Tax Return: S Corporation

Instructions:

Please complete the 2018 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 (additional information about MD can be found in the table below).MD operates four small boutique clothing outlet stores (family clothing stores) in the North Carolina cities of Charlotte, Durham, Raleigh, and Winston-Salem.

Name

Address (has not changed since inception)

Employer Identification Number

Date Incorporated

S Election Effective Date

Shares Issued and Outstanding

Modern Day Clothing, Inc.

1515 North Lincoln Highway

Charlotte, NC28201

14-2953556

February 2, 2001

January 1, 2017

10,000 common shares

MD is owned by four unrelated shareholders (shareholder-specific information is provided in the table below).There were no stock transfers or changes in stock ownership during the current tax year.

Name

Address

Social Security Number

Shares Owned

Officer Title

2018 Officer Compensation

Jennifer Lyons

85 Shady Elm

Charlotte, NC28201

524-31-3493

4,300

Chief Executive Officer

$112,000

Robert Newberry

RD Route 843

Rural Hall, NC27045

482-26-5241

2,300

Chief Financial Officer

$90,000

Lamar Taylor

35 S. Main Street

Mt. Airy, NC27030

545-16-4239

2,200

Chief Operating Officer

$80,000

Lacrecia Williams

9851 Old Colonial Highway

Charlotte, NC28201

429-82-9384

1,200

Not an officer

N/A

MD was taxed as a C corporation from inception through the S election effective date.The table below provides pertinent account balances as of December 31, 2017 for MD:

Description

12/31/2017 Balance

Net unrecognized built-in gain (NUBIG)*

$400,000

Accumulated earnings and profits

$500,000

Accumulated adjustments account

$125,000

Other adjustments account

$7,000

*NUBIG was entirely attributable to unimproved land that MD originally purchased for $250,000 on June 16, 2002.The land was held by MD as an investment asset only and was not connected with its clothing business.On August 1, 2018, MD sold the unimproved land for $850,000 (net of selling commissions).MD did not receive a Form 1099-B reflecting the sale.

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

MD leases all its real property.

On December 1, 2018, MD made a pro rata distribution to all common stockholders, totaling $794,400.

On July 1, 2018, MD purchased $640,000 of new office equipment (5-year MACRS property) that it used to expand its Charlotte store.Excluding the $640,000 of 2018 additions, MD's regular and AMT tax depreciation for the current year is $275,000.MD desires to maximize its current year cost recovery deductions related to the 2018 additions.

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 contributed $32,000 in cash to the Red Cross to assist with hurricane disaster clean-up in the North Carolina area.

MD reports employee compensation amounts that remained unpaid at year-end in Accrued Employee Wages, Accrued Officer Bonuses and Accrued Employee Vacation 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 Amount

Payment Date

12/31/2017

Accrued Employee Wages

$27,000

All employees (including officers)

$27,000

01/15/2018

12/31/2017

Accrued Officer Bonuses

$110,000

Officers only

$110,000

07/01/2018

12/31/2017

Accrued Employee Vacation

$19,000

Non-officer employees

$3,000

Thru 03/15/2018

12/31/2018

Accrued Employee Wages

$31,000

All employees (including officers)

$31,000

01/15/2019

12/31/2018

Accrued Officer Bonuses

$145,000

Officers only

$145,000

07/01/2019

12/31/2018

Accrued Employee Vacation

$21,000

Non-officer employees

$9,000

Thru 03/15/2019

MD made the following Federal and North Carolina estimated income tax payments on April 15^th, June 15^th, September 15^th and December 15^th, 2018:

oFederal:$21,000 each quarter, $84,000 for the 2018 tax year

oNorth Carolina:$5,000 each quarter, $20,000 for the 2018 tax year

Supplementary Details:

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 or publicly traded debt nor been required to file a Form 8918.

MD's annual gross receipts have never exceeded $25,000,000.

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 Forms 1099 were filed timely.

MD's activities all represent qualified trades or businesses, and none constitute a specified trade or business. MD paid $723,000 in W-2 wages in 2018.

MD's original, unadjusted basis in all its assets is consistent with historical cost on the balance sheet.

MD's three officers devoted 100% of their time to the company.

Financial Statements (kept on a GAAP basis):

Modern Day Clothing, Inc.

Balance Sheet

Assets:12/31/201712/31/2018

Cash$340,000$496,6000

Accounts Receivable-Credit Cards205,000232,000

Accounts Receivable-Trade63,00058,000

Less: Allowance for Bad Debts(13,000)(11,500)

Inventory2,908,000 3,010,000

Tax-exempt Securities 100,000100,000

U.S. Treasury Bonds200,000200,000

Fixed Assets4,010,0004,650,000

Less: Acc. Depreciation (2,875,000) (3,055,000)

Land-Unimproved (tax and GAAP basis)250,0000

Prepaid Rent165,000168,000

Total Assets:$5,353,000 $5,848,100

Liabilities and Shareholders' Equity:

Accounts Payable99,00093,000

Accrued Employee Wages27,00031,000

Accrued Officer Bonuses110,000145,000

Accrued Employee Vacation19,00021,000

Note Payable-First Bank of NC (Credit Line)536,000812,000

Note Payable-First Bank of Charlotte3,655,0003,139,750

Capital Stock1,0001,000

Additional paid-in Capital99,00099,000

Retained Earnings807,0001,506,350

Total Liabilities and Shareholders' Equity $5,353,000$5,848,100

Income Statement for the year ending December 31, 2018

ItemAmount

Income:

Gross Sales$8,936,500

Less: Returns(354,000)

Net Sales8,582,500

Cost of Goods Sold(4,910,500)

Gross Profit3,672,000

Gain on Sale of Unimproved Land600,000

Interest Income -Bank 3,750

Interest Income-U.S. Gov't6,000

Municipal Bond Interest Income 2,650

Total Income: $4,284,400

Expenses:

Officer Salaries$317,000

Employee Salaries437,000

Repairs and Maintenance12,600

Bad Debts22,000

Rent765,000

Payroll Taxes84,500

Licensing Fees10,750

Property Taxes12,500

Interest Expense175,500

Depreciation180,000

Office Supplies5,300

Employee Training13,750

Key employee Insurance12,000

Advertising58,500

Employee Benefit Programs133,000

Meals and Entertainment3,750

Travel8,500

Charitable Contribution32,000

Federal Income Taxes (built-in gains tax) 84,000

State Income Taxes (built-in gain tax)20,000

Insurance18,000

Utilities243,000

Telephone 142,000

Total Expenses:$2,790,650

Net Income (Loss): $1,493,750