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. Thetax 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 31^stof 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