PLEASE DO NOT COPY AND PASTE AN ANSWER. THE ANSWER HAS THREE PARTS AND MUST ALL BE INCLUDED FOR THE ANSWER TO BE COMPLETE. While

PLEASE DO NOT COPY AND PASTE AN ANSWER. THE ANSWER HAS THREE PARTS AND MUST ALL BE INCLUDED FOR THE ANSWER TO BE COMPLETE.

While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2021, and each contributed $50,000 in exchange for a 50 percent ownership interest. GTE also borrowed $200,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTEs 2021 activities:

GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).
GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes, if any).
GTE paid $15,000 of rent for a building and equipment, $20,000 for advertising, $14,000 in interest expense, $4,000 for utilities, and $2,000 for supplies.
GTE contributed $5,000 to charity.
GTE received a $1,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend), and it recognized $1,500 in short-term capital gain when it sold some of the stock.
On December 1, 2021, GTE distributed $20,000 to James and $20,000 to Paul.
GTE has qualified property of $300,000 (unadjusted basis).

(Leave no answer blank. Enter zero if applicable. Enter N/A if not applicable.)

Comprehensive Problem 11-86 (Static) Part a-1

a-1. Assume James and Paul formed GTE as an S corporation.

Complete GTEs Form 1120-S, page 1; Form 1120-S, Schedule K.

a-2. Assume James and Paul formed GTE as an S corporation.

Complete Pauls Form 1120-S, Schedule K-1.

a-3. Assume James and Paul formed GTE as an S corporation.

1. Compute the tax basis of Pauls stock in GTE at the end of 2021.
2. What amount of Pauls income from GTE is subject to FICA or self-employment taxes?
3. What amount of income, including its character, will Paul recognize on the $20,000 distribution he receives on December 1?
4. What amount of tax does GTE pay on the $1,000 qualified dividend it received?

b-1. Assume James and Paul formed GTE as an LLC. Complete GTEs Form 1065, page 1; Form 1065, Schedule K.

b-2. Assume James and Paul formed GTE as an LLC. Complete Pauls Form 1065, Schedule K-1.

b-3. Assume James and Paul formed GTE as an LLC.

1. Compute the tax basis of Pauls ownership interest in GTE at the end of 2021.
2. What amount of Pauls income from GTE is subject to FICA or self-employment taxes?
3. What amount of income, including its character, will Paul recognize on the $20,000 distribution he receives on December 1?
4. What amount of tax does GTE pay on the $1,000 qualified dividend it received?

c-1. Assume James and Paul formed GTE as a C corporation. Complete GTEs Form 1120, page 1.

c-2. Assume James and Paul formed GTE as a C corporation.

1. Compute the tax basis of Pauls stock in GTE at the end of 2021.

2. What amount of Pauls income from GTE is subject to FICA or self-employment taxes?

3. What amount of income, including its character, will Paul recognize on the $20,000 distribution he receives on December 1?

