McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Tax Return Problem 20 To be completed with Chapter 22 Required: Please complete the 2022 tax return for Modern Day Clothing, Inc. based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations or reporting. Do not complete K-1s for the individual owners or the state tax return. Forms and schedules can be found on the IRS website. You will complete: Form 1120-S (5 pages) Form 1125-A (1 page) Form 1125-E (1 page) Schedule D for Form 1120-S (2 pages) Facts: Modern Day Clothing, Inc. (MD) is organized as a corporation in the state of North Carolina and is taxed as an S corporation with a calendar-year end (additional information about MD can be found in the table below). MD operates four small boutique clothing outlet stores (family clothing stores) in the North Carolina cities of Charlotte, Durham, Raleigh, and Winston-Salem. Name Address (has not changed since inception) Employer ID Number Date Incorporated S Election Effective Date Shares Issued and Outstanding Modern Day Clothing, Inc. 1515 North Lincoln Highway Charlotte, NC 28201 14- 2953556 February 2, 2004 January 1, 2020 10,000 common shares McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. MD was taxed as a C corporation from inception through the S election effective date. The table below provides pertinent account balances as of December 31, 2021 for MD: Description 12/31/2021 Balance Net unrecognized built-in gain (NUBIG)* $400,000 Accumulated earnings and profits $500,000 Accumulated adjustments account $125,000 Other adjustments account $17,000 *NUBIG was entirely attributable to unimproved land that MD originally purchased for $250,000 on June 16, 2005. The land was held by MD as an investment asset only and was not connected with its clothing business. On August 1, 2022, MD sold the unimproved land for $850,000 (net of selling commissions). MD did not receive a Form 1099-B reflecting the sale. MD is owned by four unrelated shareholders (shareholder-specific information is provided in the table below). There were no stock transfers or changes in stock ownership during the current tax year. Name Address Social Security Number Shares Owned Officer Title 2022 Officer Compensation Jennifer Lyons 85 Shady Elm Charlotte, NC 28201 524-31-3493 4,300 Chief Executive Officer $112,000 Robert Newberr y RD Route 843 Rural Hall, NC 27045 482-26-5241 2,300 Chief Financial Officer $90,000 Lamar Taylor 35 S. Main Street Mt. Airy, NC 27030 545-16-4239 2,200 Chief Operating Officer $80,000 Lacrecia Williams 9851 Old Colonial Highway Charlotte, NC 28201 429-82-9384 1,200 Not an officer N/A McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Additional information: None of the expenses incurred by MD during the year relate to the production or carrying of the tax-exempt securities held in portfolio. The tax-exempt securities are maintained in a separate brokerage account distinct from other holdings. MD values its inventory at cost and has always used the specific identification method for reporting purposes. The company has never written down inventory for any reason and the rules of Section 263A (UNICAP) do not apply to MD. MD leases all its real property. On December 1, 2022, MD made a pro rata distribution to all common stockholders, totaling $794,400. On July 1, 2022, MD purchased $640,000 of new office equipment (5-year MACRS property) that it used to expand its Charlotte store. Excluding the $640,000 of 2022 additions, MDs regular tax depreciation for the current year is $275,000. MD desires to maximize its current year cost recovery deductions related to the 2022 additions. Other than the unimproved land, MD did not dispose of any assets during the year. MD maintains a life insurance policy on the life of the CEO, Jennifer Lyons. MD is the beneficiary of that policy. In March 2022, MD contributed $32,000 in cash to the Red Cross to assist those affected by tornados in Nashville, Tennessee. MD reports employee compensation amounts that remained unpaid at year-end in Accrued Employee Wages, Accrued Officer Bonuses and Accrued Employee Vacation on the balance sheet, as applicable. The table below provides a summary of the balances in these accounts for December 31, 2021 and 2022. Balance Sheet Date Account Description