Problem 17-53 (LO 17-3) (Static)

[The following information applies to the questions displayed below.]

Julio and Milania are owners of Falcons Corporation, an S corporation. Each owns 50 percent of Falcons Corporation. In year 2, Julio and Milania each received distributions of $25,000 from Falcons Corporation.

b. Complete Falcons's Form 1120-S, Schedule K, for year 2.

Falcons Corporation (an S Corporation) Income Statement December 31, Year 1 and Year 2 Year 1 Sales revenue $ 300,000 Cost of goods sold (40,000) Salary to owners Julio and Milania (40,000) Employee wages (25,000) Depreciation expense (20,000) Section 179 expense (30,000) Interest income (related to business) 12,000 Municipal bond income 1,500 Government fines Overall net income $ 158,500 Distributions $ 30,000 Year 2 $ 430,000 (60,000) (80,000) (50,000) (40,000) (50,000) 22,500 4,000 (2,000) $ 174,500 $ 50,000 OMB No. 1545-0123 U.S. Income Tax Return for an S Corporation Form Do not file this form unless the corporation has filed or Department of the Treasury is attaching Form 2553 to elect to be an S corporation. Internal Revenue Services Go to www.irs.gov/Form 11205 for instructions and the latest information. For calendar year 2019 or tax year beginning 2019, ending A Selection effective dates Nermin 2019 20 D Employer identification number TYPE B Business activity cexin Numbes, street, and room or suite no. If a P.O. box, sex instructions E Data incorporated number (see instructions OR PRINT City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions C Check it Sch. M 3 attached $ GIs the corporation electing to be an S corporation beginning with this tax year? Yes No If "Yes," attach Form 2553 if not already filed H Check it: (1) Final return (2) Name change (3) Address change (4) Amended retum (5) Selection termination or revocation | 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 1a b Returns and allowances . 1b Balance. Subtract line 1b from line ta 1c 2 Cost of goods sold (attach Form 1125-A) 2 3 Gross profit. Subtract line 2 from line 10 3 4 Net gain (loss) from Fom 4797, line 17 (attach Form 4797) 4 5 Other income (loss) (see instructions-attach statement) 5 6 Total income (loss). Add lines 3 through 5 6 7 Compensation of officers (see instructions-attach Form 1125-E) 7 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 return (attach Form 4562) 14 15 Depletion (Do not deduct oil and gas depletion.) 15 16 Advertising 16 17 Pension, profit-sharing, etc., plans 17 20 40 18 Employee benefit programs 18 10 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) 22a b Tax from Schedule D (Form 1120-5) 22b Add lines 22a and 22b (see instructions for additional taxes) 22c 23a 2019 estimated tax payments and 2018 overpayment credited to 2019 23a b Tax deposited with Form 7004 23b Credit for federal tax paid on fuels (attach Form 4136) 23c d Reserved for future use 23d e Add lines 23a through 23d 23e 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached 24 25 Amount owed. If line 23e is smaller than the total of lines 22c and 24, enter amount owed 25 26 Overpayment. If line 23e is larger than the total of lines 22c and 24, enter amount overpaid 26 27 Enter amount from line 26: Credited to 2020 estimated tax Refunded 27 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and Sign belief, t is true, correct, and complete. Declaration of preparer other tran taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return Here with the prepare shown below? Signature of officer Date Title See instructions. Yes No Paid Print Type preparer's name Preparer's signature Check it self-emp Oyed Preparer Firm's name Firm's EIN Use Only Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120-S (2019) Deductions C Tax and Payments Date PIIN Page 2 Yes No Form 1120-S (2019) Schedule B Other Information (see instructions) 1 Check accounting method: a Cash b Accrual c | Other (specify) 2 See the instructions and enter the: a Business activity b Product or service 3 AL any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation. 4 At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly. 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If "Yes," complete (i) through (v) below (i) Narrie of Corporation (ii) Errployer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage of Stock Owned (v) If Percentage in (ivi is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If "Yes," complete (i) through (V) below... (i) Name of Entity (ii) Employer (iii) Type of Entity (iv) Country of (v) Maximum Percentage Owned Identification Organization in Profit, Loss, or Capital Number (if any) 6 5a At the end of the tax year, did the corporation have any outstanding shares of restricted stock? ........ If "Yes," complete lines (i) and (ii) below. 0) Total shares of restricted stock (ii) Total shares of non-restricted stock b At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? If "Yes," complete lines (1) and (i) below. 