4. What amount of tax does GTE pay on the $1,000 qualified dividend it received? image text in transcribed

OMB No. 1545-0123 Form 1120-s U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or Department of the Treasury is attaching Form 2553 to elect to be an Scorporation. Internal Revenue Service Go to www.irs.gov/Form 11205 for instructions and the latest information. For calendar year 2021 or tax year beginning . 2021, ending A Selection effective date Name 2021 20 D Employer identification number 1a 1b 2 Income NO IGN 1c 2 3 4 5 6 7 TYPE B Business activity code OR Number, street, and room or suite no. If a P.O. box, see instructions. E Date Incorporated number (see instructions) PRINT City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions) C Check if Sch. M-3 attached G is the corporation electing to be an Scorporation beginning with this tax year? See instructions. Yes No H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) Selection termination Enter the number of shareholders who were shareholders during any part of the tax year J Check if corporation: (1) Aggregated activities for section 465 at-risk purposes (2) Grouped activities for section 469 passive activity purposes Caution: Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. 1a Gross receipts or sales b Retums and allowances c Balance. Subtract line 1b from line 1a Cost of goods sold (attach Form 1125-A) 3 Gross profit. Subtract line 2 from line 1c 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797) 5 Other income (loss) (see instructions-attach statement) 6 Total income (loss). Add lines 3 through 5 7 Compensation of officers (see instructions-attach Form 1125-E) 8 Salaries and wages (less employment credits) 8 9 Repairs and maintenance 9 10 Bad debts 10 11 Rents 11 12 Taxes and licenses 12 13 Interest (see instructions) 13 14 Depreciation not claimed on Form 1125-A or elsewhere on retum (attach Form 4562) 14 15 Depletion (Do not deduct oil and gas depletion.) 15 16 Advertising 16 17 Pension, profit-sharing, etc., plans 17 18 Employee benefit programs 18 19 Other deductions (attach statement) 19 20 Total deductions. Add lines 7 through 19 20 21 Ordinary business income (loss). Subtract line 20 from line 6 21 22a Excess net passive income or LIFO recapture tax (see instructions) b Tax from Schedule D (Form 1120-S) 22b c Add lines 22a and 22b (see instructions for additional taxes) 22c 23a 2021 estimated tax payments and 2020 overpayment credited to 2021 23a b Tax deposited with Form 7004. 23b c Credit for federal tax paid on fuels (attach Form 4136) 23c d Add lines 23a through 23c 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached 24 25 Amount owed. If line 23d is smaller than the total of lines 220 and 24, enter amount owed 25 26 Overpayment. If line 23d is larger than the total of lines 220 and 24, enter amount overpaid 26 27 Enter amount from line 26: Credited to 2022 estimated tax Refunded 27 Deductions (see instructions for limitations) 22a Tax and Payments Total amount 1 2 c 4 5a Income (Loss) 6 7 8 If "Yes," enter the amount from Form 8996, line 15 $ Schedule K Shareholders' Pro Rata Share Items 1 Ordinary business income (loss) (page 1, line 21) 2 Net rental real estate income (loss) (attach Form 8825) 3a Other gross rental income (loss). 3a b Expenses from other rental activities (attach statement) 3b c Other net rental income (loss). Subtract line 36 from line 3a 4 Interest income 5 Dividends: a Ordinary dividends b Qualified dividends 5b 6 Royalties 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120-S)) 8a Net long-term capital gain (loss) (attach Schedule D (Form 1120-S)) b Collectibles (28%) gain (loss) - 8b c Unrecaptured section 1250 gain (attach statement) 8c 9 Net section 1231 gain (loss) (attach Form 4797) 10 Other income (loss) (see instructions) Type - 11 Section 179 deduction (attach Form 4562) 12a Charitable contributions b Investment interest expense c Section 59(e)(2) expenditures Type d Other deductions (see instructions) Type 13a Low-income housing credit (Section 420)(5) b Low-income housing credit (other) c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) d Other rental real estate credits (see instructions) Type e Other rental credits (see instructions) Type - f Biofuel producer credit (attach Form 6478) g Other credits (see instructions) Type - 14 Attach Schedule K-2 (Form 1120-S), Shareholders' Pro Rata Share Items-International, and check this box to indicate you are reporting items of international tax relevance Deductions 9 10 11 12a 12b 12c 12d 13a 13b 13c 13d 13e 131 139 Credits International Transactions Altemative Minimum Tax (AMT) Items f 15a Post-1986 depreciation adjustment b Adjusted gain or loss c Depletion (other than oil and gas) d oil, gas, and geothermal properties-gross income e Oil, gas, and geothermal properties-deductions Other AMT items (attach statement). 