C-16 Appendix C CORPORATE TAX RETURN PROBLEM 2 Required: Complete Blue Catering Service Inc.'s (BCS) 2017 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below. Form 4562 for depreciation is not required. Include the amount of tax deprecia tion given in the problem on the appropriate line on the first page of Form 1120 f any information is missing, use reasonable assumptions to fill in the gaps. The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms. Facts: Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2010. It has only one class of stock outstanding and operates as a C corporation for tax purposes. BCS caters all types of social events throughout southern California. BCS is located at 540 Waverly Way, San Diego, California 92101 BCS's Employer Identification Number is 38-4743474 BCS's business activity is catering food and services. Its business activity code is 722300 The shareholders also work as officers for the corporation as follows Cara is the chief executive officer and president (Social Security number 231-54-8976) Janna is the executive vice president and chief operating officer (Social Security number 798-56-3241). Valerie is the vice president of finance (Social Security number 879-21-4536). All officers devote 100 percent of their time to the business and all officers are U.S. citizens BCS uses the accrual method of accounting and has a calendar year-end. BCS made four equal estimated tax payments of $20,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, BCS would like to receive a refund BCS paid a dividend of $30,000 to its sharcholders on November ample earnings and profits (E&P) to absorb the distribution BCS had The following is BCS's audited income statement for 2017 BCS Income Statement For year ending December 31, 2017 Revenue from sales $1,800,000 Sales retums and allowances (5,000) $1445 000 Gross profit from operations .. Other income: Capital Didcond in (1 25.000 ncome 10,000 Interest income Gross income $1,465,000 C-17 Appendix C BCS Income Statement For year ending December 31, 2017 Expenses: Compensation (950,000) Depreciation (10,000) Bad debt expense (15,000) Meals (3.000) Maintenance (6,000) Property taxes (11,000) State income taxes (ooo'st) taxes Rent (60,000) Interest (5,000) Advertising (52,000) Professional services (16,000) Employee benefits (32.000) Supplies (5,000) Other expenses (27,000) (1,281,000 Total expenses 184,00 beore taxes expense $122000 Net income after taxes Notes: 1. BCS's inventory-rel ated purchases during 2017 were $360,000. It values its inven- tory based on cost using the FIFO inventory cost flow method. Assume the rules of $263A do not apply to BCS 2. Of the $10,000 interest income, $1,250 was from a City of Irvine bond issued in 2015, $1,750 was from an Oceanside city bond issued in 2014, $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account. 3. BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of the stock in Clever Cakes at the beginning of the year. This represented 10 percent of SSM outstanding stock. 4. On October 1, 2017, BCS sold 1,000 shares of its CC stock for $25,000. It had orig- inally purchased these shares on April 18, 2013, for $40,000. After the sale, BCS owned 9 percent of CC 5. BCS's compensation is as follows: Cara, $150,000 Janna, $140,000 Valerie, $130,000 Other, $530.000 6. BCS wrote off $25,000 in accounts receivable as uncollectible during the year 7. BCS's tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A 8. The S5,000 interest expense was from a business loan 9. Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie C-18 Appendix C The following are BCS's audited balance sheets as of January 1, 2017, and Decem- ber 31, 2017 2017 January 1 December 31 Assets $ 180,000 205,000 Cash Accounts receivable 560,000 580,000 Allowance for doubtful accounts (60,000) (50,000) 140,000 150,000 Inventory U.S. government bonds 20,000 20,000 State and local bonds 120,000 120,000 400,000 360,000 Investments in stock Fixed assets 140,000 160,000 Accumulated depreciation (50,000) (60,000) Other assets 20,000 21,000 $1,506,000 $1,470,000 Total assets Liabilities and Shareholders' Equity $ 240,000 Accounts payable $ 280,000 Other current liabilities 20,000 18,000 Other liabilities 40,000 26,000 Capital stock 400,000 400,000 Retained earnings Total liabilities and shareholders' equity 730,000 822,000 $1,470,000 $1,506,000 1120 U.S. Corporation Income Tax Return For calendar year 2018 or tax year beginningma- ..2018, ending OMB No. 1545-0123 ,20 2018 Department of the Treasury Internal Revenue Service Go to www.irs.gov/Form1 120 for instructions and the latest information B Employer identification number Name Check in lated return LTYPE (attach Form 851) C Date incorporated Number, street, and room or suite no. If a P.O. box, see instructions. onsoli- OR PRINT 2 Personal holding co, D Total assets (see instructions) City or town, state a province, country, and ZIP or foreign postal code cve corp (see instructions) Address change Schedule M-3 attached E Check if (1) Initial returm (2) Final return (3) Name change (4 Gross receipts c 1a 1a sales Returns and allowances 1b b Balance. Subtract line 1b from line 1a 1c C Cost of goods sold (attach Fom 1125-A)- 2 ddeds and inclusions (Schedule C. line 23, column (a))- 5 Interest 5 6 Gross rents 6 Gross royalties Capital gain net income (attach Schedule D (Fom 1120)) 7 7 8 8 9 Net gain or (loss) from Form 4797, Part I, line 17 (attach Form 4797) Other income (see instructions-attach statement) Total income. Add lines 3 through 10 Compensation of officers (see instructions-attach Form 1 125-E) 9 10 10 11 11 12 12 13 Salaries and wages (less employment credits) 13 14 Repairs and maintenance 14 15 Bad debts 15 16 Rents 16 Taxes and licenses 17 17 18 Interest (see instructions) 18 Charitable contributions 