0) Total shares of stock outstanding at the end of the tax year (1) Total shares of stock outstanding if all instruments were executed Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? ................ 7 Check this box if the corporation issued publicly offered debt instruments with original issue discount If checked, the corporation may have to file Form 8281, Information Retum for Publicly Offered Original Issue Discount Instruments 8 If the corporation (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset for the basis of any other property) in the hands of a C corporation and (b) has nat unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years. See instructions $ Did the corporation have an election under section 1636) for any real property trade or business or any farming business in effect during the tax year7 See instructions ? .... 10 Does the corporation satisfy one or more of the following? See instructions ........... The corporation owns a pass-through entity with current, or prior year carryover, excess business interest expense. b The corporation's aggregate average annual gross receipts (determined under section 448(c)) for the 3 tax years preceding the current tax year are more than $26 million and the corporation has business interest expense. The corporation is a tax shelter and the corporation has business interest expense. If "Yes," complete and attach Form 8990. 11 Does the corporation satisfy both of the following conditions? The corporation's total receipts (see instructions) for the tax year were less than $250,000. b The corporation's total assets at the end of the tax year were less than $250,000. If "Yes," the corporation is not required to complete Schedules L and M-1. Form 1120-S (2019) 9 a a Page 4 Total amount e Form 1120-S (2019) Schedule K Shareholders' Pro Rata Share Items (continued) 15a Post-1986 depreciation adjustment b Adjusted gain or loss Depletion (other than oil and gas) Oil, gas, and geothermal properties-gross income Oil, gas, and geothermal properties -deductions f Other AMT items (attach statement) 16a Tax-exempt interest income Other tax-exempt income Nanda Nondeductible expenses d Distributions (attach statement if required) (see instructions) e Repayment of loans from shareholders. 17a Investment income ....... b Investment expenses Dividend distributions paid from accumulated earnings and profits Other items and amounts (attach statement) Alternative (AMT) Items Shareholder Minimum Tax Items Affecting Basis 15a 15b 15c 150 15e 151 16a 16b 160 160 16e 17a 17b 17c C Recon- Other ciliation Informatic d 18 Income (loss) reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 120 and 14p 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (a) (b) (c) (d) 1 Cash 2a Trade notes and accounts receivable b Less allowance for bad debts. 3 3 Inventories 4 U.S. government obligations 5 Tax-exempt securities (sce instructions) 6 Other current assets (attach statement) 7 Loans to shareholders 8 Mortgage and real estate loans 9 Other investments (attach statement) 10a Buildings and other depreciable assets b Less accumulated depreciation 11a Depletable assets b Less accumulated depletion 12 Land (net of any amortization) 13a Intangible assets (amortizable only) b Less accumulated amortization 14 Other assets (attach statement) 15 Total assets assets Liabilities and Shareholders' Equity 16 Accounts payable !!!!! 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement) 19 Loans from shareholders 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) 22 Capital stock. . 23 Additional paid-in capital 24 Retained earnings 25 Adjustments to shareholders' equity (attach statement) 26 Less cost of treasury stock 27 Total liabilities and shareholders' equity Form 1120-S12019) Page 5 Form 1120-S (2019) Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books. 5 Income recorded on books this year 2 Income included on Schedule K, lines 1, 2, not included on Schedule K, lines 1 3c. 4. 5a, 6. 7. 8. 9. and 10. not recorded through 10 (itemize): on books this year (itemize) ) a Tax-exempt interest $ 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14p (itemize): a Depreciation $ 6 Deductions included on Schedule K, lines 1 through 12 and 14p, not charged against book income this year (itemize): a Depreciation S b Travel and entertainment $ 7 Add lines 5 and 6 ...... ----- 8 Income (loss) (Schedule K, line 18). Add lines 1 through 3 Subtract line 7 from line 4 Schedule M-2 Analysis of Accumulated Adjustments Account, Shareholders' Undistributed Taxable income Previously Taxed, Accumulated Earnings and Profits, and Other Adjustments Account (see instructions) (a) Accumulated (b) Shareholders' (c) Acoumulated (d) Other adjustments adjustments account undistributed taxable earnings and profits account income previously faxed 1 Balance at beginning of tax year 2 Ordinary income from page 1. line 21 3 3 Other additions 4 Loss from page 1, line 21 5 Other reductions. 