Tax Return Problem: C corporation

Instructions:

Please complete the book-tax reconciliation excel spreadsheet and 2018 Federal income tax return for Fun Fair of Ventura, Inc. based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. You may work in a small group of maximum three members in each group.

Fun Fair of Ventura, Inc. (FF) is organized as a corporation and is taxed as a C corporation with a calendar year-end. FF owns and operates an amusement park in Oxnard, California. Oxnards weather allows FF to operate year-round. FFs address, employer identification number (EIN), and date of incorporation are as follows:

Fun Fair of Ventura, Inc. 50 Boardwalk Oxnard, California 93030 EIN: 36-4385943

Date Incorporated: July 23, 2001

FF has been at the same address since inception.

FF has only common shares issued (no preferred stock).

FF is owned by 86 shareholders. The majority owner of FF is a large private equity firm based in San Jose, California called Amusement Ventures, LLC (AV). AVs address, employer identification, and other information are as follows:

Amusement Ventures, LLC 675 Shady Wood Boulevard San Jose, California 95101 EIN: 54-8293213

AV is taxed as a partnership for federal tax purposes. AV is organized in California. It owns 30% of the voting stock of FF directly. No other person or entity owns directly 20% or more, or owns, directly or indirectly, more than 50% of the voting stock of FF.

FF uses the accrual method of accounting. FF is not a subsidiary nor is it in an affiliated group with any other entity. FF is not audited by a CPA firm. It does, however, use GAAP-based financial statements. FF has never had a restatement of its income statement.

FF reported the following information for 2018:

• FF did not pay dividends in excess of its current and accumulated earnings and profits.

• None of the stock of FF is owned by non-U.S. persons

• FF has never issued publicly offered debt instruments.

• FF is not required to file a Form UTP

• FF made payments that required it to file federal Form(s) 1099. These Forms 1099 were filed timely by FF.

• None of the shareholders of FF changed during the year.

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

• FF did not receive any assets in a Section 351 transfer during the year.

Additional information:

On August 1, 2018 FF was notified by its legal counsel that FF was being sued by a former employee regarding her termination of employment from FF. On December 21, 2018, a legal settlement was reached with this terminated employee. As part of the settlement, FF agreed to pay the employee a settlement amount of $190,000 on January 10, 2019. FF accrued this expense on its 2018 financial statements.

FF maintains a portfolio of tax-exempt securities (none of which is a private activity bond) and publicly- traded stocks as a measure to provide immediate liquidity if needed (none of these investments is debt financed). All of these securities originate from less than 20% owned domestic corporations.

From inception until this year the Rapid Coaster had been FFs main attraction. However due to safety, crowd appeal, and other factors, FF disposed of the Rapid Coaster on March 1, 2018 and purchased a new attraction known as the Vomitnator. The Rapid Coaster originally cost $2,000,000 and was placed in service on September 1, 2006. The Rapid Coaster was fully depreciated for book, regular tax, and AMT tax depreciation purposes.

The Vomitnator was installed and rendered operational on March 1, 2018. The Vomitnator cost $6,000,000 to acquire, install, and make ready for service. It is a 7-year asset.

FFs regular tax depreciation for the year is correctly calculated as $1,112,499 before considering the 2018 addition of the Vomitnator. FF does not want to claim any current year bonus depreciation or Sec. 179 expense deduction.

FF officer information for the year is as follows (compensation amounts included in total wages on the income statement for all employees):

Name	Social security number	Percent of time devoted to business	Percent of stock owned	Amount of compensation
Marissa Hunt	435-54-2342	100%	.05%	$235,000
Dakon Williams	243-98-3242	100%	.03%	$195,000
Deon Johnson	194-23-7435	100%	0%	$165,000
Jennifer Conley	623-53-3920	100%	0%	$150,000

Near the end of the year, FF switched its property and casualty insurance company. As a result, the plan year for its insurance contract was altered. On December 31, 2018 FF prepaid insurance premiums of $25,000 representing coverage through February 15, 2019 as a condition of being accepted by the new company. FF did not expense any of the prepayment for financial accounting purposes

FF rents from vendors several pieces of equipment to use in its business. As of December 31, 2017 and December 31, 2018, respectively, FF had prepaid vendors for equipment rental of $30,000 for January 2018 and $35,000 for January 2019.

