other than dividend distributions Balance at end of tax year. Subtract line 7 from line 6 (b) Other adjustments account ) )( (c) Shareholders' undistributed taxable income previously taxed ) Form 1120S (2014)