Comprehensive Tax Return Problem: The Snap-It-Open Corporation incorporated and began operations on Jan. 15, 2017. It elects to file its initial tax return as a calendar-year corporation and uses the accrual method of accounting. It elects the FIFO method of inventory valuation. Jason Sprull and Martin Winsock formed the business. They each contributed $250,000 cash for 50 percent of the 100,000 shares of $1 par value stock issued and outstanding. On January 16, the company placed in service two machines that they had purchase for $250,000 each for printing and cutting the fabric for the umbrellas and two used umbrella assembly machines purchased for $200,000 each. The company obtained a bank loan of $750,000 secured by the machines. Jason and Martin were required to personally guarantee this loan with an 8 percent annual interest rate on the unpaid balance. The first principal payment of $160,000 is not due until January 16, 2018. During the year, the company purchased $250,000 of fabric and $310,000 of umbrella frames. It returned one order of frames valued at $5,000 because of a defect in the snap-open mechanism and received a cash refund for that amount. Both Jason and Martin worked full-time in the business. Jason was the salesperson for the company, and Martin managed the office and printing and assembly operations. Each received a salary of $60,000 for the year. They had six employees with the following incomes for the year: $45,000 for an accountant; $21,000 for a receptionist; $28,000 for each of two print machine operators; and $25,000 for each of two assembly machine operators. There are no accrued salaries or taxes as of the end of the current year. FUTA taxes are assessed on the first $7,000 of wages at a rate of 6.0 percent. By the end of the year, the company attained the umbrella sales worth $1,935,000 in umbrella sales, collected $1,430,000 on these sales, and paid the following expenses in cash: Rent $190,000 Repairs and Maintenance $20,000 Utilities $80,000 Taxes and Licenses excluding FICA and FUTA Tax $10,000 Health Insurance $16,000 Advertising $40,000 Travel excluding meals $20,000 Meals and Entertainment $15,000 Group and Term Life Insurance $2,000 As an accrual-basis taxpayer, the company recognized $57,500 in interest expense on the note ($750,000 .08 11.5/12) and established an allowance account for bad debts equal to two percent of sales. They recognized depreciation expense for financial accounting equal to10 percent of the purchase price for the new printing machines and 12.5 percent of the purchase price for the used assembly machines. Their inventory at year-end consisted of $65,000 of fabric and $68,000 of umbrella frames based on the FIFO inventory method. (For simplicity, you are only required to allocate the factory salaries to the calculation of cost of goods sold.) The company made estimated tax payments of $40,000 for the year.

1. Snap-It-Open Corporation paid for expenses in cash. In two pages, show the expenses and the extent of deduction allowed for each expense by the U.S. Tax Code. Additionally, explain any conditions or exceptions that apply to each of the expense deductions.

2. Proper documentation is a critical part of the tax professionals work. In two pages, explain the type of documentation and details of transactions that are needed to support each of the expenses that Snap-It-Open Corporation incurred.