Tax Return - Problem 1: C corporation

Instructions:

Please complete Express Catering, Inc.s 2018 Form 1120, U.S. Corporation Income Tax Return, based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. You may ignore any Alternative Minimum Tax (AMT) calculations and should not prepare any AMT-related forms.

Express Catering, Inc. (EC) is organized in the state of New York as a corporation and is taxed as a C corporation with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY that specializes in mobile food catering for events and gatherings within the tri-state area. ECs address (unchanged since inception), employer identification number (EIN), and date of incorporation are as follows:

Express Catering, Inc.

257 West 55th Avenue

New York City, NY 10027

EIN: 13-9823459

Date of Incorporation: March 17, 2012

ECs address has not changed since its inception.

EC has been rapidly expanding its catering business. This expansion has required a significant amount of new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on debt to fund these purchases. Further, EC invested heavily in its catering business by significantly increasing its advertising budget. EC and its officers expect that revenue increases from these expenditures will begin next year.

EC is owned by four related shareholders from the same family for the entire year: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. None of ECs shareholders are non-U.S. persons. There are currently 10,000 shares of EC common stock issued and outstanding (EC has never issued preferred stock).

The shareholders are also employees of EC and its only corporate officers. The relevant shareholder and officer information for the current year is provided below. Officer compensation is included in Employee Salaries on the income statement. Their personal information is provided below:

Raphael Giordano

160 West 57th Avenue

New York City, NY 10027

SSN: 356-87-4322

Shares owned 5,500

Silvia Giordano Costa

250 South Main

Hoboken, New Jersey 07030

SSN: 284-58-4583

Shares owned 1,500

Andrea Giordano

65 East 55th Avenue

New York City, NY 10027

SSN: 423-84-2343

Shares owned 1,500

Marco Giordano

160 West 57th Avenue

New York City, NY 10027

SSN-487-27-4797

Shares owned 1,500

EC follows the accrual method of accounting (GAAP) and is not a member of any consolidated or affiliated group of entities. EC is not audited by a CPA firm and has never had to restate its financial statement information.

Supplementary Details:

The dividends received by EC during the year were paid by Apple, Inc. (EC owns less than 20% of Apple, Inc.s stock).

EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC originally purchased the New York City bonds on February 1, 2015 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2018 for $100,000. Both tax basis and proceeds received on this transaction were reported to EC on a Form 1099-B.

EC purchased 200 shares of Apple, Inc. on October 10, 2015 for $100,000 (including commission). On July 10, of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share (including commission). Both tax basis and proceeds received on this transaction were reported to EC on a form 1099-B.

During the year, EC contributed $8,000 to the American Lung Association.

On December 10, EC paid Madison Advertising $27,500 to design a new catering advertisement campaign for next year. This money represented half of the total $55,000 contract price. EC expects that the services will be provided and delivered to EC on about June 30, 2019.

EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2018 through September 30, 2019.

ECs regular tax depreciation for the year is correctly calculated as $350,000 before considering the current year fixed asset additions of $840,000 (see table below). EC wants to claim the fastest recovery method(s) possible on these asset additions without electing any 179 expensing.

EC acquired the following new fixed assets from unrelated parties in 2018:

Description

Date Purchased

Amount

5-year MACRS Property

October 2, 2018

$480,000

7-year MACRS Property

September 10, 2018

$320,000

Delivery Truck (over 6,000 lbs): 5-year MACRS Property

October 12, 2018

$40,000

EC reports employee compensation amounts that remained unpaid at year-end in Accrued Bonuses, Accrued Vacation and Accrued Wages on the balance sheet, as applicable. The table below provides a summary of the balances in these accounts for December 31, 2017 and 2018.

Balance Sheet Date

Account Description

Account Balance

Applicable Employees

Payment Date

12/31/2017

Accrued Bonuses

$45,000

ECs Shareholders (father and children)

01/20/2018

12/31/2017

Accrued Vacation

$62,500

Unrelated Employees

04/01/2018 11/30/2018

12/31/2017

Accrued Wages

$44,500

ECs Shareholders (father and children)

01/20/2018

12/31/2018

Accrued Vacation

$73,000

Unrelated Employees

Unpaid as of 03/15/2019

12/31/2018

Accrued Wages

$51,500

ECs Shareholders (father and children)

01/22/2019

Supplementary Details (continued):

On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2019 at the insurance companys annual meeting in New York City. The deposit is fully refundable until January 15, 2019. Thereafter, half of the deposit becomes non-refundable.

