CORPORATE TAX RETURN PROBLEM Required: Complete Tiny Tacos Inc.'s (TT) Current Year's Federal Form 1120 and all
Question:
CORPORATE TAX RETURN PROBLEM
Required:
- Complete Tiny Tacos Inc.'s (TT) Current Year's Federal Form 1120 and all applicable schedules using a tax preparation software program of your choice and the information provided below. The return with all schedules that would be required to be filed.
- Form 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.
- Assume that TT does not owe any alternative minimum tax.
- If any information is missing, use reasonable assumptions to fill in the gaps.
- The forms, schedules, and instructions can be found at the IRS Web site (www.irs.gov). The instructions can be helpful in completing the forms if you do not use tax preparation software.
Facts:
Sal Monella, Tao Mane and Carne Asco each own one-third of the common stock of Tiny Tacos Inc. (TT). TT was incorporated on February 4, 2008. It has only one class of stock outstanding and operates as a C corporation for tax purposes. TT caters all types of social events throughout southern California.
- TT is located at 1541 Dumpster Way, Huntington Beach, CA 92647
- TT's Employer Identification Number is 38-7562491
- TT'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:
- Sal is the chief executive officer and president (Social Security number 231-54-8976).
- Tao is the executive vice president and chief operating officer (Social Security number 798-56-3241).
- Carne 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.
- TT uses the accrual method of accounting and has a calendar year-end.
- TT 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, TT would like to receive a refund.
- TT paid a dividend of $30,000 to its shareholders on November 1 of the Current Tax Year . TT had ample earnings and profits (E&P) to absorb the distribution.
The following is TT's audited income statement for Current Tax Year:
Tiny Tacos
Income Statement
Current Tax Year
Revenue from sales
$2,000,000
Cost of goods sold (Food)
-400,000
Gross profit from operations
$1,600,000
Other income:
Capital loss
-20,000
Dividend income
30,000
Interest income
15,000
Gross income
$1,625,000
Expenses:
Compensation
-950,000
Depreciation
-10,000
Bad debt expense
-15,000
Meals and entertainment
-3,000
Maintenance
-6,000
Property taxes
-11,000
State income taxes
-45,000
Other taxes
-44,000
Rent
-60,000
Interest
-5,000
Advertising
-52,000
Professional services
-16,000
Employee benefits
-32,000
Supplies
-5,000
Other expenses
-27,000
Total expenses
-1,281,000
Income before taxes
344,000
Federal income tax expense
-103,000
Net income after taxes
$241,000
Notes:
1.TT's inventory-related purchases during Current Tax Year were $410,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to BCS
.
2.Of the $15,000 interest income, $2,000 was from a City of Huntington Beach bond that was used to fund public activities (issued in 2005), $1,000 was from a Costa Mesa city bond used to fund private activities (issued in 2004), $1,000 was from a U.S. Treasury bond, and the remaining $11,000 was from a money market account at Madoff Investments.
3.TT's dividend income came from Malo Menu. (MM). TT owned 20,000 shares of the stock in Malo Menu the beginning of the year. This represented 10 percent of MM outstanding stock.
4.On October 1 of the Current Tax Year, TT sold 2,000 shares of its MM stock for $25,000. It had originally purchased these shares on April 18, 2008, for $40,000. After the sale, TT owned 9 percent of MM.
5.TT's compensation is as follows:
oSal $150,000
oTao $150,000
oCarne $150,000
oOther $500,000
6.TT wrote off $25,000 in accounts receivable as uncollectible during the Current Tax Year.
7.TT used straight line depreciation to determine book income and accelerated depreciation for tax determination purposes. The tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.
8.The $5,000 interest expense was from a business loan.
9.Other expenses include $6,000 for premiums paid on term life insurance policies for which TTis the beneficiary. The policies cover the lives of Sal, Tao, and Carne.
The following are TT's audited balance sheets as of January 1st, and December 31st of the Current Tax Year
Tiny Tacos
Balance Sheets
January 1st and December 31, 20XX
20XX
1-Jan
31-Dec
Assets
Cash
$180,000
$324,000
Accounts receivable
560,000
580,000
Allowance for doubtful accounts
-60,000
-50,000
Inventory
140,000
150,000
U.S. government bonds
20,000
20,000
State and local bonds
120,000
120,000
Investments in stock
400,000
360,000
Fixed assets
140,000
160,000
Accumulated depreciation
-50,000
-60,000
Other assets
20,000
21,000
Total assets
$1,470,000
$1,625,000
Liabilities and Shareholders' Equity
Accounts payable
$280,000
$240,000
Other current liabilities
20,000
18,000
Other liabilities
40,000
26,000
Capital stock
400,000
400,000
Retained earnings
730,000
941,000
Total liabilities and shareholders' equity
$1,470,000
$1,625,000