19 19 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on retum (attach Form 4562) 20 21 Depletion 21 22 Advertising 22 23 Pension, profit-sharing, etc., plans 23 Employee benefit programs 24 24 25 Reserved for future use 25 26 Other deductions (attach statement) 26 27 Total deductions. Add lines 12 through 26 27 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 28 29a Net operating loss deduction (see instructions) 29a 29b E Special deductions (Schedule C, line 24, column (c) Add lines 29a and 29b 29. c 30 Taxable income. Subtract line 29c from line 28. See instructions 30 Total tax (Schedule J. Part I, line 11) 31 31 32 2018 net 965 tax liability paid (Schedule J, Part lI, line 12) 32 Total payments, credits, and section 965 net tax liability (Schedule J, Part II, line 23) 33 33 34 34 Estimated tax penalty. See instructions. Check if Form 2220 Amount owed attached 35 f line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 35 36 Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid 36 Refunded to the bast of my knowedga and belief, it is trua, corract Enter amount from line 36 you want: Credited 31 2019 estimated tax 37 les and sto and complete, Declaraton of preparer (other than taxpave) is based on all information of which preparer has any knowledoe, Sign Here May the See instructiors. Yes No Signature Title officer Date Print/Type preparer's name Preparer's signature Date PTIN Check i self-employed Firm's EIN Paid Preparer Use Only Firm's name Firm's address h Phone no Form 1120 2018) For Paperwork Reduction Act Notice, see separate instructions. Cat, No. 114500 Deductions (See i Form 1120 (2018) Page 2 Schedule C (a) Dividends and inclusions Dividends, Inclusions, and Special Dedu ctions (see instructions) (c) Special deductions (a) (b) (b) % Dividends from less-than-20 % - owned domestic coporations (other than debt-financed 1 50 stock) Dividends from 20 % - or - more-owned domestic corporations (other than debt-financed 2 65 stock) nstruction 3 Dividends on certain debt-financed stock of domestic and foreign corporations 23.3 less-than-20 %-owned public utilities 4 Dividends on certain preferred stock 20%- or -more-owned public utilities 26.7 5 Dividends on certain prefered stock 50 6 Dividends from less-than-20 % - owned foreign corporations and certain FSCS 65 Dividends from 20 % - or - more-owned foreign corporations and certain FSCS 7 100 8 Dividends from wholly owned foreign subsidiaries see instruction Subtotal. Add lines 1 through 8. See instructions for imitations Dividends from domestic corporations received by a small business investment 10 100 company operating under the Small Business Investment Act of 1958 100 Dividends from affiliated group members 11 100 12 Dividends from certain FSCS 100 Foreign-source portion of dividends received from a specified 10%-owned foreign corporation (excluding hybrid dividends) (see instructions) 13 Dividends from foreign corporations not included on line 3. 6, 7, 8, 11, 12, or 13 14 (including any hybrid dividends) see instruction Section 965(a) inclusion 15 ... 100 16a Subpart F inclusions derived from the sale by a controlled foreign corporation (CFC) of the stock of a lower-tier foreign corporation treated as a dividend (attach Form(s) 5471) (see instructions) Subpart F inclusions derived from hybrid dividends of tiered corporations (attach Form(s) 5471) (see instructions) ... Other inclusions from CFCs under subpart F not included on line 15, 16a, 16b, or 17 (attach Form(s) 5471) (see instructions) C 17 Global Intangible Low-Taxed Income (GILTI (attach Form(s) 5471 and Form 8992) 18 Gross-up for foreign taxes deemed paid 19 IC-DISC and former DISC dividends not included on line 1,2, or 3 Other dividends 20 Deduction for dividends paid on certain preferred stock of public utilities 21 Section 250 deduction (attach Form 8993) 22 23 Total dividends and inclusions. Add lines 9 through 20. Enter here and on page 1, line 4 .. ..... 24 Total special deductions. Add lines 9 through 22, column (c). Enter here and on page 1, line 29b Form 1120 (2018) Form 1120 (2018) Page 3 Schedule J Tax Computation and Payment (see instructions) Part I-Tax Computation Check if the corporation is a member of a controlled group (attach Schedule O (Form 1120). See instructions Income tax. See instructions 2 2 3 Base erosion minimum tax (attach Fom 8991) 3 4. Add lines 2 and 3 5a 5a Foreign tax credit (attach Form 1118) b Credit from Form 8834 (see instructions) 5b General business credit (attach Form 3800) 5c C d Credit for prior year minimum tax (attach Fom 8827) 5d Bond credits from Form 8912 5e Total credits. Add lines 5a through 5e 6 Subtract line 6 from line 4 a inttach Schedule PH (Form 1120) ttach Form 4255) ersonal halding 8 9a 9a ap Recapture of low-income housing credit (attach Form 8611) 9b under the look-back method-completed long-term contracts (attach Eorm 8697) 9c d Interest due under the look-back method-income forecast method (attach Form 8866) 9d Alternative tax on qualifying shipping activities (attach Form 8902) 9e f Other (see instructions-attach statement) Total. Add lines 9a through 9f Of 10 10 11 11 Total tax. Add lines 7, 8, and 10. Enter here and on page 1, line 31 Part Il-Section 965 Payments (see instructions) 12 2018 net 965 tax liability paid from Fom 965-B, Part II, column (k), line 2. Enter here and on page 1, line 32 12 Part II-Payments, Refundable Credits, and Section 965 Net Tax Liability 2017 overpayment credited to 2018 13 13 14 2018 estimated tax payments 14 15 2018 refund applied for on Form 4466 15 16 Combine lines 13, 14, and 15 16 17 Tax deposited with Form 7004 17 Withholding (see instructions) 18 18 19 Total payments. Add lines 16, 17, and 18 19 Refundable credits from: 20 Form 2439 20a a b Form 4136 20b Form 8827, line 8c 20c Other (attach statement-see instructions) 20d 21 Total credits. Add lines 20a through 20d 21 22 2018 net 965 tax liability from Form 965-B, Part I, column (d), line 2. See instructions 22 23 Total payments, credits, and section 965 net tax liability. Add lines 19, 21, and 22. Enter here and on page 1 ine 33 23 Form 1120 (2018) | | | Page 4 Form 1120 (2018) Other Information (see instructions) b Accrual Schedule K Check accounting method a c Other (specify) Yes No 1 Cash See the instructions and enter the: Business activity code no. Business activity b Product or serviceM Is the corporation a subsidiary in affiliated group or a parent-subsidiary controlled group? 