On December 26, 2018 FF prepaid a contractor $17,500 to repair several pieces of maintenance shop equipment in January of 2019. FF fully expects that the contractor will have completed the project by January 31, 2019.

All the accrued wages and bonus amounts on the financial statements as of December 31, 2018 were paid on February 28, 2019.

As of December 31, 2017 and 2018, respectively, FF had vacation accruals on its books of $29,000 and $35,000. As of March 15, 2018 and 2019, respectively, FF had paid $5,000 and $8,000 of those accrued amounts.

On December 2, 2018, the millionth customer entered the park. To recognize the accomplishment and to promote the amusement park through print and radio media advertisements, FF held a give-away contest wherein the lucky customer deemed to be the millionth customer would be given $100,000. The check was presented to the lucky winner on January 15, 2019.

The land on which FF resides is owned by the county. FF has a very favorable lease with the county that allows FF the ability to sublease any portion of the ground to another tenant. The board of directors of FF made the decision in the fall of 2018 to seek out a tenant for unimproved land that would not be utilized in any potential expansion plans. FF identified the potential renter and entered into a contract with the renter on December 1, 2018. The rent period is to begin on January 1, 2019; however, as part of the contract, the renter was required to pay a full six-month rental amount ($50,000) to FF by December 31, 2018. FF received a check of $50,000 on December 27, 2018 from the renter. This rental payment is not refundable to the renter under any circumstances.

FF maintains an inventory of several items that it uses in its amusement park. Inventory is valued at cost. FF has never changed it inventory method. FF uses specific identification for its inventory and assuming it sold all of its 2017 ending inventory in 2018. FF has never written down any subnormal goods. The rules of Section 263A (Unicap) apply to FF. The Unicap calculated costs related to ending inventory at December 31, 2017 and 2018, respectively, were $15,000 and $19,000.

On December 1, 2018, FF paid a $400,000 dividend to all common stockholders.

During the year, FF made Federal estimated income tax payments of $72,500 each on April 17, June 15, September 17 and December 17 of 2018 ($290,000 in total). If FF has overpaid its current year estimated taxes, it would like to apply the excess to its estimated tax payments for next year. FF is NOT a large corporation. FFs 2017 tax liability was $200,000.

FF made California state estimated income tax payments of $15,000 each on April 17, June 15, September 17 and December 17 of 2018 ($60,000 in total).

FF does not have a minimum tax credit carryover from 2017.

Financial Statements (kept on a GAAP basis): FUN FAIR OF VENTURA, INC.

Item	Book Amount	Temporary Difference	Permanent Difference	Tax Amount
Income:
Gross Sales	$26,523,275
Less: Returns	-113,500
Net Sales	26,409,775
Cost of Goods Sold	-2,052,500
Dividend Income	4,300
Interest Income	2,650
Municipal Bond Interest Income	2,300
Total Income:	24,366,525
Expenses:
Employee Salaries	13,905,600
Repairs and Maintenance	492,350
Bad Debts	58,000
Rent	1,543,000
Payroll Taxes	1,112,400
Licensing Fees	10,750
Property Taxes	277,000
Interest Expense	781,000
Depreciation	1,350,000
Office Supplies	33,950
Employee Training	53,750
Safety Expenses	31,000
Political Contribution	2,500
CA Safety Commission Fine	5,000
Advertising	290,500
Admission Supplies	143,250
Meals	8,500
Travel	13,550
Insurance	215,000
Legal Settlement	190,000
Prize Contest Expense	100,000
Fuel	158,675
Utilities	2,530,500
Telephone	135,250
Total Expenses before taxes:	$23,441,525
CA state income tax expense	60,000
Federal tax expense	290,000
Total income taxes	$350,000
Net Income:	$575,000