16a Tax-exempt interest income b Other tax-exempt income. c Nondeductible expenses d Distributions (attach statement if required) (see instructions) e Repayment of loans from shareholders f Foreign taxes paid or accrued 15a 15b 15c 15d 15e 15f 16a 16b 16c 16d 16e 166 Items Affecting Shareholder Basis Form 1120-S (2021) Final K-1 Amended K-1 OMB No. 1545-0123 Part III Shareholder's Share of Current Year Income, Deductions, Credits, and Other Items Ordinary business income (loss) Credits 1 13 2 Net rental real estate income (loss) Schedule K-1 (Form 1120-S) 2021 Department of the Treasury For calendar year 2021, or tax year Internal Revenue Service beginning 1 / 2021 ending Shareholder's Share of Income, Deductions, Credits, etc. See separate instructions. Part | Information About the Corporation A Corporation's employer identification number 3 Other net rental income (loss) 4 Interest income 5a Ordinary dividends B Corporation's name, address, city, state, and ZIP code 5b Qualified dividends 14 Schedule K-3 is attached checked. Alternative minimum tax (AMT) Items 6 Royalties 15 7 Net short-term capital gain (loss) CIRS Center where corporation filed return 8a Net long-term capital gain (loss) 8b Collectibles (28%) gain (loss) D Corporation's total number of shares Beginning of tax year End of tax year 8c Unrecaptured section 1250 gain 9 Net section 1231 gain (loss) 16 Items affecting shareholder basis Part II Information About the Shareholder E Shareholder's identifying number 10 Other income (loss) F Shareholder's name, address, city, state, and ZIP code 17 Other information G Current year allocation percentage 11 Section 179 deduction H Shareholder's number of shares Beginning of tax year End of tax year 12 Other deductions I Loans from shareholder Beginning of tax year End of tax year RS Use Only OMB No. 1545-0123 Form 1065 20 U.S. Return of Partnership Income For calendar year 2021, or tax year beginning 2021, ending Go to www.irs.gov/Form 1065 for instructions and the latest information. Name of partnership 2021 Department of the Treasury Intemal Revenue Service A Principal business activity D Employer identification number B Principal product or service Type Number, street, and room or suite no. If a P.O. box, see instructions. E Date business started or C Business code number Print City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions) 2 Income 4 5 8 OES $ G Check applicable boxes: (1) Initial return (2) Final return (3) Name change (4) Address change (5) Amended return HCheck accounting method: (1) Cash (2) Accrual (3) Other (specify) Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year J Check if Schedules C and M-3 are attached K Check if partnership: (1) Aggregated activities for section 465 at-risk purposes (2) Grouped activities for section 469 passive activity purposes Caution: Include only trade or business income and expenses on lines 1a through 22 below. See instructions for more information. 1a Gross receipts or sales. 1a b Returns and allowances 1b c Balance. Subtract line 1b from line 1a. 1c 2 Cost of goods sold (attach Form 1125-A) 3 Gross profit. Subtract line 2 from line 1c . 3 4 Ordinary income (loss) from other partnerships, estates, and trusts (attach statement) 5 Net farm profit (loss) (attach Schedule F (Form 1040)) 6 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797) 6 7 Other income (loss) (attach statement) 7 8 Total income (loss). Combine lines 3 through 7 9 Salaries and wages (other than to partners) (less employment credits) 9 10 Guaranteed payments to partners 10 11 Repairs and maintenance. 11 12 Bad debts 12 13 13 14 Taxes and licenses 14 15 Interest (see instructions). 15 16a Depreciation (if required, attach Form 4562). 16a b Less depreciation reported on Form 1125-A and elsewhere on return 16b 16c 17 Depletion (Do not deduct oil and gas depletion.) 