3 If Yes. enter name and EIN of the parent coporation ..-- At the end of the tax year: 4 partnership), trust, or tax-exempt classes of the a Did any foreign or domestic corporation, partnership (including any entity treated as organization own directly 20 % or more, corporation's stock entitled to vote? If "Yes," complete Part I rown, directly or indirectly, 50% or more of the total voting power of Schedule G (Form 1120) (attach Schedule G) . b r of all ctionltock ontited to vote? If es"complete Part l of Schedule G (Form 1120) (attach Schedule G) At the end of the tax year, did the corporation: Own directly 20% any foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructions. indirectly, 50% or more the total voting power of all classes of stock entitled to vote of a If "Yes," complete ) through (v) below. (i Employer Jumber t any iv) Percentage (i) Country oft Incorporation Identit Owned Name of Corporation Voting b Own directly interest of 20 % or more , or own, directly or indirectly, an interest of 50 % or more in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest a tnust? Eor nules of constnctive ownershin see instructions If "Yes," complete ) through (iv) below. Employer iv) Maximum (i) Country of Organization (0 Name of Entity umber dena an Prott L Cantal During this tax year, did the corporation pay dividends (other than stock dividends and distributions in exchange for stock) in excess of the corporation's current and accumulated earnings and profits? See sections 301 and 316 If "Yes," file Form 5452, Corporate Report of Nondividend Distributions. See the instructions for Form 5452. If this is a consolidated return, answer here for the parent corporation and on Form 851 for each subsidiary. 7 At any time during the tax year, did one foreign person own, directly or indirectly, least 25% of the total voting power of all classes of the corporation's stock entitled to vote or at least 25% of the total value of all classes of the corporation's stock? For rules attribution, see section 318. If "Yes," enter and (b) Owner's country . a) Percentage owned (c) The corporation may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Enqaged in a U.S. Trade or Business. Enter the number of Forms 5472 attached 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. Enter the amount of tax-exempt interest received or accrued during the tax year $ Enter the number of shareholders at the end of the tax year (if 100 or fewer) 10 forego the carryback period, check here (see instructions) I 11 If the corporation has an NOL for the tax year and is electing If the corporation is filing a consolidated return, the statement required by Regulations section 1.1502-21(b)(3) must be attached or the election will not be valid. by any deduction reported on S Enter the available NOL carryover from prior tax years (do not reduce page 1, line 29a.) 12 Form 1120 (2018) Form 1120 (2018) Page 5 Other Information (continued from page 4) Schedule K Yes No 13 Are the corporation's total receipts (page 1, line 1a, plus lines 4 through 10) for the tax year and its total assets tax year less than $250,000? If "Yes," the corporation distributions and the book value of property distributions (other than cash) made during the tax year $ the end the nat required to complete Schedules M-1, and M-2. Instead, enter the total amount of cash 14 Is the corporation required to file Schedule UTP (Form 1120), Uncertain Tax Position Statement? See instructions If "Yes," complete and attach Schedule UTP. Did the corporation make any payments 15a 2018 that would require it to file Formis) 1099? h If Yes," did or will the corporation file required Forms 1099? 16 During this tax year, did the corporation have an 80% more change in ownership, including a change due to redemption of its own stock? .... .... ........ .. During or subsequent to this tax year, but before the filing of this return, did the corporation dispose of more than 65 % ( by value ) 13 of its assets in a taxable, non-taxable, or tax deferred transaction? ..... ............ 16 Did the corporation receive assets in a section 351 transfer in which any of the transferred assets had a fair market basis fair market value of more than $1 m Forms 1042 and 1042-S 10 oticns 1441 throug 1464) or chanter 4 (eections 1471 throse 1474) of the Code? 20 Is the corporation operating on a cooperative basis? 21 During the tax year, did the corporation pay or accrue any interest or royalty for which the deduction is not allowed under section 267A? See instructions ... If Yes," enter the total amount of the disallowed deductions 22 Does the corporation have gross receipts of at least $500 million in any of the 3 preceding tax years? (See sections 59A(e)(2) and (3)) If Yes, complete and attach Form 8991. 