Tax Return: S Corporation

Instructions: Please complete the 2015 tax return for Modern Day Clothing, Inc., based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations or reporting.

Modern Day Clothing, Inc. (MD) is organized as a corporation in the state of North Carolina and is taxed as an S corporation with a calendar-year end. MD operates four small boutique clothing outlet stores (family clothing stores) in the North Carolina cities of Charlotte, Durham, Raleigh, and Winston-Salem. MDs address, employer identification number, date of incorporation, and effective date of its S corporation election are as follows:

Modern Day Clothing, Inc. 1515 North Lincoln Highway Charlotte, North Carolina 28201 EIN: 14-2953556 Date Incorporated- February 2, 1999 Effective date of the S election was January 1, 2015.

MD has been at the same address since inception.

MD has only common shares issued. There are currently 10,000 shares of MD common stock outstanding and issued. There were no stock transfers during the current tax year.

MD is owned by the following unrelated four shareholders:

Jennifer Lyons 85 Shady Elm Charlotte, North Carolina, 28201 SSN 524-31-3493 Number of common shares owned 4,300 Chief Executive Officer 2015 W-2 wages $112,000

Robert Newberry RD Route 843 Rural Hall, North Carolina 27045 SSN 482-26-5241 Number of common shares owned 2,300 Chief Financial Officer 2015 W-2 wages $90,000

Lamar Taylor 35 S. Main Street Mt. Airy, North Carolina 27030 SSN 545-16-4239 Number of common shares owned 2,200 Chief Operations Officer 2015 W-2 wages $80,000

Lacrecia Williams 9851 Old Colonial Highway Charlotte, North Carolina, 28201 SSN 429-82-9384 Number of common shares owned 1,200 Not an officer of the company

MD reported the following information for the year:

MD uses the accrual method of accounting.

MD is not a subsidiary nor is it in an affiliated group with any other entity.

MD does not own directly 20%, or, directly and indirectly, 20% or more of any other entity

(including corporations or partnerships).

MD has never issued any restrictive stock

MD has never been required to file a Form 8918

MD has never issued any publicly traded debt

MD was taxed as a C corporation from inception through the effective date of the S election.

MD had net unrecognized built-in gain from prior years of $400,000 as of January 1, 2015. The

entire gain was attributable to unimproved land that MD owned. The land was originally purchased for $250,000 on June 16, 2000. On August 1, 2015, MD sold the unimproved land for a sales price of $850,000 (net of selling commissions). MD did not receive a Form 1099-B reflecting the sale. The land was held by MD as an investment asset only and was not connected with its clothing business.

MD had $500,000 of Accumulated Earnings and Profits as of 12/31/2014.

MD had an Accumulated Adjustments Account balance at 12/31/2014 of $125,000.

MD had an Other Adjustments account balance at 12/31/2014 of $7,000.

MD did not have any non-shareholder debt that was cancelled or was forgiven nor had the

terms modified so as to reduce the principal amount of the debt during the tax year.

MD has never made nor caused to be made a qualified subchapter S subsidiary election (Qsub).

MD has never caused a Qsub election to be revoked or terminated.

MD made payments in the current year that required the filing of Forms 1099. All of those

Forms 1099 were filed timely.

Additional information:

None of the expenses incurred by MD during the year relate to the production or carrying of the tax- exempt securities held in portfolio. The tax-exempt securities are maintained in a separate brokerage account distinct from other holdings.

MD maintains its inventory on the cost method. MD uses specific identification for its inventory and has never changed its inventory method. MD has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to MD.

MD leases all of its real property. On December 1, 2015, MD made a distribution to all common stockholders of $85 per common share.

On July 1, 2015, MD purchased $640,000 of new equipment (5-year MACRS property) that it used to expand its Charlotte store. Not including the $640,000 of new additions during the year, MDs calculated regular and AMT tax depreciation for the current year is $275,000. MD desires to maximize its current year cost recovery deductions relating to the equipment additions.