Balance Sheet Assets: 12/31/17 12/31/18 Cash Accounts Receivable Less: Allowance for Bad Debts Inventory Tax-exempt Securities Publicly Traded Stocks Fixed Assets Less: Acc. Depreciation Prepaid Insurance Prepaid Rent Prepaid Installation Contract Other Assets $ 165,000 128,000 (43,000) 422,000 150,000 200,000 24,000,000 (13,542,000) $ 119,000 75,000 (49,000) 390,000 150,000 200,000 28,000,000 (12,892,000) 25,000 35,000 17,500 250,000 30,000 150,000 Total Assets: $11,660,000 $16,320,500 Liabilities and Shareholders' Equity: 48,000 123,000 68,500 29,000 Accounts Payable Accrued Wages Accrued Bonuses Accrued Vacation Legal Settlement Accrual Prize Accrual Unearned Rental Income Note Payable-First Bank of CA (Credit Line) Note Payable-Equipment Leasing, Inc. 62,000 118,000 39,000 35,000 190,000 100,000 50,000 1,084,000 11,728,000 1,540,000 7,112,000 Capital Stock Additional paid-in Capital Retained Earnings-Unappropriated 100,000 2,000,000 639,500 100,000 2,000,000 814,500 Total Liabilities and Shareholders' Equity: $11,660,000 $16,320,500 Income Statement for the period ending December 31, 2018 Item Amount Income: Gross Sales Less: Returns Net Sales $26,523,275 (113,500) 26,409,775 Cost of Goods Sold (2,052,500) Dividend Income Interest Income Municipal Bond Interest Income 4,300 2,650 2,300 Total Income: 24,366,525 Expenses: Employee Salaries Repairs and Maintenance Bad Debts Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Safety Expenses Political Contribution CA Safety Commission Fine Advertising Admission Supplies Meals Travel Insurance Legal Settlement Prize Contest Expense Fuel Utilities Telephone 13,905,600 492,350 58,000 1,543,000 1,112,400 10,750 277,000 781,000 1,350,000 33,950 53,750 31,000 2,500 5,000 290,500 143,250 8,500 13,550 215,000 190,000 100,000 158,675 2,530,500 135,250 Total Expenses before taxes: $23,441,525 CA state income tax expense Federal tax expense 60,000 290,000 Total income taxes Net Income: $350,000 $ 575,000 Balance Sheet Assets: 12/31/17 12/31/18 Cash Accounts Receivable Less: Allowance for Bad Debts Inventory Tax-exempt Securities Publicly Traded Stocks Fixed Assets Less: Acc. Depreciation Prepaid Insurance Prepaid Rent Prepaid Installation Contract Other Assets $ 165,000 128,000 (43,000) 422,000 150,000 200,000 24,000,000 (13,542,000) $ 119,000 75,000 (49,000) 390,000 150,000 200,000 28,000,000 (12,892,000) 25,000 35,000 17,500 250,000 30,000 150,000 Total Assets: $11,660,000 $16,320,500 Liabilities and Shareholders' Equity: 48,000 123,000 68,500 29,000 Accounts Payable Accrued Wages Accrued Bonuses Accrued Vacation Legal Settlement Accrual Prize Accrual Unearned Rental Income Note Payable-First Bank of CA (Credit Line) Note Payable-Equipment Leasing, Inc. 62,000 118,000 39,000 35,000 190,000 100,000 50,000 1,084,000 11,728,000 1,540,000 7,112,000 Capital Stock Additional paid-in Capital Retained Earnings-Unappropriated 100,000 2,000,000 639,500 100,000 2,000,000 814,500 Total Liabilities and Shareholders' Equity: $11,660,000 $16,320,500 Income Statement for the period ending December 31, 2018 Item Amount Income: Gross Sales Less: Returns Net Sales $26,523,275 (113,500) 26,409,775 Cost of Goods Sold (2,052,500) Dividend Income Interest Income Municipal Bond Interest Income 4,300 2,650 2,300 Total Income: 24,366,525 Expenses: Employee Salaries Repairs and Maintenance Bad Debts Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Safety Expenses Political Contribution CA Safety Commission Fine Advertising Admission Supplies Meals Travel Insurance Legal Settlement Prize Contest Expense Fuel Utilities Telephone 13,905,600 492,350 58,000 1,543,000 1,112,400 10,750 277,000 781,000 1,350,000 33,950 53,750 31,000 2,500 5,000 290,500 143,250 8,500 13,550 215,000 190,000 100,000 158,675 2,530,500 135,250 Total Expenses before taxes: $23,441,525 CA state income tax expense Federal tax expense 60,000 290,000 Total income taxes Net Income: $350,000 $ 575,000