23 Did the corporation have an election under section 1630 for any real property trade or business or any farming business in effect during the tax year? See instructions .rtion does not own a pass-through entity with current Does the ation satisfy one of the following conditions and the 24 r prior year carryover, excess business interest expense? See instructions year, The corporation's aggregate average annual gross receipts (determined under section 448(c) for the 3 tax years preceding the current tax year do not exceed $25 million, and the corporation is not a tax shelter, on The corporation only has business interest expense from (1) an electing real property trade or business, (2) an electing farming business, or (3) certain utility businesses under section 163)(7) If "No," complete and attach Form 8990. 25 Is the corporation attaching Form 8996 to certify as a Qualified Opportunity Fund? If Yes, enter amount from Form 8996, line 13 Form 1120 2018) Page 6 Form 1120 2018) Schedule L Balance Sheets per Books Beginning of tax year (b) End of tax year (a) Assets (c) (d Cash 1 . ... 2a Trade notes and accounts receivable b Less allowance for bad debts Inventories . U.S. govemment obligations 4 Tax-exempt securities (see instructions) 5 Other current assets (attach statement) 6 Loans to shareholders 7 Mortgage and real estate loans Other investments (attach statement) Buildings and other depreciable assets 10a 11a Denita depreciation b Lese ao a int ed depletion. 12 Land (net of any amortization) 13a Intangible assets (amortizable only) Less accumulated amortization b 14 Other assets (attach statement) 15 Total assets Liabilities and Shareholders' Equity Accounts payable Mortgages, notes, bonds payable in less than 1 year 16 17 18 Other current liabilities (attach statement) Loans from shareholders 19 20 Mortqages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) 22 Preferred stock Capital stock: oCommon stock Additional paid-in capital 23 24 Retained earnings-Appropriated (attach statement) Retained earnings-Unappropriated 25 26 Adjustments to shareholders' equity (attach statement) Less cost of treasury stock 27 Total liabilities and shareholders' equity 28 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required file Schedule M-3, See instructions. Net income (loss) per books .. 1 Income recorded on books this year not included on this return (itemize): 7 Federal income tax per books 2 . Excess of capital losses over capital gains 3 Tax-exempt interest 4. Income subject to tax not recorded on books this year (itemize): Deductions on this retun not charged against book income this year (itemize) 5 Expenses recorded on books this vear not deducted on this retum (itemize): a Depreciation Depreciation ... . S Charitable contributions $ b a b Charitable contributions S Travel and entertainment Add lines 7 and 8 Income (page 1, line 28)-line 6 less line 9 Add lines 1 through 5 10 |Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L) Balance at beginning of year 5 Distributions: a Cash 2 Net income (loss) per books b Stock c Property Other decreases (itemize): Other increases (itemize): 3 6 7 Add lines 5 and 6 Add lines 1. 2, and 3 8 Balance at end of vear (ine 4 less line 7) 4 Form 1120 2018) SCHEDULE D (Form 1120) Capital Gains and Losses OMB No. 1545-0123 Attach to Form 1120, 1120-c. 1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L, 1120-ND, 1120-Pc 1120-POL, 1120-REIT, 1120-RIC, 1120-SF, or certain Foms 990-T. 2018 the Treasury Department Intemal Revenue Service Go to www.irs.gov/Form 1120 for instructions and the latest information. Name Employer ident ification number Part IShort-Term Capital Gains and Losses (See instructions.) for how to fiqure the amounts to enter on in bact column (el from oes below. (el 19 fm Formis (d) 8949, Part I, line 2. column (g) column (di and combine the result with column (g) This form may be easier to complete if you round off cents to whole dolars (or other basis) (calos nricel 1a 1099-B for which hasis was renorted to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b .... 1b Total all transactons reported on Form(s) 8949 With tions reported on Form(s) 8949 with Box B checked 3 Totals for all transactions reported on Form(s) 8949 with Box C checked 4 Short-term capital gain from installment sales from Form 6252, line 26 or 37 5 Short-term capital gain (loss) from like-kind exchanges from Form 8824 5 6 Unused capital loss carryover (attach computation) 6 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in columnh Part IILong-Term Capital Gains and Losses (See instructions.) 7 (g) Adjustments to gain or loss from Form(s) rt II, line 2, See instructions for how to figure the amounts to enter on the lines below ) Gain or (loss) Subtract oolumn (e) from d) le) Proceeds Cos (sales price) (or other basis) dt with column ig) Tom may be easier to complete if you round off cents to coumn fa 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported the IRS and for l thee anacticns on Form 8949 leave this line blank and go to line 8b 8b Totals for all transactions reported on Form(s) 8949 with Box D checked 9 Totals for all transactions reported on Form(s) 8949 with Box E checked 10 Totals for all transactions reported on Form(s) 8949 with Box F checked 11 Enter gain from Form 4797, line 7 or 9 11 12 Long-term capital gain from installment sales from Form 6252, line 26 or 37 12 13 Long-term capital gain or (loss) from like-kind exchanges from Form 8824 13 14 Capital gain distributions (see instructions) 14 15 Net lonq-term capital qain or (loss). Combine liness 8a through 14 in column h 15 Part III Summary of PartsI and II 16 Enter excess of net short-term capital gain (ine 7) over net long-term capital loss (line 15) 16 17 Net capital gain. Enter excess of net long-term capital gain (line 15) over net short-term capital loss (line 7) 18 Add lines 16 and 17, Enter here and on Form 1120. page 1, line 8, or the proper line on other returns . . 