6 Combine lines 1 through 5. 7 Distributions 8 Balance at end of tax year. Subtract line 7 from line 6 Form 1120-S12019) Falcons Corporation (an S Corporation) Income Statement December 31, Year 1 and Year 2 Year 1 Sales revenue $ 300,000 Cost of goods sold (40,000) Salary to owners Julio and Milania (40,000) Employee wages (25,000) Depreciation expense (20,000) Section 179 expense (30,000) Interest income (related to business) 12,000 Municipal bond income 1,500 Government fines Overall net income $ 158,500 Distributions $ 30,000 Year 2 $ 430,000 (60,000) (80,000) (50,000) (40,000) (50,000) 22,500 4,000 (2,000) $ 174,500 $ 50,000 OMB No. 1545-0123 U.S. Income Tax Return for an S Corporation Form Do not file this form unless the corporation has filed or Department of the Treasury is attaching Form 2553 to elect to be an S corporation. Internal Revenue Services Go to www.irs.gov/Form 11205 for instructions and the latest information. For calendar year 2019 or tax year beginning 2019, ending A Selection effective dates Nermin 2019 20 D Employer identification number TYPE B Business activity cexin Numbes, street, and room or suite no. If a P.O. box, sex instructions E Data incorporated number (see instructions OR PRINT City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions C Check it Sch. M 3 attached $ GIs the corporation electing to be an S corporation beginning with this tax year? Yes No If "Yes," attach Form 2553 if not already filed H Check it: (1) Final return (2) Name change (3) Address change (4) Amended retum (5) Selection termination or revocation | 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 1a b Returns and allowances . 1b Balance. Subtract line 1b from line ta 1c 2 Cost of goods sold (attach Form 1125-A) 2 3 Gross profit. Subtract line 2 from line 10 3 4 Net gain (loss) from Fom 4797, line 17 (attach Form 4797) 4 5 Other income (loss) (see instructions-attach statement) 5 6 Total income (loss). Add lines 3 through 5 6 7 Compensation of officers (see instructions-attach Form 1125-E) 7 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 return (attach Form 4562) 14 15 Depletion (Do not deduct oil and gas depletion.) 15 16 Advertising 16 17 Pension, profit-sharing, etc., plans 17 20 40 18 Employee benefit programs 18 10 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) 22a b Tax from Schedule D (Form 1120-5) 22b Add lines 22a and 22b (see instructions for additional taxes) 22c 23a 2019 estimated tax payments and 2018 overpayment credited to 2019 23a b Tax deposited with Form 7004 23b Credit for federal tax paid on fuels (attach Form 4136) 23c d Reserved for future use 23d e Add lines 23a through 23d 23e 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached 24 25 Amount owed. If line 23e is smaller than the total of lines 22c and 24, enter amount owed 25 26 Overpayment. If line 23e is larger than the total of lines 22c and 24, enter amount overpaid 26 27 Enter amount from line 26: Credited to 2020 estimated tax Refunded 27 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and Sign belief, t is true, correct, and complete. Declaration of preparer other tran taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return Here with the prepare shown below? Signature of officer Date Title See instructions. Yes No Paid Print Type preparer's name Preparer's signature Check it self-emp Oyed Preparer Firm's name Firm's EIN Use Only Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120-S (2019) Deductions C Tax and Payments Date PIIN Page 2 Yes No Form 1120-S (2019) Schedule B Other Information (see instructions) 1 Check accounting method: a Cash b Accrual c | Other (specify) 2 See the instructions and enter the: a Business activity b Product or service 3 AL any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation. 4 At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly. 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If "Yes," complete (i) through (v) below (i) Narrie of Corporation (ii) Errployer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage of Stock Owned (v) If Percentage in (ivi is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If "Yes," complete (i) through (V) below... (i) Name of Entity (ii) Employer (iii) Type of Entity (iv) Country of (v) Maximum Percentage Owned Identification Organization in Profit, Loss, or Capital Number (if any) 6 5a At the end of the tax year, did the corporation have any outstanding shares of restricted stock? ........ If "Yes," complete lines (i) and (ii) below. 0) Total shares of restricted stock (ii) Total shares of non-restricted stock b At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? If "Yes," complete lines (1) and (i) below. 0) Total shares of stock outstanding at the end of the tax year (1) Total shares of stock outstanding if all instruments were executed Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? ................ 