FORM 1120S U.S. INCOME TAX RETURN FOR AN S CORPORATION

On March 12, 1999, Douglas Plastics Co., which is located at 2400 Lakeview Street, Fargo, North Dakota, 58103, (312) 555-8697, filed an election under Code Sec. 1362(a) to be treated as an S corporation.

Douglas Plastics Co. was incorporated January 1, 1999, under the laws of the State of North Dakota. It is engaged in the manufacture of plastic products, principally toys (principal business activity code number 326100). Its employer identification number is 31-0031258.

In 2018, the corporation had two equal stockholders and each devoted 100% of their time to the business. There were no changes in stock ownership during 2018, and each stockholder owned 1250 shares of the corporation. One of these stockholders, Douglas Pratt, served as president.

He resides at 660 Springsteen Street, Fargo, North Dakota 58103. His social security number is 555-11-6789. The other stockholder, Rickie L. Jones, served as vice president. He resides at 425 State Street, Fargo, North Dakota, 58103. His social security number is 555-33-9876. In

2018, Mr. Pratts compensation was $50,000 and Mr. Jones compensation was $46,000.

The corporation hired the outside firm of ATOZ Accounting Services (EIN 21-7777777) located at 1120 Main Street in Waytogo, North Dakota, 58103, (701) 555-1120, to prepare its income tax return on the accrual basis. M.J. Gregory prepared the return. Mr. Gregory (Preparer Tax Identification Number P12345678) is new to the firm and Mr. Pratt is uncomfortable with him discussing the tax return with the IRS without his knowledge and decides not to give him tax return preparer permission.

Form 4562

On January 3, 2017, Douglas acquired molds and patterns at a cost of $12,000. The molds and patterns are three-year MACRS property depreciated using the 200% declining balance method and a half-year convention. Bonus depreciation was not claimed because the assets are used. No Code Sec. 179 expense deduction was taken. The 2018 depreciation deduction on the molds and patterns amounts to $5,333. A $4,000 depreciation deduction was claimed in 2017.

On June 18, 2016, used but reconditioned seven-year MACRS machinery was acquired at a cost of $138,500. Douglas elected to depreciate the machinery using the alternative depreciation method with an 11-year recovery period. No bonus depreciation was claimed and no Code

Sec. 179 expense was elected for this property. The 2018 depreciation deduction on the machinery is $12,591. Accumulated depreciation at the beginning of 2018 is $18,892.

On February 11, 2018, Douglas acquired seven-year MACRS office furniture and fixtures at a cost of $4,000. Douglas elects to expense the entire amount under Code Sec. 179. On January 2, 2002, Douglas acquired a brick storage building at a cost of $110,000. The building is depreciated using the straight-line method over a 39 year life. The 2018 depreciation deduction on the building amounts to $2,821. Accumulated depreciation at the beginning of 2018 is $45,013.

Form 4797

On January 30, 2018, Douglas sold machinery for $3,500. The machinery, which is 7-year MACRS property, was purchased on January 14,2014 for $10,000 and depreciated using the 200-percent declining-balance method and a half-year convention. Accumulated depreciation

was $7,323 on the date of sale.

On January 18, 2018, Douglas sold a building for $62,500. The building was acquired on January 10, 2002, at a cost of $90,000. Douglas has accumulated depreciation on the building of $36,829 at the beginning of 2018. Also, on January 18, 2018, the corporation sold the

land associated with the building for $13,000. The land was acquired at a cost of $10,000.

Charitable Contributions

The following charitable contributions to 50% organizations located in Fargo, North Dakota were made by the corporation in 2018:

Community Fund, $500;

Mercy Hospital, $500;

Congregational Church, $250; and

Boy Scouts of America, $250.

Distributions

The corporation made cash distributions of $80,000 on March 12, 2018, and $120,000 on May 5, 2018. The distributions were in proportion to stock holdings.

From 1120S Schedule D

The corporation sold 100 shares of Nicole Co. stock on January 16, 2018, for $7,775. Douglas Plastics Co. received a 1099-B reporting that the stock was purchased on March 12, 2002, for $9,689.

ADJUSTED TRIAL BALANCE

The following is the adjusted trial balance of Douglas Plastics Co. as of December 31, 2018:

Dr. Cr.