17 18 Note: If losses exceed gains, see Capital losses in the instructions. For Paperwork Reduction Act Notice, see the Instructions for Form 1120. Cat. No. 1146OM Schedule D (Form 1120) 2018 C-16 Appendix C CORPORATE TAX RETURN PROBLEM 2 Required: Complete Blue Catering Service Inc.'s (BCS) 2017 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below. Form 4562 for depreciation is not required. Include the amount of tax deprecia tion given in the problem on the appropriate line on the first page of Form 1120 f any information is missing, use reasonable assumptions to fill in the gaps. The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms. Facts: Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2010. It has only one class of stock outstanding and operates as a C corporation for tax purposes. BCS caters all types of social events throughout southern California. BCS is located at 540 Waverly Way, San Diego, California 92101 BCS's Employer Identification Number is 38-4743474 BCS's business activity is catering food and services. Its business activity code is 722300 The shareholders also work as officers for the corporation as follows Cara is the chief executive officer and president (Social Security number 231-54-8976) Janna is the executive vice president and chief operating officer (Social Security number 798-56-3241). Valerie is the vice president of finance (Social Security number 879-21-4536). All officers devote 100 percent of their time to the business and all officers are U.S. citizens BCS uses the accrual method of accounting and has a calendar year-end. BCS made four equal estimated tax payments of $20,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, BCS would like to receive a refund BCS paid a dividend of $30,000 to its sharcholders on November ample earnings and profits (E&P) to absorb the distribution BCS had The following is BCS's audited income statement for 2017 BCS Income Statement For year ending December 31, 2017 Revenue from sales $1,800,000 Sales retums and allowances (5,000) $1445 000 Gross profit from operations .. Other income: Capital Didcond in (1 25.000 ncome 10,000 Interest income Gross income $1,465,000 C-17 Appendix C BCS Income Statement For year ending December 31, 2017 Expenses: Compensation (950,000) Depreciation (10,000) Bad debt expense (15,000) Meals (3.000) Maintenance (6,000) Property taxes (11,000) State income taxes (ooo'st) taxes Rent (60,000) Interest (5,000) Advertising (52,000) Professional services (16,000) Employee benefits (32.000) Supplies (5,000) Other expenses (27,000) (1,281,000 Total expenses 184,00 beore taxes expense $122000 Net income after taxes Notes: 1. BCS's inventory-rel ated purchases during 2017 were $360,000. It values its inven- tory based on cost using the FIFO inventory cost flow method. Assume the rules of $263A do not apply to BCS 2. Of the $10,000 interest income, $1,250 was from a City of Irvine bond issued in 2015, $1,750 was from an Oceanside city bond issued in 2014, $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account. 3. BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of the stock in Clever Cakes at the beginning of the year. This represented 10 percent of SSM outstanding stock. 4. On October 1, 2017, BCS sold 1,000 shares of its CC stock for $25,000. It had orig- inally purchased these shares on April 18, 2013, for $40,000. After the sale, BCS owned 9 percent of CC 5. BCS's compensation is as follows: Cara, $150,000 Janna, $140,000 Valerie, $130,000 Other, $530.000 6. BCS wrote off $25,000 in accounts receivable as uncollectible during the year 7. BCS's tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A 8. The S5,000 interest expense was from a business loan 9. Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie C-18 Appendix C The following are BCS's audited balance sheets as of January 1, 2017, and Decem- ber 31, 2017 2017 January 1 December 31 Assets $ 180,000 205,000 Cash Accounts receivable 560,000 580,000 Allowance for doubtful accounts (60,000) (50,000) 140,000 150,000 Inventory U.S. government bonds 20,000 20,000 State and local bonds 120,000 120,000 400,000 360,000 Investments in stock Fixed assets 140,000 160,000 Accumulated depreciation (50,000) (60,000) Other assets 20,000 21,000 $1,506,000 $1,470,000 Total assets Liabilities and Shareholders' Equity $ 240,000 Accounts payable $ 280,000 Other current liabilities 20,000 18,000 Other liabilities 40,000 26,000 Capital stock 400,000 400,000 Retained earnings Total liabilities and shareholders' equity 730,000 822,000 $1,470,000 $1,506,000 1120 U.S. Corporation Income Tax Return For calendar year 2018 or tax year beginningma- ..2018, ending OMB No. 1545-0123 ,20 2018 Department of the Treasury Internal Revenue Service Go to www.irs.gov/Form1 120 for instructions and the latest information B Employer identification number Name Check in lated return LTYPE (attach Form 851) C Date incorporated Number, street, and room or suite no. If a P.O. box, see instructions. onsoli- OR PRINT 2 Personal holding co, D Total assets (see instructions) City or town, state a province, country, and ZIP or foreign postal code cve corp (see instructions) Address change Schedule M-3 attached E Check if (1) Initial returm (2) Final return (3) Name change (4 Gross receipts c 1a 1a sales Returns and allowances 1b b Balance. Subtract line 1b from line 1a 1c C Cost of goods sold (attach Fom 1125-A)- 2 ddeds and inclusions (Schedule C. line 23, column (a))- 5 Interest 5 6 Gross rents 6 Gross royalties Capital gain net income (attach Schedule D (Fom 1120)) 7 7 8 8 9 Net gain or (loss) from Form 4797, Part I, line 17 (attach Form 4797) Other income (see instructions-attach statement) Total income. Add lines 3 through 10 Compensation of officers (see instructions-attach Form 1 125-E) 9 10 10 11 11 12 12 13 Salaries and wages (less employment credits) 13 14 Repairs and maintenance 14 15 Bad debts 15 16 Rents 16 Taxes and licenses 17 17 18 Interest (see instructions) 18 Charitable contributions 19 19 