Tax Return Instructions

1. Complete Mikas Fine Gifts, Inc., (MFG) 2018 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.

• Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.
• Assume that MFG does not owe any alternative minimum tax.
• If any information is missing, use reasonable assumptions to fill in the gaps.

In addition, you must attach supporting schedules for line items in the tax return whenever required, e.g., Line 26 of Form 1120. DO NOT complete Form 2220: Underpayment of Estimated Tax by Corporations.

Facts:

Mikas Fine Gifts, Inc., (MFG) was formed in 2009 by Rich Rones and Katie Sikes. Rich and Katie officially incorporated their store on June 12, 2010. MFG sells (retail) all kinds of fine gifts. Rich owns 60 percent of the outstanding common stock of MFG and Katie owns the remaining 40 percent.

• MFG is located at 424 Winter Road, Amherst, New York 14228.
• MFG's Employer Identification Number is 31-5522119.
• MFG's business activity is retail sales of fine gifts. Its business activity code is 451140.
• Officers of the corporation are as follows:
  • Rich is the chief executive officer and president (Social Security number 565-000-6789).
  • Katie is the executive vice president (Social Security number 123-22-8886).

• • Korey Elaire is the vice president of operations (Social Security number 789-12-3456).
  • John Abode is the secretary (Social Security number 321-54-6789).
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• Neither Korey nor John owns any stock in MFG.
• MFG uses the accrual method of accounting and has a calendar year-end.
• MFG made four equal estimated tax payments of $70,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, MFG would like to receive a refund.
• MFG paid a dividend of $80,000 to its shareholders on December 1. MFG had ample earnings and profits (E&P) to absorb the distribution.

Notes:

1. MFG has a capital loss carryover to this year from last year in the amount of $5,000.
2. MFG's inventory-related purchases during the year were $1,134,000. MFG values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to MFG.
3. Of the $15,000 interest income, $2,500 was from a City of Amherst bond, $3,500 was from a Lackawanna city bond issued in 2017, $3,000 was from a U.S. Treasury bond issued in 2018, and the remaining $6,000 was from a money market account.
4. MFG sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of $4,000 of book depreciation on the asset and a cumulative total of $6,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under 1245.
5. MFG's dividend income came from Katco, Inc., a publicly held corporation. MFG owned 15,000 shares of the stock in Katco at the beginning of the year. This represented 15 percent of Katcos outstanding stock.
6. On July 22, 2018, MFG sold 2,500 shares of its Katco stock for $33,000. It had originally purchased these shares on April 24, 2014, for $25,000. After the sale, MFG owned 12.5 percent of Katco.

7. MFG's compensation is as follows:
   • Rich $210,000
   • Katie $190,000

7. • Korey $110,000
   • John $90,000
   • Other $700,000
8. MFG wrote off $10,000 in accounts receivable as uncollectible during the year.
9. Regular tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.
10. Of the $62,000 of interest expense, $56,000 was from the mortgage on MFG's building and the remaining $6,000 of interest is from business-related loans.
11. The pension expense is the same for both book and tax purposes.
12. Other expenses include $3,000 for premiums paid on term life insurance policies for which MFG is the beneficiary. The policies cover the lives of Rich and Katie.

MFG Income Statement For year ending December 31, 2018
Revenue from sales	$3,420,000
Sales returns and allowances	(40,000)
Cost of goods sold	(834,000)
Gross profit from operations	$2,546,000
Other income:
Capital gains	$ 8,000
Gain from disposition of fixed assets	2,000
Dividend income	12,000
Interest income	15,000
Gross Income	$2,583,000
Expenses:
Compensation	$(1,300,000)
Depreciation	(20,000)
Bad debt expense	(15,000)
Meals	(5,000)
Maintenance	(5,000)
Charitable donations	(27,000)
Property taxes	(45,000)
State income taxes	(60,000)
Other taxes	(56,000)
Interest	(62,000)
Advertising	(44,000)
Professional services	(32,000)
Pension expense	(40,000)
Supplies	(6,000)
Other expenses	(38,000)
Total expenses	(1,755,000)
Income before taxes	828,000
Federal income tax expense	(260,000)
Net Income after taxes	$ 568,000

	2018
	January 1	December 31
Assets
Cash	$ 240,000	$ 171,000
Accounts receivable	600,000	700,000
Allowance for doubtful accounts	(35,000)	(40,000)
Inventory	1,400,000	1,700,000
U.S. government bonds	50,000	50,000
State and local bonds	140,000	140,000
Investments in stock	300,000	275,000
Building and other depreciable assets	1,500,000	1,600,000
Accumulated depreciation	(200,000)	(216,000)
Land	900,000	900,000
Other assets	250,000	270,000
Total assets	$5,145,000	$5,550,000
Liabilities and Shareholders Equity
Accounts payable	$ 250,000	$ 220,000
Other current liabilities	125,000	120,000
Mortgage	800,000	790,000
Other liabilities	200,000	162,000
Capital stock	600,000	600,000
Retained earnings	3,170,000	3,658,000
Total liabilities and shareholders equity	$5,145,000	$5,550,000