Gross sales............................................................................................... $692,759

Returns and allowances........................................ $ 7,360

Inventory adjustment ^1............................................. 6,565

Purchases............................................................. 100,650

Factory salaries and wages.................................. 180,235

Freight expense.......................................................... 950

Factory insurance.................................................... 4,200

Factory utilities..................................................... 10,850

Factory water........................................................... 1,150

Factory payroll taxes............................................. 16,110

Factory real estate taxes...................................5,000

Dividends received (domestic) ²................................ 788

Interest on U. S. obligations ²................................. 2,990

Interest on tax-exempt state bonds 1,635

Expense related to tax-exempt bonds........................ 90

Other interest ²......................................................... 472

Gross rents ³.......................................................... 4,000

Loss on sale of stock ⁴........................................... 1,914

Gain on sale of building ⁴...................................... 9,425

Gain on sale of land ⁴............................................ 3,000

Gain on sale of machine ⁴........................................ 823

Bad debts.............................................................. 4,500

Rents paid............................................................. 1,200

Motor vehicle tax..................................................... 100

Employment taxes.............................................. 11,157

Franchise tax........................................................... 300

Real property tax.................................................. 1,680

Charitable contributions....................................... 1,500

Employee health insurance costs........................ 34,000

Depreciation....................................................... 25,288

Postage................................................................. 4,683

Office supplies..................................................... 3,760

Telephone............................................................. 4,630

Meals and entertainment

(subject to 50% limitation).................................. 6,600

Shareholder distributions, 3/12/16..................... 80,000

Shareholder distributions, 5/5/16..................... 120,000

Officers salaries................................................ 96,000

Salaries and wages of salespersons

and office personnel........................................... 39,446

Repairs................................................................. 3,694

Interest paid....................................................... 13,620

Advertising.......................................................... 3,500

Pension plan contributions.................................. 8,805

Cash................................................................... 60,662

Closing inventory............................................ 125,330

Notes and accounts receivable.......................... 19,210

Prepaid insurance................................................... 300

North Dakota municipal bonds......................... 30,000

U.S. Series EE Bonds....................................... 24,450

100S Nicole Co. Common Stock........................ 9,700

Brick storage building (acquired 1/2/00)........ 110,000

Factory equipment (acquired 6/18/14)............ 138,500

Molds and patterns (acquired 1/3/15)............... 12,000

Furniture and fixtures (acquired 2/11/16)........... 4,000

Accumulated depreciation..................................................................................... 92,650

Land.................................................................. 20,000

Accounts payable.................................................................................................. 90,749

Short-term notes payable to banks........................................................................ 10,000

Accrued payroll taxes............................................................................................. 4,410

Long-term notes payable.................................................................................... 210,000

Capital stock........................................................................................................... 5,000

Accumulated adjustments account

(as of 1/1/16)⁵..................................................................................................... 210,218

Other adjustments account

(as of 1/1/16)⁵.........................................................................................................1,640

$1,347,124 $1,347,124

¹ Inventory adjustment: The inventory adjustment figure represents the difference between the opening inventory and the closing inventory. This figure, as such, will not appear on the return. The inventories are taken at cost or market, whichever is lower. There was no change in determining the quantities, cost or valuations between the opening and closing inventory.

² Dividends received; U.S. obligations interest; Other interest: The Nicole Co. dividend income of $788, the interest earned on the U.S. Series EE Bonds of $2,990, and the other interest of $472 from Fargo National Bank, is portfolio income. As such, these items are reported

on Schedules K and K-1.

³ Gross rents: The gross rents of $4,000 represent gross income from a rental activity other than real estate and are reported on Schedules K and K-1. There were no related expenses.

⁴ Stock sale loss; Building sale gain; Land sale gain; Machine sale gain: For purposes of reporting these items on Form 1120S, it is necessary to first report each of them either on Schedule D or on Form 4797, as applicable. The capital loss and any Code Sec. 1231 gain

are reported on Schedules K and K-1.

⁵ Accumulated adjustments account; Other adjustments account: The amount of the Retained earnings as reported on Line 24, column (b) of Schedule L is the sum of the Accumulated Adjustments account and the Other Adjustments account at the beginning of 2018.

Schedule M-2 must be completed to determine the amount reported on Line 24, column (d) of Schedule L.

The following is a balance sheet for Douglas Plastics Co. as of December 31, 2017:

Assets

Cash............................................................................. $ 50,706

Notes and accounts receivable....................................... 94,210

Inventories.................................................................... 118,765

Prepaid insurance................................................................ 530

U.S. Series EE Bonds..................................................... 10,368

North Dakota municipal bonds....................................... 30,000

Loans to shareholders...................................................... 2,000

200 shares - Nicole Co. - Common ............................... 19,389

Buildings and other depreciable assets........................ 360,500

Less: Accumulated depreciation...........................,...... 111,610

Net depreciable assets................................................................................ 248,890

Land................................................................................ 30,000

Total assets.......................................................... $604,858

Liabilities and Capital

Accounts payable..................................................... $155,905

Short-term notes payable to banks..................... 20,000

Accrued payroll taxes............................................. 2,095

Long-term notes...................................................... 210,000

Capital stock............................................................. 5,000

Accumulated adjustments account...................... 210,218

Other adjustments account................................... 1,640

Total liabilities and capital............................... $604,858

Douglas Plastics Co. filed all other necessary information and tax returns for 2018, including Form 1096 and Form(s) 1099.