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on retum (attach Form 4562) 20 21 Depletion 21 22 Advertising 22 23 Pension, profit-sharing, etc., plans 23 Employee benefit programs 24 24 25 Reserved for future use 25 26 Other deductions (attach statement) 26 27 Total deductions. Add lines 12 through 26 27 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 28 29a Net operating loss deduction (see instructions) 29a 29b E Special deductions (Schedule C, line 24, column (c) Add lines 29a and 29b 29. c 30 Taxable income. Subtract line 29c from line 28. See instructions 30 Total tax (Schedule J. Part I, line 11) 31 31 32 2018 net 965 tax liability paid (Schedule J, Part lI, line 12) 32 Total payments, credits, and section 965 net tax liability (Schedule J, Part II, line 23) 33 33 34 34 Estimated tax penalty. See instructions. Check if Form 2220 Amount owed attached 35 f line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 35 36 Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid 36 Refunded to the bast of my knowedga and belief, it is trua, corract Enter amount from line 36 you want: Credited 31 2019 estimated tax 37 les and sto and complete, Declaraton of preparer (other than taxpave) is based on all information of which preparer has any knowledoe, Sign Here May the See instructiors. Yes No Signature Title officer Date Print/Type preparer's name Preparer's signature Date PTIN Check i self-employed Firm's EIN Paid Preparer Use Only Firm's name Firm's address h Phone no Form 1120 2018) For Paperwork Reduction Act Notice, see separate instructions. Cat, No. 114500 Deductions (See i Form 1120 (2018) Page 2 Schedule C (a) Dividends and inclusions Dividends, Inclusions, and Special Dedu ctions (see instructions) (c) Special deductions (a) (b) (b) % Dividends from less-than-20 % - owned domestic coporations (other than debt-financed 1 50 stock) Dividends from 20 % - or - more-owned domestic corporations (other than debt-financed 2 65 stock) nstruction 3 Dividends on certain debt-financed stock of domestic and foreign corporations 23.3 less-than-20 %-owned public utilities 4 Dividends on certain preferred stock 20%- or -more-owned public utilities 26.7 5 Dividends on certain prefered stock 50 6 Dividends from less-than-20 % - owned foreign corporations and certain FSCS 65 Dividends from 20 % - or - more-owned foreign corporations and certain FSCS 7 100 8 Dividends from wholly owned foreign subsidiaries see instruction Subtotal. Add lines 1 through 8. See instructions for imitations Dividends from domestic corporations received by a small business investment 10 100 company operating under the Small Business Investment Act of 1958 100 Dividends from affiliated group members 11 100 12 Dividends from certain FSCS 100 Foreign-source portion of dividends received from a specified 10%-owned foreign corporation (excluding hybrid dividends) (see instructions) 13 Dividends from foreign corporations not included on line 3. 6, 7, 8, 11, 12, or 13 14 (including any hybrid dividends) see instruction Section 965(a) inclusion 15 ... 100 16a Subpart F inclusions derived from the sale by a controlled foreign corporation (CFC) of the stock of a lower-tier foreign corporation treated as a dividend (attach Form(s) 5471) (see instructions) Subpart F inclusions derived from hybrid dividends of tiered corporations (attach Form(s) 5471) (see instructions) ... Other inclusions from CFCs under subpart F not included on line 15, 16a, 16b, or 17 (attach Form(s) 5471) (see instructions) C 17 Global Intangible Low-Taxed Income (GILTI (attach Form(s) 5471 and Form 8992) 18 Gross-up for foreign taxes deemed paid 19 IC-DISC and former DISC dividends not included on line 1,2, or 3 Other dividends 20 Deduction for dividends paid on certain preferred stock of public utilities 21 Section 250 deduction (attach Form 8993) 22 23 Total dividends and inclusions. Add lines 9 through 20. Enter here and on page 1, line 4 .. ..... 24 Total special deductions. Add lines 9 through 22, column (c). Enter here and on page 1, line 29b Form 1120 (2018) Form 1120 (2018) Page 3 Schedule J Tax Computation and Payment (see instructions) Part I-Tax Computation Check if the corporation is a member of a controlled group (attach Schedule O (Form 1120). See instructions Income tax. See instructions 2 2 3 Base erosion minimum tax (attach Fom 8991) 3 4. Add lines 2 and 3 5a 5a Foreign tax credit (attach Form 1118) b Credit from Form 8834 (see instructions) 5b General business credit (attach Form 3800) 5c C d Credit for prior year minimum tax (attach Fom 8827) 5d Bond credits from Form 8912 5e Total credits. Add lines 5a through 5e 6 Subtract line 6 from line 4 a inttach Schedule PH (Form 1120) ttach Form 4255) ersonal halding 8 9a 9a ap Recapture of low-income housing credit (attach Form 8611) 9b under the look-back method-completed long-term contracts (attach Eorm 8697) 9c d Interest due under the look-back method-income forecast method (attach Form 8866) 9d Alternative tax on qualifying shipping activities (attach Form 8902) 9e f Other (see instructions-attach statement) Total. Add lines 9a through 9f Of 10 10 11 11 Total tax. Add lines 7, 8, and 10. Enter here and on page 1, line 31 Part Il-Section 965 Payments (see instructions) 12 2018 net 965 tax liability paid from Fom 965-B, Part II, column (k), line 2. Enter here and on page 1, line 32 12 Part II-Payments, Refundable Credits, and Section 965 Net Tax Liability 2017 overpayment credited to 2018 13 13 14 2018 estimated tax payments 14 15 2018 refund applied for on Form 4466 15 16 Combine lines 13, 14, and 15 16 17 Tax deposited with Form 7004 17 Withholding (see instructions) 18 18 19 Total payments. Add lines 16, 17, and 18 19 Refundable credits from: 20 Form 2439 20a a b Form 4136 20b Form 8827, line 8c 20c Other (attach statement-see instructions) 20d 21 Total credits. Add lines 20a through 20d 21 22 2018 net 965 tax liability from Form 965-B, Part I, column (d), line 2. See instructions 22 23 Total payments, credits, and section 965 net tax liability. Add lines 19, 21, and 22. Enter here and on page 1 ine 33 23 Form 1120 (2018) | | | Page 4 Form 1120 (2018) Other Information (see instructions) b Accrual Schedule K Check accounting method a c Other (specify) Yes No 1 Cash See the instructions and enter the: Business activity code no. Business activity b Product or serviceM Is the corporation a subsidiary in affiliated group or a parent-subsidiary controlled group? 