17 18 Retirement plans, etc. 18 19 Employee benefit programs 19 20 Other deductions (attach statement) 20 21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20 21 22 Ordinary business income (loss). Subtract line 21 from line 8 22 23 Interest due under the look-back method - completed long-term contracts (attach Form 8697) 23 24 Interest due under the look back method-income forecast method (attach Form 8866) 24 25 BBA AAR imputed underpayment (see instructions) 25 26 Other taxes (see instructions) 26 27 Total balance due. Add lines 23 through 26 27 28 Payment (see instructions) 28 29 Amount owed. If line 28 is smaller than line 27, enter amount owed. 29 30 Overpayment. If line 28 is larger than line 27, enter overpayment 30 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge Rent.. Deductions on instructions for imitations) Tax and Payment Page 4 Total amount 1 2 3c 5 Income (Loss) 4c 5 7 8 9a Form 1065 (2021) Schedule Partners' Distributive Share Items 1 Ordinary business income (loss) (page 1, line 22) 2 Net rental real estate income (loss) (attach Form 8825) 3a Other gross rental income (loss). b Expenses from other rental activities (attach statement) 3b c Other net rental income (loss). Subtract line 3b from line 3a 4 Guaranteed payments: a Services 4a b Capital 4b c Total. Add lines 4a and 4b Interest income 6 Dividends and dividend equivalents: a Ordinary dividends b Qualified dividends 6b c Dividend equivalents 6C 7 Royalties 8 Net short-term capital gain (loss) (attach Schedule D (Form 1065)) 9a Net long-term capital gain (loss) (attach Schedule D (Form 1065)) b Collectibles (28%) gain (loss). 9b c Unrecaptured section 1250 gain (attach statement) 9c 10 Net section 1231 gain (loss) (attach Form 4797) - 11 Other income (oss) (see instructions) Type 12 Section 179 deduction (attach Form 4562) 13a Contributions. b Investment interest expense c Section 59(e)(2) expenditures: (1) Type (2) Amount d Other deductions (see instructions) Type 14a Net earnings (loss) from self-employment. b Gross farming or fishing income c Gross nonfarm income 15a Low-income housing credit (section 420)(5)) b Low-income housing credit (other) c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) d Other rental real estate credits (see instructions) Type e Other rental credits (see instructions) Type f Other credits (see instructions) Type 16 Attach Schedule K-2 (Form 1065), Partners' Distributive Share Items-International, and check this box to indicate that you are reporting items of international tax relevance. Employ- Deductions Self- ment 10 11 12 13a 13b 13c12 13d 14a 14b 14c 15a 15b 15c 15d 15e 151 Credits International Transactions Alternative Minimum Tax (AMT) Items 17a Post-1986 depreciation adjustment. b Adjusted gain or loss. c Depletion (other than oil and gas) d Oil, gas, and geothermal properties - gross income e Oil, gas, and geothermal properties - deductions f Other AMT items (attach statement). 18a Tax-exempt interest income b Other tax-exempt income c Nondeductible expenses 19a Distributions of cash and marketable securities b Distributions of other property 20a Investment income b Investment expenses c Other items and amounts (attach statement) 21 Total foreign taxes paid or accrued 17a 17b 17c 17d 17e 17f 18a 18b 18c 19a 19b 20a 20b Other Information 21 Final K-1 Amended K-1 OMB No. 1545-0123 Part III Partner's Share of Current Year Income, Deductions, Credits, and Other Items Ordinary business income (loss) 14 Self-employment earnings (oss) 2 Net rental real estate income (loss) Schedule K-1 2021 (Form 1065) Department of the Treasury Internal Revenue Service For calendar year 2021, or tax year beginning 2021 ending Partner's Share of Income, Deductions, Credits, etc. See back of form and separate instructions. Partl Information About the Partnership A Partnership's employer identification number 3 Other net rental income foss) 15 Credits 4a Guaranteed payments for services 4b Guaranteed payments for capital 16 B Partnership's name, address, city, state, and ZIP code Schedule K-3 is attached checked. Alternative minimum tax (AMT) items 4c Total guaranteed payments 17 5 Interest income Ordinary dividends D IRS center where partnership filed return Check if this is a publicly traded partnership (PTP) Part II Information About the Partner E Partner's SSN or TIN (Do not use TIN of a disregarded entity. See instructions.) 