Please use this year of 2019 and Schedule C Form 1120

The attached information is to be used to complete Part A (Schedule C) and Project B (1120-page 1 and schedule m-1). This project is to be done manually (i.e. no software).

Basic information is provided for a single business. Essentially this requires you to first complete a Schedule C for a proprietorship and then use the same data to complete a form 1120 for a corporation.

A trial balance is posted in the Project file on Canvas.

Note: one difference between the Schedule C and 1120 is that the employment taxes increase to 14,480 for the 1120 instead of the 8,320 given in the trial balance for the Schedule C.

Facts for Sole Proprietorship Schedule C:

Lewis Smith is the sole proprietor of a business that operates under the name Smith Furniture (Business Code 337000). The proprietorship is located at 1234 First Avenue, City, ST, 5555. Lewis started the business with 200,000 capital investment on June 1, 2008. The proprietorship uses the calendar year as its tax year (the same as its proprietor) and the accrual method of accounting. The following information pertains to its 2017 activities.

1. Cost of goods sold is determined as follows:

Inventory at the beginning of the year 64,000

Plus: Purchases 540,800

Cost of labor 143,204

Additional S263A adjustment 7,000

Other costs 90,000

Good Available for Sale 845,004

Minus: Inventory at the end of year (104,800)

Cost of Goods Sold 740,204

The inventory is valued using the FIFO method and historical cost. The S263A rules apply to the proprietorship. No change in valuing inventories occurred between the beginning and end of the tax year.

2. The proprietorship uses MACRS depreciation for tax purposes. The current year tax depreciation is 27,476. Of this amount 15,000 is included in cost of goods sold and inventory.
3. Using its excess funds, the proprietorship has purchased various temporary investments including a 2% investment in Plaza Corporation stock, 50 shares of Service Corporation stock, and some tax-exempt municipal bonds. The proprietorship has held the Plaza stock for two years and sold it in July for 4,500 more than its 7,000 adjusted basis. Prior to the sale, Plaza paid a 1,000 dividend. The 50 shares of Service stock, which had been purchased during the year, was declared worthless during the year. The proprietorship recovered none of its 2,100 adjusted basis.
4. Employees other than Lewis Smith receive limited fringe benefits. One employee also receives a 2,000 contribution to an Individual Retirement account paid by the proprietorship.
5. The proprietorship paid no estimated taxes.

Here are notes to accompany the Sole Proprietorship trial balance:

1. The 3,000 monthly salary for Lewis Smith is treated as a withdrawal from the proprietorship and is not deducted on Schedule C. The salary does not reduce Schedule C income and therefore is taxed as self-employment income. ,
2. MACRS depreciation is 27,476-15,000 = 12,476
3. 50% of the meals and entertainment expense is not deductible for tax purposes.
4. The pension plan expense is the same for book and tax purposes for this business. No pension expense relate to pensions for the proprietor.
5. The employee benefit expense is the same for book and tax purposes for this business. None relates to proprietor benefits.

Facts for C Corporation Form 1120:

The same basic facts for the Lewis Smith Proprietorship are used for the C corporation except for the following:

1. Lewis Smith and Stewart James are the two 50% shareholders of James and Smith, Inc., a furniture manufacturer (Business Code 337,000). Johns and Lawrence is located at 1234 First Avenue, City, ST 55555. The following information pertains to the 2017 corporate tax return:

Compensation of Officers

Name Shares Title Compensation

Stewart James 1000 President 18,000

Andrew Lawrence 1000 V.P. 18,000

Total 2000 36,000

The corporation paid all salaries owed to the shareholders in 2017. The corporation paid none of the interest or rentals to the shareholders (i.e. all was paid to external parties).

2. The book income for the corporation appears in the attached worksheet, which reconciles the corporations book income and its taxable income for special deductions.
3. The company was incorporated on June 1, 2008. Each of the two officers hold one-half the stock, which they acquired on that date for a total cash and property contribution of 200,000. No change in the stockholdings has occurred since incorporation. James and Smith each devote 100% of their time to the business. The corporation provides no expense allowances. The corporation, however, reimburses properly substantiated expenses. Both officers are US citizens. James and Smith is not a member of a controlled group.
4. Addresses for the officers are: Lewis Smith, 333 Third Street, City, ST 55555; Stewart James, 777 Seventh Street, City, ST 5555.
5. The corporation paid estimated taxes of 14,000 for tax year 2017.

6. Other deductions include:

Travel 4,000

Meals and Entertainment 8,000

Minus: (50% Allowance) ( 4,000)

Office Expenses 16,000

Transportation 10,400

Gen and Admin 3,000

Miscellaneous 1,000

Total 38,400

7. The 28,212 of withdrawals made by the two owners are dividends out of the corporations earnings and profits. They are reported as gross income on the shareholders individual tax returns.