Account Balance Applicable Employees Payment Amount Payment Date 12/31/2021 Accrued Employee Wages $27,000 All employees (including officers) $27,000 01/15/2022 12/31/2021 Accrued Officer Bonuses $110,000 Officers only $110,000 07/01/2022 12/31/2021 Accrued Employee Vacation $19,000 Non-officer employees $3,000 Thru 03/15/2022 12/31/2022 Accrued Employee Wages $31,000 All employees (including officers) $31,000 01/15/2023 12/31/2022 Accrued Officer Bonuses $145,000 Officers only $145,000 07/01/2023 12/31/2022 Accrued Employee Vacation $21,000 Non-officer employees $9,000 Thru 03/15/2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. MD made the following Federal and North Carolina estimated income tax payments on April 15th, June 15th, September 15th and December 15th , 2022: o Federal: $21,000 each quarter, $84,000 for the 2022 tax year o North Carolina: $5,000 each quarter, $20,000 for the 2022 tax year Supplementary Details: MD uses the accrual method of accounting. MD is not a subsidiary nor is it in an affiliated group with any other entity. MD does not own directly 20%, or, directly and indirectly, 20% or more of any other entity (including corporations or partnerships). MD has never issued any restrictive stock or publicly traded debt nor been required to file a Form 8918. MDs average annual gross receipts have never exceeded $26,000,000. MD did not have any non-shareholder debt that was cancelled or was forgiven nor had the terms modified so as to reduce the principal amount of the debt during the tax year. MD has never made nor caused to be made a qualified subchapter S subsidiary election (Qsub). MD has never caused a Qsub election to be revoked or terminated. MD made payments in the current year that required the filing of Forms 1099. All Forms 1099 were filed timely. MDs activities all represent qualified trades or businesses, and none constitute a specified trade or business. MD paid $723,000 in W-2 wages in 2022. MDs original, unadjusted basis in all its assets is consistent with historical cost on the balance sheet. MDs three officers devoted 100% of their time to the company. McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Financial Statements (kept on a GAAP basis): Modern Day Clothing, Inc. Balance Sheet as of December 31, 2022 Assets: 12/31/2021 12/31/2022 Cash $ 340,000 $ 496,6000 Accounts Receivable-Credit Cards 205,000 232,000 Accounts Receivable-Trade 63,000 58,000 Less: Allowance for Bad Debts (13,000) (11,500) Inventory 2,908,000 3,010,000 Tax-exempt Securities 100,000 100,000 U.S. Treasury Bonds 200,000 200,000 Fixed Assets 4,010,000 4,650,000 Less: Acc. Depreciation (2,875,000) (3,055,000) Land-Unimproved (tax and GAAP basis) 250,000 0 Prepaid Rent 165,000 168,000 Total Assets: $5,353,000 $5,848,100 Liabilities and Shareholders Equity: Accounts Payable 99,000 93,000 Accrued Employee Wages 27,000 31,000 Accrued Officer Bonuses 110,000 145,000 Accrued Employee Vacation 19,000 21,000 Note Payable-First Bank of NC (Credit Line) 536,000 812,000 Note Payable-First Bank of Charlotte 3,655,000 3,139,750 Capital Stock 1,000 1,000 Additional paid-in Capital 99,000 99,000 Retained Earnings 807,000 1,506,350 Total Liabilities and Shareholders Equity $5,353,000 $5,848,100 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Modern Day Clothing, Inc Income Statement for the year ending December 31, 2022 Item Amount Income: Gross Sales $8,936,500 Less: Returns (354,000) Net Sales 8,582,500 Cost of Goods Sold (4,910,500) Gross Profit 3,672,000 Gain on Sale of Unimproved Land 600,000 Interest Income-Bank 3,750 Interest Income-U.S. Govt 6,000 Municipal Bond Interest Income 2,650 Total Income: $4,284,400 Expenses: Officer Salaries $317,000 Employee Salaries 437,000 Repairs and Maintenance 12,600 Bad Debts 22,000 Rent 765,000 Payroll Taxes 84,500 Licensing Fees 10,750 Property Taxes 12,500 Interest Expense 175,500 Depreciation 180,000 Office Supplies 5,300 Employee Training 13,750 Key employee Insurance 13,875 Advertising 58,500 Employee Benefit Programs 133,000 Travel 10,375 Charitable Contribution 32,000 Federal Income Taxes (built-in gains tax) 84,000 State Income Taxes (built-in gain tax) 20,000 Insurance 18,000 Utilities 243,000 Telephone 142,000 Total Expenses: $2,790,650 Net Income (Loss): $1,493,750