Meal expenses were incurred for clients and EC staff at important meetings where business was conducted. EC did not incur any entertainment-related expenses in 2018.

EC values its inventory at cost and has always used the specific identification method for reporting purposes. The company has never written down any inventory for any reason and the rules of Section 263A (UNICAP) do not apply to EC.

EC made the following estimated Federal income tax payments:

April 15th, 2018: $2,000

September 15th, 2018: $2,000

June 15th, 2018: $1,500

December 15th, 2018

If applicable, EC wants any overpayment credited to its 2019 estimated taxes.

Miscellaneous Information:

EC did not make any dividend distributions or distributions in excess of current and accumulated earnings and profits during the current year.

EC does not have any net operating loss carryforward amounts available for the current year.

EC has never issued publicly offered debt instruments.

EC is not required to file a Schedule UTP, Uncertain Tax Position Statement.

EC made several payments during the current year that were required to be reported on Forms 1099; all required Forms 1099 were filed timely by EC.

EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax-deferred transaction.

EC did not receive any assets in Section 351 transfers during the year.

All questions on Schedule B, Form 1120 should be checked no for the current year.

ECs gross receipts have never exceeded $5 million annually.

Express Catering, Inc.

Financial Statements (kept on a GAAP basis):

Balance Sheet

Assets: 12/31/2017 12/31/2018

Cash $ 62,500 $ 1,037,000

Accounts Receivable 145,000 177,000

Less: Allowance-Bad Debts (32,000) (41,000)

Inventory 59,000 96,000

Publicly traded securities 100,000 0

Tax-exempt bond 100,000 0

U.S. Treasury Bonds 125,000 125,000

Fixed Assets 2,115,000 2,955,000

Less: Acc. Depreciation (436,500) (715,000)

Prepaid Insurance 0 15,750

Prepaid Rent 38,500 39,500

Prepaid Advertising 0 27,500

Total Assets: $2,276,500 $3,716,750

Liabilities and Shareholders Equity:

12/31/2017 12/31/2018

Accounts Payable 102,000 131,000

Accrued Bonuses 45,000 0

Accrued Vacation 62,500 73,000

Accrued Wages 44,500 51,500

Event Deposits 0 100,000

Income Tax Payable 0 $46,820 Deferred Tax Liability 45,910 14,000

Note Payable 424,000 657,000 -First Bank of NY (Credit Line)

Note Payable 1,243,000 1,415,000

-EG Capital Equipment Leasing

Capital Stock 1,000 1,000

Additional paid-in Capital 99,000 99,000

Retained Earnings-Unappropriated 209,590 1,128,430

Total Liabilities

& Shareholders Equity: $2,276,500 $3,716,750

Income Statement for the period ending December 31, 2018

Item Amount

Income:

Gross Sales $ 3,925,000

Less: Returns (8,500)

Net Sales 3,916,500

Cost of Goods Sold (1,129,850)

Gross Profit 2,786,650

Dividend Income 2,800

Interest Income -Bank 150

Interest Income-U.S. Treasury 3,000

Municipal Bond Interest Income 1,400

Capital Loss-Shares of Apple, Inc. (30,000)

Total Income: 2,764,000

Expenses:

Employee Salaries 743,500

Repairs and Maintenance 19,000

Bad Debts 44,000

Rent 230,000

Payroll Taxes 60,000

Licensing Fees 4,500

Property Taxes 12,500

Interest Expense 140,000

Depreciation 278,500

Office Supplies 5,400

Employee Training 3,600

Employee Benefits 24,000

Charitable Contribution 8,000

Advertising 70,000

Meals 3,400

Travel 600

Insurance 19,750

Utilities 142,000

Telephone 14,500

Federal income tax expense/(benefit) 21,910

Total Expenses: 1,845,160

Net Income (Loss): $918,840