7 Check this box if the corporation issued publicly offered debt instruments with original issue discount If checked, the corporation may have to file Form 8281, Information Retum for Publicly Offered Original Issue Discount Instruments 8 If the corporation (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset for the basis of any other property) in the hands of a C corporation and (b) has nat unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years. See instructions $ Did the corporation have an election under section 1636) for any real property trade or business or any farming business in effect during the tax year7 See instructions ? .... 10 Does the corporation satisfy one or more of the following? See instructions ........... The corporation owns a pass-through entity with current, or prior year carryover, excess business interest expense. b The corporation's aggregate average annual gross receipts (determined under section 448(c)) for the 3 tax years preceding the current tax year are more than $26 million and the corporation has business interest expense. The corporation is a tax shelter and the corporation has business interest expense. If "Yes," complete and attach Form 8990. 11 Does the corporation satisfy both of the following conditions? The corporation's total receipts (see instructions) for the tax year were less than $250,000. b The corporation's total assets at the end of the tax year were less than $250,000. If "Yes," the corporation is not required to complete Schedules L and M-1. Form 1120-S (2019) 9 a a Page 4 Total amount e Form 1120-S (2019) Schedule K Shareholders' Pro Rata Share Items (continued) 15a Post-1986 depreciation adjustment b Adjusted gain or loss Depletion (other than oil and gas) Oil, gas, and geothermal properties-gross income Oil, gas, and geothermal properties -deductions f Other AMT items (attach statement) 16a Tax-exempt interest income Other tax-exempt income Nanda Nondeductible expenses d Distributions (attach statement if required) (see instructions) e Repayment of loans from shareholders. 17a Investment income ....... b Investment expenses Dividend distributions paid from accumulated earnings and profits Other items and amounts (attach statement) Alternative (AMT) Items Shareholder Minimum Tax Items Affecting Basis 15a 15b 15c 150 15e 151 16a 16b 160 160 16e 17a 17b 17c C Recon- Other ciliation Informatic d 18 Income (loss) reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 120 and 14p 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (a) (b) (c) (d) 1 Cash 2a Trade notes and accounts receivable b Less allowance for bad debts. 3 3 Inventories 4 U.S. government obligations 5 Tax-exempt securities (sce instructions) 6 Other current assets (attach statement) 7 Loans to shareholders 8 Mortgage and real estate loans 9 Other investments (attach statement) 10a Buildings and other depreciable assets b Less accumulated depreciation 11a Depletable assets b Less accumulated depletion 12 Land (net of any amortization) 13a Intangible assets (amortizable only) b Less accumulated amortization 14 Other assets (attach statement) 15 Total assets assets Liabilities and Shareholders' Equity 16 Accounts payable !!!!! 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement) 19 Loans from shareholders 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) 22 Capital stock. . 23 Additional paid-in capital 24 Retained earnings 25 Adjustments to shareholders' equity (attach statement) 26 Less cost of treasury stock 27 Total liabilities and shareholders' equity Form 1120-S12019) Page 5 Form 1120-S (2019) Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books. 5 Income recorded on books this year 2 Income included on Schedule K, lines 1, 2, not included on Schedule K, lines 1 3c. 4. 5a, 6. 7. 8. 9. and 10. not recorded through 10 (itemize): on books this year (itemize) ) a Tax-exempt interest $ 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14p (itemize): a Depreciation $ 6 Deductions included on Schedule K, lines 1 through 12 and 14p, not charged against book income this year (itemize): a Depreciation S b Travel and entertainment $ 7 Add lines 5 and 6 ...... ----- 8 Income (loss) (Schedule K, line 18). Add lines 1 through 3 Subtract line 7 from line 4 Schedule M-2 Analysis of Accumulated Adjustments Account, Shareholders' Undistributed Taxable income Previously Taxed, Accumulated Earnings and Profits, and Other Adjustments Account (see instructions) (a) Accumulated (b) Shareholders' (c) Acoumulated (d) Other adjustments adjustments account undistributed taxable earnings and profits account income previously faxed 1 Balance at beginning of tax year 2 Ordinary income from page 1. line 21 3 3 Other additions 4 Loss from page 1, line 21 5 Other reductions. 6 Combine lines 1 through 5. 7 Distributions 8 Balance at end of tax year. Subtract line 7 from line 6 Form 1120-S12019)