Question
Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss
Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss items for the current year:
Sales | $650,000 |
Corporate dividend (from 5% owned corporation) | 60,000 |
Municipal bond interest | 25,000 |
Long-term capital gain | 0 |
Short-term capital loss | (8,000) |
Cost of goods sold | 320,000 |
Depreciation | 65,000 |
Nondeductible fines | 4,000 |
Advertising | 7,000 |
Utilities | 6,000 |
Rent | 5,000 |
Furthermore, Sunshines liabilities (all recourse) increased from $0 on 1/1 to $300,000 on 12/31 of the current year.
- Assume that Sunshine Company is an s-corporation. Alvin contributed $60,000 in exchange for 60% of the stock while his wifes best friend, Ann, contributed $40,000 in exchange for the remaining 40% of the stock when the corporation was formed this year. Alvin received a $2,400 per month salary ($28,800 in total). Ann doesnt work for the company so she received no salary. The company made a $55,000 partial distribution of profits at the end of the year. (9 points)
- Calculate Sunshines ordinary income and separately stated items to be reported on Form 1120S.
- What amount and type of income must Alvin report on his individual Form 1040 tax return?
- What amount of Alvins income will be subject to self-employment tax?
- What is Alvins basis in his Sunshine Company stock at the end of the year?
Note that you do not need to complete Form 1120-S but this form and related schedules will be a useful guide in completing this portion of the assignment.
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