Taxation

Ndaluate AaBbccba = = mv, Normal No Spacing Heading 1 Heading 2 Tax Returns 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) Modern Day 1515 North Lincoln Highway Clothing, Inc. Charlotte, NC 28201 Employer Date S Election Shares issued Identification and Number Incorporated Effective Date Outstanding 10,000 14-2953556 February 2, 2001 January 1, 2017 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 Shares Number 2018 Officer Officer Title Owned Compensation Jennifer 85 Shady Elm 524-31-3493 4,300 Chief Executive Lyons Charlotte, NC 28201 Officer $112,000 Robert RD Route 843 Chief Financial 482-26-5241 2,300 Newberry Rural Hall, NC 27045 Officer $90,000 Lamar 35 S. Main Street 545-16-4239 Chief Operating 2,200 Taylor Mt. Alry, NC 27030 Officer $80,000 baseesia 9851 Old Colonial Highway Williams 429-82-9384 1,200 Not an officer Charlotte, NC 28201 N/A MD was taxed as a C corporation from inception through the Selection 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 12/31/2017 Account Balance $27,000 Payment Amount $27,000 Payment Date 01/15/2018 12/31/2017 $110,000 $110,000 07/01/2018 12/31/2017 Account Description Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation $19,000 Applicable Employees All employees (including officers) Officers only Non-officer employees All employees (including officers) Officers only Non-officer employees $3,000 Thru 03/15/2018 01/15/2019 12/31/2018 $31,000 $31,000 12/31/2018 $145,000 $145,000 07/01/2019 12/31/2018 $21,000 $9,000 Thru 03/15/2019 MD made the following Federal and North Carolina estimated income tax payments on April 15th, June 15th, September 15th and December 15th, 2018: Federal: $21,000 each quarter, $84,000 for the 2018 tax year North Carolina: $5,000 each quarter, $20,000 for the 2018 tax year o o 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 (sub). 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: Cash Accounts Receivable-Credit Cards Accounts Receivable-Trade Less: Allowance for Bad Debts Inventory Tax-exempt Securities U.S. Treasury Bonds Fixed Assets Less: Acc. Depreciation Land-Unimproved (tax and GAAP basis) Prepaid Rent Total Assets: 12/31/2017 $ 340,000 205,000 63,000 (13,000) 2,908,000 100,000 200,000 4,010,000 (2,875,000) 250,000 165,000 $5,353,000 12/31/2018 $ 496,6000 232,000 58,000 (11,500) 3,010,000 100,000 200,000 4,650,000 (3,055,000) 0 168,000 $5,848,100 Liabilities and Shareholders' Equity: Accounts Payable Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Note Payable-First Bank of NC (Credit Line) Note Payable-First Bank of Charlotte 99,000 27,000 110,000 19,000 536,000 3,655,000 93,000 31,000 145,000 21,000 812,000 3,139,750 Capital Stock Additional paid-in Capital Retained Earnings Total Liabilities and Shareholders' Equity 1,000 99,000 807.000 $5,353,000 1,000 99,000 1.506.350 $5,848, 100 Income Statement for the year ending December 31, 2018 Item Income: Amount Gross Sales Less: Returns Net Sales Cost of Goods Sold Gross Profit $8,936,500 (354.000) 8,582,500 (4.910.500) 3,672,000 Gain on Sale of Unimproved Land 600,000 Interest Income-Bank Interest Income-U.S. Gov't Municipal Bond Interest Income Total Income: 3,750 6,000 2.650 $4,284,400 Expenses: Officer Salaries Employee Salaries Repairs and Maintenance Bad Debts Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Key employee Insurance Advertising Employee Benefit Programs Meals and Entertainment Travel Charitable Contribution Federal Income Taxes (built-in gains tax) State Income Taxes (built-in gain tax) Insurance Utilities Telephone Total Expenses: $317,000 437,000 12,600 22,000 765,000 84,500 10,750 12,500 175,500 180,000 5,300 13,750 12,000 58,500 133,000 3,750 8,500 32,000 84,000 20,000 18,000 243,000 142.000 $2,790,650 Net Income (Loss): $1,493,750 Ndaluate