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Tax Return 10: S Corporation Instructions: Please complete the required federal corporation income tax return forms for Modern Day Clothing, Inc. for the 2013 tax year based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations or reporting. Modern Day Clothing, Inc. (MD) is organized as a corporation in the state of North Carolina and is taxed as an \"S\" corporation with a calendar year-end. MD operates four small boutique clothing outlet stores (family clothing stores) in the cities of Charlotte, Durham, Raleigh, and Winston-Salem North Carolina. MD's address, employer identification number, date of incorporation, and effective date of its S corporation election are as follows: Modern Day Clothing, Inc. 1515 North Lincoln Highway Charlotte, North Carolina 28201 EIN: 14-2953556 Date Incorporated- February 2, 1997 Effective date of the S election was July 1, 2012. MD has been at the same address since inception. MD has only common shares issued. There are currently 10,000 shares of MD common stock outstanding and issued. There were no stock transfers during the current tax year. MD is owned by the following four shareholders: Jennifer Lyons 85 Shady Elm Charlotte, North Carolina, 28201 SSN 524-31-3493 Number of common shares owned 4,300 Chief Executive Officer 2013 W-2 wages $112,000 Robert Newberry RD Route 843 Rural Hall, North Carolina 27045 SSN 482-26-5241 Number of common shares owned 2,300 Chief Financial Officer 2013 W-2 wages $90,000 Lamar Taylor 35 S. Main Street Mt. Airy, North Carolina 27030 SSN 545-16-4239 Number of common shares owned 2,200 Chief Operations Officer 2013 W-2 wages $80,000 Lacrecia Williams 9851 Old Colonial Highway Charlotte, North Carolina, 28201 SSN 429-82-9384 Number of common shares owned 1,200 Not an officer of the company MD reported the following information for the current year: MD uses the accrual method of accounting. MD is not a subsidiary nor is it in an affiliated group with any other entity. MD does not own directly 20%, or, directly and indirectly, 20% or more of any other entity (including corporations or partnerships). MD has never issued any restrictive stock MD has never been required to file an Form 8918 MD has never issued any publicly traded debt MD was taxed as a C corporation from inception through the effective date of the S election. MD had net unrecognized built-in gain from prior years of $400,000 as of January 1, 2013. The entire gain was attributable to unimproved land that MD owned. The land was originally purchased for $250,000 on June 16, 1998. On August 1, 2013, MD sold the unimproved land for a sales price of $850,000 (net of selling commissions). MD did not receive a Form 1099-B reflecting the sale. The land was held by MD as an investment asset only and was not connected with its clothing business. MD has $500,000 of Accumulated Earnings and Profits as of 12/31/2012. MD has an Accumulated Adjustments Account balance at 12/31/2012 of $125,000. MD has an Other Adjustments account balance at 12/31/2012 of $7,000. MD did not have any non-shareholder debt that was cancelled or was forgiven nor had the terms modified so as to reduce the principal amount of the debt during the current tax year. MD has never made nor caused to be made a qualified subchapter S subsidiary election (Qsub). MD has never caused a Qsub election to be revoked or terminated. MD did make payments in the current year that required the filing of Forms 1099. All of those Forms 1099 were filed timely. Additional information: None of the expenses incurred by MD during the current year relate to the production of or the carrying of the tax-exempt securities held in portfolio. The tax-exempt securities are maintained in a separate brokerage account distinct from other holdings. MD maintains it inventory on the cost method. MD has never has never changed it inventory method. MD uses specific identification for its inventory. MD has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to MD. MD leases all of its real property. On December 1, 2013, MD made a distribution to all common stockholders of $85 per common share owned as of that date. On July 1, 2013, MD purchased $640,000 of equipment (5-year MACRS property) that it used to expand its Charlotte store. Not including the $640,000 of new year additions, MD's calculated tax depreciation for the current year is $275,000. MD desires to maximize its current year cost recovery deductions relating to the equipment additions. Book depreciation (including all assets) for 2013 was $180,000. Other than the unimproved land, MD did not dispose of any assets during the year. MD maintains a life insurance policy on the life of the CEO, Jennifer Lyons. MD is the beneficiary of that policy. During the current year, MD gave $25,000 in cash to the Red Cross to assist with hurricane disaster cleanup in the North Carolina area. All of the accrued wage amounts on the balance sheet as of December 31, 2013 were paid on January 15, 2014. The accrued bonus amounts on the balance sheets as of December 31, 2012 and 2013, respectively, were paid on July 1, 2013 and July 1, 2014, respectively. As of December 31, 2012 and 2013, respectively, MD had accrued vacation on its books of $19,000 and $21,000. As of March 15, 2013 and March 15, 2014, respectively, MD had paid $3,000 and $9,000 of those accrued amounts. None of these accrued amounts relate to officers' compensation. MD paid $140,000 ($35,000 each on 4/15/2013, 6/15/2013, 9/15/2013 and 12/15/2013) to the U.S. Treasury for current year estimated federal tax payments and $20,000 to the state of North Carolina for current year estimated state income tax payments. Financial Statements (kept on a GAAP basis): Modern Day Clothing, Inc. Balance Sheet Assets: 1/01/2013 12/31/2013 Cash Accounts Receivable-Credit Cards Accounts Receivable-Trade Less: Allowance for Bad Debts Inventory Tax-exempt Securities U.S. Treasury Bonds Fixed Assets Less: Acc. Depreciation Land-Unimproved (tax and GAAP basis) Prepaid Rent $ $ 385,000 232,000 58,000 (11,500) 3,010,000 100,000 200,000 4,650,000 (3,055,000) 0 168,000 Total Assets: $5,353,000 340,000 205,000 63,000 (13,000) 2,908,000 100,000 200,000 4,010,000 (2,875,000) 250,000 165,000 $5,736,500 Liabilities and Shareholders' Equity: Accounts Payable Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Note Payable-First Bank of NC (Credit Line) Note Payable-First Bank of Charlotte Capital Stock Additional paid-in Capital Retained Earnings Total Liabilities and Shareholders' Equity 99,000 27,000 110,000 19,000 536,000 3,655,000 93,000 31,000 145,000 21,000 812,000 3,139,750 1,000 99,000 807,000 1,000 99,000 1,394,750 $5,353,000 $5,736,500 Income Statement for the year ending December 31, 2013 Item Amount Income: Gross Sales Less: Returns Net Sales $8,936,500 (354,000) 8,582,500 Cost of Goods Sold (4,910,500) Gross Profit Gain on Sale of Unimproved Land Interest Income -Bank Interest Income-U.S. Gov't Municipal Bond Interest Income Total Income: 3,672,000 600,000 3,750 6,000 2,650 4,284,400 Expenses: Officer Salaries Employee Salaries Repairs and Maintenance Bad Debts Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Key Man Life Insurance Advertising Employee Benefit Programs Meals and Entertainment Travel Charitable Contribution Federal Income Taxes (built-in gains tax) State Income Taxes (built-in gain tax) Insurance Utilities Telephone 317,000 437,000 12,600 22,000 765,000 84,500 10,750 12,500 175,500 180,000 5,300 13,750 12,000 58,500 133,000 3,750 8,500 25,000 140,000 20,000 25,000 243,000 142,000 Total Expenses: $2,846,650 Net Income: $1,437,750