Tax return-problem 7: C corporation

Instructions:

Please complete the Express Catering, Inc.s 2015 tax return based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations and do 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, employer identification number (EIN), and date of incorporation are as follows:

Express Catering, Inc.

257 West 55^th Avenue

New York City, NY 10027

EIN- 13-9823459

Date Incorporated: March 17, 2010

ECs address has not changed since its inception.

EC has only common shares issued (no preferred stock). There are currently 10,000 shares of EC common stock issued and outstanding.

EC is owned by four shareholders from the same family: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. Their personal information is provided below:

Raphael Giordano

160 West 57^th 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 55^th Avenue

New York City, NY 10027

SSN: 423-84-2343

Shares owned 1,500

Marco Giordano

160 West 57^th Avenue

New York City, NY 10027

SSN-487-27-4797

Shares owned 1,500

EC uses the accrual method of accounting and follows GAAP. EC is not a subsidiary nor is it in an affiliated group with any other entity. EC is not audited by a CPA firm and has never had a restatement of its income statement.

EC reported the following information for the year:

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

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

EC has never issued publicly offered debt instruments.

EC is not required to file a Form UTP.

EC made several payments in the current year that required the filing of federal Forms 1099. These Forms 1099 were filed timely by EC.

During the year, none of the shareholders of EC changed.

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

Additional information:

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.

Despite being profitable the past few years, EC does not want to carryback net operating loss (if any) generated in the current year. EC believes the next few years will be far more profitable and the losses will be of a greater tax benefit in the future.

The dividends received by EC during the year were paid by Apple, Inc.

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, 2012 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2015 for $100,000. EC received a Form 1099-B to reflect the transaction. Box 6b of the 1099-B was checked.

EC purchased 200 shares of Apple, Inc. on October 10, 2012 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). EC received a 1099-B reporting the sale proceeds. Box 6b was checked on the 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, 2016.

EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2015 through September 30, 2016

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.

Total current year asset additions are as follows (all the equipment purchased was new):

Description	Date Purchased	Amount
5-year MACRS Property	October 2, 2015	$480,000
7-year MACRS Property	September 10, 2015	$320,000
Delivery Truck (over 6,000 lbs): 5-year MACRS Property	October 12, 2015	$40,000

EC 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
Raphael Giordano	356-87-4322	100%	55%	150,000
Silvia Costa	284-58-4583	100%	15%	130,000
Andrea Giordano	423-84-2343	100%	15%	130,000
Marco Giordano	487-27-4797	100%	15%	120,000

As reported on the balance sheet (see below), on December 31, 2014 the accrued wages were $44,500 and the accrued bonuses were $45,000. The wages and bonuses were payable to Raphael, Silvia, Andrea, and Marco. These accrued wages and bonuses were paid on January 20, of 2015. Also, as reported on the balance sheet, on December 31, 2015, the accrued wages were $51,500. The wages were owed to Raphael, Silvia, Andrea, and Marco. The accrued wages were paid on January 22, 2016.

All the other employees wages and bonuses were paid on December 31, 2015.

As of December 31, 2014 and December 31, 2015, respectively, EC had accrued vacation payable on its books of $62,500 and $73,000. All the 2014 vacation accrual was paid during the period from April 1 through November 30, 2015. As of March 15, 2016 EC had paid none of its 2015 accrual. All of the vacation accrual amounts for both years were owed to employees other than Raphael, Silvia, Andrea, and Marco. None of the officers had accrued vacation at December 31, 2014 or 2015.

On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2016 at the insurance companys annual meeting in New York City. The money is fully refundable up until January 15, 2016. Thereafter, half of the deposit becomes non-refundable.

EC maintains an inventory of several items. Inventory is valued at cost. EC has never has never changed it inventory method. EC uses specific identification for its inventory. EC has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to EC.

EC did not pay a dividend in the current year.

EC made no estimated tax payments during the current year.

Financial Statements (kept on a GAAP basis):

Express Catering, Inc.

Balance Sheet

Assets: 12/31/2014 12/31/2015

Cash $ 62,500 $ 44,000

Accounts Receivable 145,000 177,000

Less: Allowance for 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 $2,723,750

Liabilities and Shareholders Equity:

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

Deferred Tax Liability 45,910 14,000

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

Note Payable-EG Capital Equipment Leasing 1,243,000 1,415,000

Capital Stock 1,000 1,000

Additional paid-in Capital 99,000 99,000

Retained Earnings-Unappropriated 209,590 182,250

Total Liabilities and Shareholders Equity: $2,276,500 $2,723,750

Income Statement for the period ending December 31, 2015

Item Amount

Income:

Gross Sales $ 2,925,000

Less: Returns (8,500)

Net Sales 2,916,500

Cost of Goods Sold (1,129,850)

Gross Profit 1,786,650

Dividend Income 2,800

Interest Income -Bank 150

Interest Income-U.S. Treasury 3,000

Municipal Bond Interest Income 1,400

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

Total Income: 1,764,000

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 and Entertainment 3,400

Travel 600

Insurance 19,750

Utilities 142,000

Telephone 14,500

Federal income tax expense/(benefit) (31,910)

Total Expenses: 1,791,340

Net Income (Loss): ($27,340)