S Corporation Tax Return. John Forsythe (SSN 555555555) began a custom cabinet manufacturing business, John's Cabinets (EIN 861122334 and Business Code 321000), four years ago as of July 1 of the current tax year. John incorporated the business, and the corporation made a timely election to be

Problem Assignments 563

Dennis-c11.indd563 6/1/20166:09:37 PM

564 CHAPTER 11 Sole Proprietorships and Flow-Through Entities

taxed as an S corporation. The business has been highly successful, but to bring in additional capital for expansion, it sold 10,000 shares of previously unissued stock to John's friend, Tom Jones (SSN 666666666), on March 1 of the current year for $80,000. John continues to hold his original 15,000 shares that were issued at incorporation for his contribution of money and property valued at $120,000. The business used the additional capital to purchase $20,000 of new woodworking machines (7year property) on October 15 and $60,000 as a down payment on the purchase of a new building for its manufacturing and office operations located at 7620 N. Commerce Place, Beavercreek, OH 45440. The business claimed only the basic MACRS depreciation deductions for these acquisitions. The total cost of the building was $320,000 and the S corporation began using it on October 1. In the month the business began, the S corporation purchased $60,000 of used woodworking machinery. It elected to use ADS for cost recovery on the 7year property to reduce any potential losses in the firstyears of the business. On September 15 of the current year, the business sold one of the old machines that had cost $10,000 originally for $5,000. When moving to the new building, a second machine that had cost $5,000 originally fell off the truck used to move it and was a total loss. The loss was not covered by insurance. John works fulltime in the business and takes a salary of $9,000 per month. Wages for his seven employees for the year were $220,000. (None of those employees made less than $7,000 or more than the FICA maximum.) Additional data for the completion of the S corporation tax return are

Sales revenue $850,000 Sales returns 12,000 Purchases 335,000 Rent 36,000 Repairs 4,000 Insurance* 21,000 Truck rental 3,000 Taxes and licenses** 14,000 Advertising 2,000 Interest expense 4,000 Charitable contribution 10,000 Meals and entertainment 1,000 Fines for improper permitting 2,000 Beginning inventory (at cost) 25,000 Ending inventory (at cost) 30,000 *Includes $500 for John's group term life insurance of $200,000 and $3,000 for medical and dental insurance premiums for him and his family. The balance is for insurance for other employees. **Excludes FICA and FUTA taxes for John and the other employees. The FUTA rate is 6 percent.

For its books prepared for banks and other creditors, the company shows $2,000 as an addition to its allowance for bad debt for the current year, depreciation of $8,200, a gain on the sale of the machine of $1,500, and a loss of $2,500 on the destruction of the machine. The corporation is a calendaryear S corporation and uses the hybrid method of accounting, recording all but its sales and cost of goods sold on the cash method of accounting. It has a balance of $35,700 in it accumulated adjustments account at the beginning of the year. John's home address is 100 Main Street, Kettering, OH 45435 and Tom's home address is 222 Williams Street, Fairborn, OH 45422. Prepare Form 1120S for this corporation, excluding Schedule L. Complete the schedule K1s for John and Tom as well as any other required forms. Assume that the Section263A rules do not apply and that you do not have to apportion any other costs to inventory. Use the latest available tax forms from the IRS Web site at www.irs.gov.

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Answers to Test Yourself 565

1. b. $22,300. The Section1231 gain and the charitable contributions are reported separately. 2. b. $22,300. The Section1231 gain and the charitable contributions are reported separately. 3. c. $47,900. $26,000 beginning basis + $18,000 net income + $600 taxexempt income $1,200 capital loss + $4,500 share of liability. Guaranteed payments reduce ordinary income. 4. a. $140,100. $84,000 beginning basis + $30,000 guaranteed payment + $42,000 net income + $1,400 taxexempt income $2,800 capital loss + $10,500 share of liability $25,000 cash withdrawal. 5. a. $43,400. $26,000 beginning basis + $18,000 net income + $600 taxexempt income $1,200 capital loss.