S Corporation Tax Return Final

Federal Taxation II

Instructions:

Calculate the Taxable Income for 2018. Prepare a 2018 S Corporation Form 1120 & Schedule K-1 (form 1120) tax return for Clothes R Us, Inc., using the following information found below [Complete page 1, Schedule K, L, & M-1 on Form 1120S and Schedule K-1 (Form 1120S)]. Use your own judgement (along with your justification) to fill in any missing information. Ignore any Alternative Minimum Tax calculations.

Clothes R Us, Inc. (CRU) is organized as a corporation in the state of Maine and is taxed as an S corporation with a calendar-year end. CRU operates four small boutique clothing outlet stores (family clothing stores) in the Maine cities of Presque Isle, Durham, Raleigh, and Winston-Salem. CRUs address, employer identification number, date of incorporation, and effective date of its S corporation election are as follows:

Clothes R Us, Inc.

181 Main Street

Presque Isle, Maine 28201

EIN: 12-6592345

Date Incorporated- February 2, 2000

Effective date of the S election was January 1, 2018.

CRU has been at the same address since inception.

CRU has only common shares issued. There are currently 10,000 shares of CRU common stock outstanding and issued. There were no stock transfers during the current tax year.

CRU is owned by the following unrelated four shareholders:

Mitch Mumford

85 Shady Elm

Presque Isle, Maine, 28201

SSN 524-31-3493

Number of common shares owned 4,300

Chief Executive Officer

2018 W-2 wages $112,000

Susan Sailboat

RD Route 843

Rural Hall, Maine 27045

SSN 482-26-5241

Number of common shares owned 2,300

Chief Financial Officer

2018 W-2 wages $90,000

Lucy Lollipop

35 S. Main Street

Mt. Airy, Maine 27030

SSN 545-16-4239

Number of common shares owned 2,200

Chief Operations Officer

2018 W-2 wages $80,000

Helen Crockpot

9851 Old Colonial Highway

Presque Isle, Maine, 28201

SSN 429-82-9384

Number of common shares owned 1,200

Not an officer of the company

CRU reported the following information for the year:

• CRU uses the accrual method of accounting.
• CRU is not a subsidiary nor is it in an affiliated group with any other entity.
• CRU does not own directly 20%, or, directly and indirectly, 20% or more of any other entity (including corporations or partnerships).
• CRU has never issued any restrictive stock.
• CRU has never been required to file a Form 8918.
• CRU has never issued any publicly traded debt.
• CRU was never a C Corporation.
• CRU made payments in the current year that required the filing of Forms 1099. All of those Forms 1099 were filed timely.

Additional information:

None of the expenses incurred by CRU 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.

CRU maintains its inventory on the cost method. CRU uses specific identification for its inventory and has never changed its inventory method. CRU has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to CRU.

CRU leases all of its real property.

On December 1, 2018, CRU made a distribution to all common stockholders of $85 per common share.

On July 1, 2018, CRU purchased $640,000 of new equipment (5-year MACRS property) that it used to expand its Presque Isle store. Not including the $640,000 of new additions during the year, CRUs calculated regular and AMT tax depreciation for the current year is $275,000. CRU desires to maximize its current year cost recovery deductions relating to the equipment additions.

Other than the unimproved land, CRU did not dispose of any assets during the year.

CRU maintains a life insurance policy on the life of the CEO, Mitch Mumford. CRU is the beneficiary of that policy.

During the current year, CRU gave $32,000 in cash to the Red Cross to assist with hurricane disaster clean-up in the Maine area.

All of the accrued wage amounts on the balance sheet as of December 31, 2018 were paid on January 15, 2018.

The accrued bonus amounts on the balance sheets as of December 31, 2017 and 2018, respectively, were paid on July 1, 2017 and July 1, 2018, respectively.

As of December 31, 2017 and 2018, respectively, CRU had accrued vacation on its books of $19,000 and $21,000. As of March 15, 2017 and March 15, 2018, respectively, CRU had paid $3,000 and $9,000 of those accrued amounts. None of these accrued amounts relate to officers compensation.

There were no changes in stock ownership during the year.

The three officers in the company devoted 100% of their time to the company.

Income Statement for the year ending December 31, 2018 Expenses: OfficerSalariesEmployeeSalariesRepairsandMaintenanceBadDebtsRentPayrollTaxesLicensingFeesPropertyTaxesInterestExpenseDepreciationOfficeSuppliesEmployeeTrainingKeyManLifeInsuranceAdvertisingEmployeeBenefitProgramsMealsandEntertainmentTravelCharitableContributionInsuranceUtilitiesTelephoneTotalExpenses:NetIncome(loss):317,000437,00012,60022,000765,00084,50010,75012,500175,500180,0005,30013,75012,00058,500133,0003,7508,50032,00018,000243,000142,000$2,686,650$1,597,750 Liabilities and Shareholders' Equity: Financial Statements (GAAP): Clothes R Us, Inc. Balance Sheet Assets: Cash A/R Trade Less: Allowance for Bad Debts Inventory Tax-exempt Securities U.S. Treasury Bonds Fixed Assets Less: Acc. Depreciation Land-Unimproved (tax and GAAP basis) Prepaid Rent Total Assets: Liabilities and Shareholders' Equity: Accounts Payable Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Note Payable-First Bank of NC (Credit Line) 12/31/2017 12/31/2018 $340,000 \$ 385,000 290,000 (11,500) 3,010,000 100,000 200,000 4,650,000 (3,055,000) (2,875,000) 0 165,000168,000 $5,353,000 $5,736,500 $5,736,500 99,00027,000110,00019,000536,00093,00031,000145,00021,000812,000