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CCS Corporate Tax Return Problem Due Date: Monday, September 25, 2017 at 11:59 pm Purpose: The purpose of this is not merely to learn how to fill-in forms but to enable you to meet the following goals: Understand the corporate tax formula Identify common book-tax differences and distinguish between permanent & temporary differences. Calculate the current & deferred income tax expense or benefit components of a tax provision. Task: In order to successfully complete this assignment you must: Complete Celebrity Catering Service Inc.'s (CCS) Form 1120 and all related schedules. Be sure to attach schedules for any line item, which indicates one is required on the 1120. This includes line items that may require you to create a schedule that identifies the various items that are included in a line on the return these usually indicate \"attach schedule.\" Other lines will indicate specifically which schedule must be included with the return. The returns must be in.pdf format. The student can use either: o Forms schedules and instructions found at www.irs.gov o Tax preparation software may be used to prepare your assignment, but submission must still be in .pdf format. Include a list of all the judgments, decisions and assumptions that you made in order to complete the return. This should be submitted along with your return. FORM 4562 is not required. (Do not complete Form 4562 [depreciation calculation] since you do not have all the information). 1 | P a g e Criteria for Success: In order to earn maximum credit for this assignment be sure to review the grading rubric. Rubric: Prepare a corporate tax return. Dimension/Task Content- Book to Tax Differences - 40% Content- Balance Sheet - 40% Fair Quality (25 pt.) Average Quality (40 pts.) Excellent (50 pts.) Your return meets ANY Your return meets ANY of Your return includes ALL of the following of these criteria: these criteria: criteria: Key items A key item requiring Key items requiring special special tax treatment requiring special tax treatment was not identified. tax treatment were not were all identified. identified. M-1 Taxable income is reconciliation is correct completely M-1 incorrect Reconciliation is correct Your return meets ANY Your return meets ANY of Your return includes ALL of the following of these criteria: these criteria: criteria: Key items A key items requiring special requiring special tax Key items tax treatment treatment was not requiring special were not tax treatment identified. identified. were all identified. M-2 is incorrect M-2 is correct Your return meets ANY Your return meets ANY of Your return includes ALL of the following of these criteria: these criteria: criteria: Many schedules Schedules or forms Necessary or forms are are missing Completeness-20% schedules and missing Schedules or forms forms are Many schedules are incomplete provided. or forms are Schedules and incomplete forms are complete. 2 | P a g e Rachael Ray, Paula Deen and Gordon Ramsay each own one-third of the common stock of Celebrity Catering Services, Inc. (CCS). CCS was incorporated on February 2, 2009. It has only one class of stock outstanding and operates as a C corporation for tax purposes. CCS caters to all types of social events. CCS is located at 540 Waverly Way Burbank, CA 91501 Its employer ID is 38-4743474 CCS's business activity is catering food services. Its business activity code is 722300. The shareholders also work as officers for the corporation as follows: o Rachael is the chief executive officer and president, (SS# 231-54-8976). Her salary this year is $215,000. o Paula is the executive VP and Chief operating officer (SS#798-56-3241). Her salary this year is $160,000. o Gordon is the VP of Finance (SS# 879-21-4536). His salary this year is $145,000. All officers devote 100% of their time to the business and all of the officers are US citizens. CCS uses the accrual method of accounting and has a calendar year-end. CCS made four equal quarterly estimated tax payments of $45,000 each. Its tax liability last year was $165,800. If it has overpaid its federal tax liability, CCS would like to receive a refund. In the prior year, the company made a large charitable contribution. $35,000 of that contribution exceeded the amount deductible and was carried forward to the current year. CCS paid a dividend of $72,000 to each of its shareholders on November 1. CCS had ample earnings and profits (E&P) to absorb the distribution. 3 | P a g e Income Statement Income Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Capital loss Dividend income Interest income Total income Expenses Salaries and wages Bad Debt Meals & Entertainment Repairs and Maintenance Property Taxes State Income Tax Payroll Taxes Charitable Contribution Equipment Rent Warehouse Rent Interest Advertising Professional Services Depreciation Employee benefits Programs Other Miscellaneous Expenses Total expenses Net income before taxes Federal income taxes Net income after taxes 975,000 37,000 26,000 8,000 13,000 23,000 107,500 42,000 40,000 200,000 5,0004 62,000 15,000 14,0005 53,000 15,2006 $3,100,000 (40,500) 3,059,500 930,0001 2,129,500 ($16,000) 29,0002 7,0003 $2,149,500 1.635,700 $513,800 [172,584] $341,216 1 CCS'S inventory-related purchases during the year were $340,000 and direct labor of $600,000. It values its inventory based on cost using FIFO inventory cost flow method. CCS must use the 263A method for valuing its inventory for tax purposes the beginning balance of 263A adjustment is $10,000 and the ending value is $12,000. The current year additional 263A costs are $87,000 of the officer's salary. 2 CCS's dividend income came from Sinful Desserts, Inc. (SD) CCS owned 10,000 shares of stock in SD at the beginning of the year this represented 16% of SD's outstanding stock. 3 $1,200 was from a City of Irvine bond that was used to fund public activities (issued in 2006), $1,300 was from an Oceanview City bond used to fund public activities (issued in 2005), $ 900 was from a US Treasury Bond and the rest was from a money market account at Bank of America. 4 The interest expense was from a deductible business loan. 5 CCS tax depreciation using MACRS is $42,000. None of the depreciation could be claimed on 1125A. This includes $17,000 of 179 expenses. 6 Includes $3,600 for premiums paid on term life insurance policies for which CCS is the beneficiary. The policies cover Rachael, Paula and Gordon. The rest are miscellaneous ordinary and necessary expenses. 4 | P a g e Balance Sheet Assets Cash Trade and accounts receivables Allowance for Doubtful Accounts Inventories U.S. government bonds State & Local bonds Investment In Stock Prepaid Federal Income Taxes Property, plant and equipment Accumulated depreciation Other assets Total Assets Liabilities and Owners' Equity Accounts payable Income Taxes Payable Deferred Tax Liability Other current liabilities Other Liabilities Capital stock Retained earnings Total Liabilities and Owners' Equity 1/1/2016 $180,000 586,000 (60,000) 140,000 20,000 120,000 400,000 0 140,000 (50,000) 20.000 $1,496,000 $306,000 5,000 10,000 5,000 40,000 400,000 730,000 $1,496,000 12/31/16 $149,800 606,000 (69,000)7 150,000 20,000 120,000 354,0008 13,431 160,000 (64,000) 25,000 $1,465,231 $130,000 0 16,015 21,000 43,000 400,000 855,216 1,465,231 Required: Complete Celebrity Catering Service Inc.'s (CCS) Form 1120 and all related schedules. Be sure to attach schedules for any line item which indicates one is required on the 1120. FORM 4562 is not required. (Do not complete Form 4562 [depreciation calculation] since you do not have all the information). If any information is missing, use reasonable assumptions to fill in the gaps and list those assumptions as an attachment. The forms schedules and instructions can be found at www.irs.gov and download the necessary forms. 7 CCS wrote off $28,000 as uncollectible during the year. 8 On October 15, 2016 CCS sold 1,000 shares of SD stock for $30,000. It had originally purchased these shares on April 18, 2010 for $46,000. After the sale CCS owns 14.4 percent of SD. 5 | P a g e