3 If Yes. enter name and EIN of the parent coporation ..-- At the end of the tax year: 4 partnership), trust, or tax-exempt classes of the a Did any foreign or domestic corporation, partnership (including any entity treated as organization own directly 20 % or more, corporation's stock entitled to vote? If "Yes," complete Part I rown, directly or indirectly, 50% or more of the total voting power of Schedule G (Form 1120) (attach Schedule G) . b r of all ctionltock ontited to vote? If es"complete Part l of Schedule G (Form 1120) (attach Schedule G) At the end of the tax year, did the corporation: Own directly 20% any foreign or domestic corporation not included on Form 851, Affiliations Schedule? For rules of constructive ownership, see instructions. indirectly, 50% or more the total voting power of all classes of stock entitled to vote of a If "Yes," complete ) through (v) below. (i Employer Jumber t any iv) Percentage (i) Country oft Incorporation Identit Owned Name of Corporation Voting b Own directly interest of 20 % or more , or own, directly or indirectly, an interest of 50 % or more in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest a tnust? Eor nules of constnctive ownershin see instructions If "Yes," complete ) through (iv) below. Employer iv) Maximum (i) Country of Organization (0 Name of Entity umber dena an Prott L Cantal During this tax year, did the corporation pay dividends (other than stock dividends and distributions in exchange for stock) in excess of the corporation's current and accumulated earnings and profits? See sections 301 and 316 If "Yes," file Form 5452, Corporate Report of Nondividend Distributions. See the instructions for Form 5452. If this is a consolidated return, answer here for the parent corporation and on Form 851 for each subsidiary. 7 At any time during the tax year, did one foreign person own, directly or indirectly, least 25% of the total voting power of all classes of the corporation's stock entitled to vote or at least 25% of the total value of all classes of the corporation's stock? For rules attribution, see section 318. If "Yes," enter and (b) Owner's country . a) Percentage owned (c) The corporation may have to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Enqaged in a U.S. Trade or Business. Enter the number of Forms 5472 attached 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. Enter the amount of tax-exempt interest received or accrued during the tax year $ Enter the number of shareholders at the end of the tax year (if 100 or fewer) 10 forego the carryback period, check here (see instructions) I 11 If the corporation has an NOL for the tax year and is electing If the corporation is filing a consolidated return, the statement required by Regulations section 1.1502-21(b)(3) must be attached or the election will not be valid. by any deduction reported on S Enter the available NOL carryover from prior tax years (do not reduce page 1, line 29a.) 12 Form 1120 (2018) Form 1120 (2018) Page 5 Other Information (continued from page 4) Schedule K Yes No 13 Are the corporation's total receipts (page 1, line 1a, plus lines 4 through 10) for the tax year and its total assets tax year less than $250,000? If "Yes," the corporation distributions and the book value of property distributions (other than cash) made during the tax year $ the end the nat required to complete Schedules M-1, and M-2. Instead, enter the total amount of cash 14 Is the corporation required to file Schedule UTP (Form 1120), Uncertain Tax Position Statement? See instructions If "Yes," complete and attach Schedule UTP. Did the corporation make any payments 15a 2018 that would require it to file Formis) 1099? h If Yes," did or will the corporation file required Forms 1099? 16 During this tax year, did the corporation have an 80% more change in ownership, including a change due to redemption of its own stock? .... .... ........ .. During or subsequent to this tax year, but before the filing of this return, did the corporation dispose of more than 65 % ( by value ) 13 of its assets in a taxable, non-taxable, or tax deferred transaction? ..... ............ 16 Did the corporation receive assets in a section 351 transfer in which any of the transferred assets had a fair market basis fair market value of more than $1 m Forms 1042 and 1042-S 10 oticns 1441 throug 1464) or chanter 4 (eections 1471 throse 1474) of the Code? 20 Is the corporation operating on a cooperative basis? 21 During the tax year, did the corporation pay or accrue any interest or royalty for which the deduction is not allowed under section 267A? See instructions ... If Yes," enter the total amount of the disallowed deductions 22 Does the corporation have gross receipts of at least $500 million in any of the 3 preceding tax years? (See sections 59A(e)(2) and (3)) If Yes, complete and attach Form 8991. 