TAX RETURN PROJECT

Tax Return Instructions

1. Prepare a Form 1120 Corporate Tax Return for 2020. The following forms must be completed:

* Form 1120: U.S. Corporation Income Tax Return (pages 1 6)

* Schedule D (for Form 1120): Capital Gains and Losses

* Form 1125-A: Cost of Goods Sold

* Form 1125-E: Compensation of Officers

* Form 8949: Sale and Disposition of Capital Assets

* Form 4562: Depreciation

* Form 4797: Sales of Business Property

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.

2. When completing the return, round amounts to the nearest dollar (and leave the cents columns blank). Do not place zeros on lines for which there is no amount (unless the instructions tell you to do so); merely leave the line blank. You must prepare the return by hand. You must use a pencil when preparing your return; no ink, no typing, no computer-generated print.

FACTS:

JC Musical Sales, Inc., is located at 514 Crimson Lane, Bakersville, North Carolina 28705. The corporation uses the calendar year and accrual basis for both book and tax purposes. It is engaged in the sale of musical instruments with an employer identification number (EIN) of 75-8799797. The company incorporated on December 31, 2016 and began business on January 2, 2017. Balance sheet information at January 1, 2020 and December 31, 2020, and an income statement for 2020 (all on a book basis) are included in a separate file on Blackboard.

Other information follows.

1. Estimated Tax Payments: The corporation paid federal estimated tax payments of $555,000 towards its federal tax liability for 2020.

2. Inventory and Cost of Goods Sold (Form 1125-A)

The corporation uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: the corporation is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million.

Line 9(a) Check (ii)

(b), (c), & (d) Not applicable

(e) & (f) No

3. Compensation of Officers (Form 1125-E)

(a)	(b)	(c)	(d)	(f)
JC Glenn	345-82-7091	100%	50%	$290,000
Sandra Phillips	783-97-9105	100%	25%	180,000
Samantha Haley	465-34-2245	100%	25%	180,000
Total				$650,000

4. Bad Debts

For tax purposes, the corporation uses the direct write-off method of deducting bad debts. For book purposes the corporation uses an allowance for doubtful accounts. For 2020, actual write-offs were $40,000.

5. Additional Information (Schedule K)

1b Accrual	6-7 No
2a 451140	8 Do not check box
b Retail sales	9 Fill in the correct amount
c Musical Instruments	10 3
3 No	11 Do not check box
4a No	12 Not applicable
4b Yes; omit Schedule G	13-15a No
5 No (both a and b)	15b Not applicable
	16-26 NO

6. Capital Gains and Losses

The corporation sold 100 shares of PDQ Corp. common stock on October 8, 2020 for $145,000. The corporation acquired the stock on December 15, 2019 for $90,000. The corporation also sold 75 shares of JSB Corp. common stock on June 18, 2020 for $110,000. The corporation acquired this stock on September 18, 2018 for $120,000. The corporation has a $15,000 capital loss carryover from 2019.

7. Fixed Assets and Depreciation Assets Acquired Prior to 2020

Fixed Asset Information

- Building acquired for $2,000,000 and placed in service on January 2, 2017.

- Two pieces of equipment acquired and placed in service on January 2, 2017:

- Equipment #1: $250,000

- Equipment #2: $500,000

- Trucks acquired for $100,000 and placed in service on July 18, 2018

Book Depreciation Information: The corporation uses straight-line depreciation over the useful lives of assets as follows:

- Building, 50 years

- Equipment, 10 years

- Trucks, 5 years

The corporation takes a half-years depreciation in the year of acquisition and the year of disposition and assumes no salvage value. The book financial statements reflect these calculations.

Tax Depreciation Information: All assets are MACRS property as follows:

- Building, 39 year nonresidential real property

- Equipment, 7 year property

- Truck, 5 year property

The corporation did not elect Section 179 or take any bonus depreciation on any of the above properties. The trucks are not listed property or subject to the luxury automobile limitations.

Accumulated tax depreciation through December 31, 2019, on these properties is as follows:

- Store building: $151,780

- Equipment 1: 140,675

- Equipment 2: 281,350

- Trucks: 52,000

8. Sale of Equipment in 2020

On October 16, 2020, the corporation sold Equipment #1 for $280,000 (that had originally cost $250,000 when purchased on January 2, 2017). The corporation had no Section 1231 losses from prior years.

9. Purchase of Equipment in 2020

On October 17, 2020, the corporation acquired and placed in service a piece of equipment costing $600,000. The equipment is seven-year MACRS property for tax depreciation. The corporation is electing to expense all $600,000 of the equipment under Section 179. Therefore, the new equipment will not be subject to MACRS as all of the cost will be expensed under Section 179

For book purposes, the property is ten-year and the corporation will use straight-line depreciation.

10. Other information:

* Ignore AMT and accumulated earnings tax.

* The corporation is not required to complete Schedule M-3.

* The corporation received its dividends from a taxable, domestic corporation, the stock of which JC Musical Sales owns less than 20%.

* The corporation paid $100,000 in cash dividends to its shareholders during the year and charged the payment directly to retained earnings.

* The state income tax on the book income statement is the exact amount of such taxes incurred during the year. Therefore, no book to tax difference adjustment is necessary.

* Assume the corporation is not entitled to any credits.

* Do not complete Form 2220 and ignore the impact of any estimated tax underpayment penalties.