6b Qualified dividends 18 Tax-exempt income and nondeductible expenses 6c Dividend equivalents F Name, address, city, state, and ZIP code for partner entered in E. See instructions. 7 Royalties 8 Net short-term capital gain (loss) 19 Distributions 9a Net long-term capital gain (loss) 9b Collectibles (28%) gain (loss) 20 Other information 9c Unrecaptured section 1250 gain General partner or LLC Limited partner or other LLC member-manager member H1 Domestic partner Foreign partner H2 If the partner is a disregarded entity (DE), enter the partner's: TIN Name 11 What type of entity is this partner? 12 If this partner is a retirement plan (IRA/SEP/Keogh/etc.), check here J Partner's share of profit, loss, and capital (see instructions): Beginning Ending Profit % 10 Net section 1231 gain (loss) 11 Other income (loss) % % LOSS 96 12 Section 179 deduction 21 Foreign taxes paid or accrued Capital % Check if decrease is due to sale or exchange of partnership interest Partner's share of liabilities: Beginning Ending K 13 Other deductions Nonrecourse $ I L Qualified nonrecourse financing $ $ Recourse $ $ Check this box if Item k includes liability amounts from lower tier partnerships Partner's Capital Account Analysis Beginning capital account Capital contributed during the year $ Current year net income (loss). $ Other increase (decrease) (attach explanation $ Withdrawals and distributions $ 0 Ending capital account 22 More than one activity for at-risk purposes 23 More than one activity for passive activity purposes *See attached statement for additional information. se Only rom 1120 4 Income 8 9 VI U.S. Corporation Income Tax Return OMB No. 1545-0123 For calendar year 2021 or tax year beginning 2021, ending 20 Department of the Treasury 2021 Intemal Revenue Service Go to www.irs.gov/Form1120 for instructions and the latest information. A Check it: Name B Employer identification number 1a Consolidated retum (attach Form 851) TYPE b Lifeonlife consol Number, street, and room or suite no. If a P.O.box, see instructions. OR C Date incorporated dated return 2 Personal holding co. PRINT (attach Sch. PH] City or town, state or province, country, and ZIP or foreign postal code D Total assets (see instructions) 3 Personal service corp. see instructions) $ 4 Schedule M-3 attached E Check it: (1) Initial return (2) Final return (3) Name change (4) Address change 1a Gross receipts or sales 1a b Returns and allowances. 1b Balance. Subtract line 1b from line 1a 1c 2 Cost of goods sold (attach Form 1125-A). 2 3 Gross profit. Subtract line 2 from line 1c. 3 4 Dividends and inclusions (Schedule C, line 23) 5 Interest 5 6 Gross rents 6 7 Gross royalties 7 8 Capital gain net income (attach Schedule D (Form 1120)) 9 Net gain or loss) from Form 4797, Part II, line 17 (attach Form 4797) 10 Other income (see instructions-attach statement). 10 11 Total income. Add lines 3 through 10 11 12 Compensation of officers (see instructions-attach Form 1125-E) 12 13 Salaries and wages (less employment credits) 13 14 Repairs and maintenance 14 15 Bad debts. 15 16 Rents 16 17 Taxes and licenses 17 18 Interest (see instructions) 18 19 Charitable contributions. 19 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) 20 21 Depletion. 21 22 Advertising 22 23 Pension, profit-sharing, etc., plans 23 24 Employee benefit programs 24 25 Reserved for future use. 25 26 Other deductions (attach statement) 26 27 Total deductions. Add lines 12 through 26. 27 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11. 28 29a Net operating loss deduction (see instructions) 29a b Special deductions (Schedule C, line 24). 29b c Add lines 29a and 29b 29c 30 Taxable income. Subtract line 29c from line 28. See instructions 30 31 Total tax (Schedule J, Part I, line 11) 31 32 Reserved for future use 32 33 Total payments and credits (Schedule J, Part III, line 23) 33 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached 34 35 Amount owed. If line 33 is smaller than the total of lines 31 and 34, enter amount owed 35 36 Overpayment. If line 33 is larger than the total of lines 31 and 34, enter amount overpaid 36 37 Enter amount from line 36 you want: Credited to 2022 estimated tax Refunded 37 Deductions (See instructions for limitations on deductions.) Tax Refundable Credits, and Payments Under penalties of periury. I declare that I have mined this retum. Including accompanying schedules and statements, and to the best of my knowledge and bclict, it is true, correct