23 Did the corporation have an election under section 1630 for any real property trade or business or any farming business in effect during the tax year? See instructions .rtion does not own a pass-through entity with current Does the ation satisfy one of the following conditions and the 24 r prior year carryover, excess business interest expense? See instructions year, The corporation's aggregate average annual gross receipts (determined under section 448(c) for the 3 tax years preceding the current tax year do not exceed $25 million, and the corporation is not a tax shelter, on The corporation only has business interest expense from (1) an electing real property trade or business, (2) an electing farming business, or (3) certain utility businesses under section 163)(7) If "No," complete and attach Form 8990. 25 Is the corporation attaching Form 8996 to certify as a Qualified Opportunity Fund? If Yes, enter amount from Form 8996, line 13 Form 1120 2018) Page 6 Form 1120 2018) Schedule L Balance Sheets per Books Beginning of tax year (b) End of tax year (a) Assets (c) (d Cash 1 . ... 2a Trade notes and accounts receivable b Less allowance for bad debts Inventories . U.S. govemment obligations 4 Tax-exempt securities (see instructions) 5 Other current assets (attach statement) 6 Loans to shareholders 7 Mortgage and real estate loans Other investments (attach statement) Buildings and other depreciable assets 10a 11a Denita depreciation b Lese ao a int ed depletion. 12 Land (net of any amortization) 13a Intangible assets (amortizable only) Less accumulated amortization b 14 Other assets (attach statement) 15 Total assets Liabilities and Shareholders' Equity Accounts payable Mortgages, notes, bonds payable in less than 1 year 16 17 18 Other current liabilities (attach statement) Loans from shareholders 19 20 Mortqages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) 22 Preferred stock Capital stock: oCommon stock Additional paid-in capital 23 24 Retained earnings-Appropriated (attach statement) Retained earnings-Unappropriated 25 26 Adjustments to shareholders' equity (attach statement) Less cost of treasury stock 27 Total liabilities and shareholders' equity 28 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required file Schedule M-3, See instructions. Net income (loss) per books .. 1 Income recorded on books this year not included on this return (itemize): 7 Federal income tax per books 2 . Excess of capital losses over capital gains 3 Tax-exempt interest 4. Income subject to tax not recorded on books this year (itemize): Deductions on this retun not charged against book income this year (itemize) 5 Expenses recorded on books this vear not deducted on this retum (itemize): a Depreciation Depreciation ... . S Charitable contributions $ b a b Charitable contributions S Travel and entertainment Add lines 7 and 8 Income (page 1, line 28)-line 6 less line 9 Add lines 1 through 5 10 |Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L) Balance at beginning of year 5 Distributions: a Cash 2 Net income (loss) per books b Stock c Property Other decreases (itemize): Other increases (itemize): 3 6 7 Add lines 5 and 6 Add lines 1. 2, and 3 8 Balance at end of vear (ine 4 less line 7) 4 Form 1120 2018) SCHEDULE D (Form 1120) Capital Gains and Losses OMB No. 1545-0123 Attach to Form 1120, 1120-c. 1120-F, 1120-FSC, 1120-H, 1120-IC-DISC, 1120-L, 1120-ND, 1120-Pc 1120-POL, 1120-REIT, 1120-RIC, 1120-SF, or certain Foms 990-T. 2018 the Treasury Department Intemal Revenue Service Go to www.irs.gov/Form 1120 for instructions and the latest information. Name Employer ident ification number Part IShort-Term Capital Gains and Losses (See instructions.) for how to fiqure the amounts to enter on in bact column (el from oes below. (el 19 fm Formis (d) 8949, Part I, line 2. column (g) column (di and combine the result with column (g) This form may be easier to complete if you round off cents to whole dolars (or other basis) (calos nricel 1a 1099-B for which hasis was renorted to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b .... 1b Total all transactons reported on Form(s) 8949 With tions reported on Form(s) 8949 with Box B checked 3 Totals for all transactions reported on Form(s) 8949 with Box C checked 4 Short-term capital gain from installment sales from Form 6252, line 26 or 37 5 Short-term capital gain (loss) from like-kind exchanges from Form 8824 5 6 Unused capital loss carryover (attach computation) 6 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in columnh Part IILong-Term Capital Gains and Losses (See instructions.) 7 (g) Adjustments to gain or loss from Form(s) rt II, line 2, See instructions for how to figure the amounts to enter on the lines below ) Gain or (loss) Subtract oolumn (e) from d) le) Proceeds Cos (sales price) (or other basis) dt with column ig) Tom may be easier to complete if you round off cents to coumn fa 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported the IRS and for l thee anacticns on Form 8949 leave this line blank and go to line 8b 8b Totals for all transactions reported on Form(s) 8949 with Box D checked 9 Totals for all transactions reported on Form(s) 8949 with Box E checked 10 Totals for all transactions reported on Form(s) 8949 with Box F checked 11 Enter gain from Form 4797, line 7 or 9 11 12 Long-term capital gain from installment sales from Form 6252, line 26 or 37 12 13 Long-term capital gain or (loss) from like-kind exchanges from Form 8824 13 14 Capital gain distributions (see instructions) 14 15 Net lonq-term capital qain or (loss). Combine liness 8a through 14 in column h 15 Part III Summary of PartsI and II 16 Enter excess of net short-term capital gain (ine 7) over net long-term capital loss (line 15) 16 17 Net capital gain. Enter excess of net long-term capital gain (line 15) over net short-term capital loss (line 7) 18 Add lines 16 and 17, Enter here and on Form 1120. page 1, line 8, or the proper line on other returns . . 17 18 Note: If losses exceed gains, see Capital losses in the instructions. For Paperwork Reduction Act Notice, see the Instructions for Form 1120. Cat. No. 1146OM Schedule D (Form 1120) 2018