Instructions

• Complete Express Catering Services Inc.s (ECS) 2020 Form 1120 (Links to an external site.) and Schedule D (Links to an external site.) based upon the facts presented.

• If any information is missing, use reasonable assumptions to fill in the gaps.

• 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.

• The forms, schedules and instructions can be found at the IRS website (Links to an external site.) (www.irs.gov). The instructions can be helpful in completing the forms.

• Please include your name in the Preparer section of the Form.

Company Information

Lisa Cutter, Jeff McMullen, and Tina Woodbrook each own one-third of the common stock of Express Catering Services Inc. ECS was incorporated on March 17, 2010. It has only one class of stock outstanding and operates as a C-Corporation for tax purposes. ECS caters all types of social events throughout the tri-state area.

• ECS is located at 257 West 55th Avenue, New York City, NY 10027.
• ECSs Employer Identification Number is 13-9823459.
• ECSs business activity is catering food services. Its business activity code is 722300.
• The shareholders also work as officers for the corporation as follows:
  • Lisa is the Chief Executive Officer (CEO) and President (Social Security Number 356-87-4322).
  • Jeff is the Chief Operating Officer (COO) and Executive Vice President (Social Security Number 284-58-4583).
  • Tina is the Vice President of Finance (Social Security Number 423-84-2343).
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• ECS uses the accrual method of accounting and has a calendar year-end.
• ECS made four equal estimated tax payments of $25,000 each. Its tax liability last year was $1100,000. If it has overpaid its federal tax liability, ECS would like to receive a refund.
• ECS paid a dividend of $30,000 to its shareholders on November 1. ECS had ample earnings and profits (E&P) to absorb the distribution.

Financial Statements

The following is ECSs audited income statement for 2020:

ECS Income Statement For year ending December 31, 2020

Income
Revenue from sales	$ 2,100,000
Sales returns and allowances	(8,000)
Cost of goods sold	(350,000)
Gross profit from operations	1,742,000
Other Income
Capital loss	$ (15,000)
Dividend income	25,000
Interest income	10,000
Gross income	$ 1,762,000
Expenses
Compensation	$ (950,000)
Depreciation	(10,000)
Bad debt expense	(15,000)
Meals	(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	481,000
Federal income tax expense	(150,000)
Net income after taxes	$ 331,000

The following are ECSs audited balance sheets as of January 1, 2020, and December 31, 2020.

ECS Balance Sheet

	1/1/2020	12/31/2020
Assets
Cash	$ 180,000	$ 305,000
Accounts receivable	560,000	630,000
Allowance for doubtful accounts	(60,000)	(50,000)
Inventory	140,000	169,000
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	200,000
Accumulated depreciation	(50,000)	(60,000)
Other assets	20,000	21,000
Total Assets	$ 1,470,000	$ 1,715,000
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	1,031,000
Total liabilities and shareholders' equity	$ 1,470,000	$ 1,715,000

Additional Notes

• ECSs inventory-related purchases during 2020 were $360,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to ECS.
• Of the $10,000 interest income, $1,250 was from a New York City bond issued in 2015, $1,750 was from a Manhattan Borough bond issued in 2014, $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
• ECSs dividend income came from Slatterys Inc. ECS owned 10,000 shares of the stock in Slatterys at the beginning of the year. This represented 10 percent of Slatterys outstanding stock.
• On October 1, 2020, ECS sold 1,000 shares of its Slatterys stock for $25,000. It had originally purchased these shares on April 18, 2013, for $40,000. After the sale, ECS owned 9 percent of Slatterys.
• ECSs compensation is as follows:
  • Lisa, $150,000
  • Jeff, $140,000
  • Tina, $130,000
  • Other, $530,000
• ECS wrote off $25,000 in accounts receivable as uncollectible during the year.
• ECSs tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.
• The $5,000 interest expense was from a business loan.
• Other expenses include $6,000 for premiums paid on term life insurance policies for which ECS is the beneficiary. The policies cover the lives of Lisa, Jeff, and Tina.