AaBbccba = = mv, Normal No Spacing Heading 1 Heading 2 Tax Returns 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) Modern Day 1515 North Lincoln Highway Clothing, Inc. Charlotte, NC 28201 Employer Date S Election Shares issued Identification and Number Incorporated Effective Date Outstanding 10,000 14-2953556 February 2, 2001 January 1, 2017 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 Shares Number 2018 Officer Officer Title Owned Compensation Jennifer 85 Shady Elm 524-31-3493 4,300 Chief Executive Lyons Charlotte, NC 28201 Officer $112,000 Robert RD Route 843 Chief Financial 482-26-5241 2,300 Newberry Rural Hall, NC 27045 Officer $90,000 Lamar 35 S. Main Street 545-16-4239 Chief Operating 2,200 Taylor Mt. Alry, NC 27030 Officer $80,000 baseesia 9851 Old Colonial Highway Williams 429-82-9384 1,200 Not an officer Charlotte, NC 28201 N/A MD was taxed as a C corporation from inception through the Selection 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 12/31/2017 Account Balance $27,000 Payment Amount $27,000 Payment Date 01/15/2018 12/31/2017 $110,000 $110,000 07/01/2018 12/31/2017 Account Description Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation $19,000 Applicable Employees All employees (including officers) Officers only Non-officer employees All employees (including officers) Officers only Non-officer employees $3,000 Thru 03/15/2018 01/15/2019 12/31/2018 $31,000 $31,000 12/31/2018 $145,000 $145,000 07/01/2019 12/31/2018 $21,000 $9,000 Thru 03/15/2019 MD made the following Federal and North Carolina estimated income tax payments on April 15th, June 15th, September 15th and December 15th, 2018: Federal: $21,000 each quarter, $84,000 for the 2018 tax year North Carolina: $5,000 each quarter, $20,000 for the 2018 tax year o o 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 (sub). 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: Cash Accounts Receivable-Credit Cards Accounts Receivable-Trade Less: Allowance for Bad Debts Inventory Tax-exempt Securities U.S. Treasury Bonds Fixed Assets Less: Acc. Depreciation Land-Unimproved (tax and GAAP basis) Prepaid Rent Total Assets: 12/31/2017 $ 340,000 205,000 63,000 (13,000) 2,908,000 100,000 200,000 4,010,000 (2,875,000) 250,000 165,000 $5,353,000 12/31/2018 $ 496,6000 232,000 58,000 (11,500) 3,010,000 100,000 200,000 4,650,000 (3,055,000) 0 168,000 $5,848,100 Liabilities and Shareholders' Equity: Accounts Payable Accrued Employee Wages Accrued Officer Bonuses Accrued Employee Vacation Note Payable-First Bank of NC (Credit Line) Note Payable-First Bank of Charlotte 99,000 27,000 110,000 19,000 536,000 3,655,000 93,000 31,000 145,000 21,000 812,000 3,139,750 Capital Stock Additional paid-in Capital Retained Earnings Total Liabilities and Shareholders' Equity 1,000 99,000 807.000 $5,353,000 1,000 99,000 1.506.350 $5,848, 100 Income Statement for the year ending December 31, 2018 Item Income: Amount Gross Sales Less: Returns Net Sales Cost of Goods Sold Gross Profit $8,936,500 (354.000) 8,582,500 (4.910.500) 3,672,000 Gain on Sale of Unimproved Land 600,000 Interest Income-Bank Interest Income-U.S. Gov't Municipal Bond Interest Income Total Income: 3,750 6,000 2.650 $4,284,400 Expenses: Officer Salaries Employee Salaries Repairs and Maintenance Bad Debts Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Key employee Insurance Advertising Employee Benefit Programs Meals and Entertainment Travel Charitable Contribution Federal Income Taxes (built-in gains tax) State Income Taxes (built-in gain tax) Insurance Utilities Telephone Total Expenses: $317,000 437,000 12,600 22,000 765,000 84,500 10,750 12,500 175,500 180,000 5,300 13,750 12,000 58,500 133,000 3,750 8,500 32,000 84,000 20,000 18,000 243,000 142.000 $2,790,650 Net Income (Loss): $1,493,750