Book depreciation (including all assets) for 2015 was $180,000. Other than the unimproved land, MD did not dispose of any assets during the year.

MD maintains a life insurance policy on the life of the CEO, Jennifer Lyons. MD is the beneficiary of that policy.

During the current year, MD gave $32,000 in cash to the Red Cross to assist with hurricane disaster clean-up in the North Carolina area.

All of the accrued wage amounts on the balance sheet as of December 31, 2015 were paid on January 15, 2015.

The accrued bonus amounts on the balance sheets as of December 31, 2014 and 2015, respectively, were paid on July 1, 2015 and July 1, 2016, respectively.

As of December 31, 2014 and 2015, respectively, MD had accrued vacation on its books of $19,000 and $21,000. As of March 15, 2015 and March 15, 2016, respectively, MD had paid $3,000 and $9,000 of those accrued amounts. None of these accrued amounts relate to officers compensation.

MD paid $140,000 ($35,000 each on 4/15/2015, 6/15/2015, 9/15/2015 and 12/15/2015) to the U.S. Treasury for current year estimated federal tax payments and $20,000 to the state of North Carolina for current year estimated state income tax payments.

There were no changes in stock ownership during the year. The three officers in the company devoted 100% of their time to the company.

3

Financial Statements (kept on a GAAP basis): Modern Day Clothing, Inc. Balance Sheet

Modern Day Clothing, Inc.
Balance Sheet
Assets:				12/31/14	12/31/15
Cash				340,000	385,000
Accounts Receivable-Credit Cards				205,000	232,000
Accounts Receivable-Trade				63,000	58,000
Less: Allowance for Bad Debts				(13,000)	(11,500)
Inventory				2,908,000	3,010,000
Tax-exempt Securities				100,000	100,000
U.S. Treasury Bonds				200,000	200,000
Fixed Assets				4,010,000	4,650,000
Less: Acc. Depreciation				(2,875,000)	(3,055,000)
Land-Unimproved (tax and GAAP basis)				250,000	0
Prepaid Rent				165,000	168,000
Total Assets:				5,353,000	5,736,500
Liabilities and Shareholders Equity:
Accounts Payable				99,000	93,000
Accrued Employee Wages				27,000	31,000
Accrued Officer Bonuses				110,000	145,000
Accrued Employee Vacation				19,000	21,000
Note Payable-First Bank of NC (Credit Line)				536,000	812,000
Note Payable-First Bank of Charlotte				3,655,000	3,139,750
Capital Stock				1,000	1,000
Additional paid-in Capital				99,000	99,000
Retained Earnings				807,000	1,394,750
Total Liabilities and Shareholders Equity				5,353,000	5,736,500

Income Statement for the year ending December 31, 2015
Item				Amount
Income:
Gross Sales				8,936,500
Less: Returns				(354,000)
Net Sales				8,582,500
Cost of Goods Sold				(4,910,500)
Gross Profit				36,720,000
Gain on Sale of Unimproved Land				600,000
Interest Income -Bank				3,750
Interest Income-U.S. Govt				6,000
Municipal Bond Interest Income				2,650
Total Income: Expenses:				4,284,400
Officer Salaries				317,000
Employee Salaries				437,000
Repairs and Maintenance				12,600
Bad Debts				22,000
Rent				765,000
Payroll Taxes				84,500
Licensing Fees				10,750
Property Taxes				12,500
Interest Expense				175,500
Depreciation				180,000
Office Supplies				5,300
Employee Training				13,750
Key Man Life Insurance				12,000
Advertising				58,500
Employee Benefit Programs				133,000
Meals and Entertainment				3,750
Travel				8,500
Charitable Contribution				32,000
Federal Income Taxes (built-in gains tax)				140,000
State Income Taxes (built-in gain tax) Insurance				20,000
Insurance				18,000
Utilities				243,000
Telephone				142,000
Total Expenses:				2,846,650
Net Income (loss):				1,437,750