The 2019 Corporate Tax Case

A long time ago in a far, far away land (Albion, Michigan), WTF! Inc., a novelty toy manufacturing company, hired you to prepare their 2019corporate income tax return.

WTF! (12-1212666) is located at 1.3 Ismygpa Street, Albion Michigan, 49224. The company was incorporated on May 15, 1979 (back in the days when disco music was fresh). They manufacture a variety of toys and gag gifts aimed at the high school and college crowd. Examples of past popular products include: supersize disco balls, bell-bottom jeans, strobe lights, lava lamps, stuffed animals, and their best-selling product to date, the two liter Bierstiefel. Their principal business code is 18000.

WTF! is currently a privately-held corporation with over 100 shareholders. One shareholder, the original founder and CEO, Dr. William T. Frankenfurter owns directly 50% of the voting stock. Dr. Frankenfurter (SSN 513-12-6789) lives in a small castle outside of town at 1975 Time Warp Lane, Marshall, Michigan 49068. WTF! does notown directly or indirectly any foreign entities nor is the firm owned by any outside foreign entities.

WTF! Management team includes Dr. Frankenfurter CEO, Janet Weiss CFO, Rock E. Horror, VP R&D, Brad Majors, VP Sales, and Richard (Riff) Raff, VP Operations.

WTF! is an accrual method, calendar year taxpayer. Inventories are determined using the FIFO and the lower of cost or market method. All products are manufactured or assembled in the United States although some materials are outsourced from foreign countries. The firm uses the straight-line method of depreciation for book purposes and the MACRS tables for tax purposes and the firm uses the straight-line method of amortization of intangibles for both book and tax as allowed by law.

Over the years the firm has grown through both normal operations and by acquisitions. According to Ms. Weiss, the companys long-term goal is to go public with an IPO in the next five years. Besides preparing the current year tax return, she is looking for guidance from you given the recent tax law changes.

Below are the December 31, 2019 GAAP prepared financial statements (Income Statement and Balance Sheets) for your review. Additional comments and footnotes are presented afterward.

You are required to prepare are necessary tax forms and supporting documents to file a complete 2019 tax return and write a letter to the CFO (Ms. Weiss) about future (2020) tax planning opportunities and obstacles to consider.

Please download all required tax forms from the IRS.gov website, use Excel to create all required supporting schedules, and write the 2020 tax planning memo in Word.

Need a memo written and IRS forms 1120, 1125 A, M3, 4562 and Schedule L

Thanks!

Need done by Thursday evening April 23rd

WTF! Inc. Balance Sheet As of December 31, 2019 and 2018 (0009) 12/31/2018 (000) 12/31/2019 $ $ 798 2,566 $ $ Current Assets Cash & Cash Equivalents Accounts Receivable, net INote Receivable Inventories Other Current Assets otal Current Assets 876 2.472 218 2.373 389 6,328 $ $ $ 2,033 467 5,864 Property, Plant & Equipment, net Investment in Equity Companies Goodwill Other Intangibles, net Other Long Term Assets "otal Assets $ $ $ $ $ $ 8,033 355 3,275 310 1,372 19,209 8,356 374 3,404 287 1.115 19,864 $ $ Current Liabilities Current Portion of LT Debt Accounts Payable Other Current Liabilities Dividends Payable Warranty Payable Total Current Liabilities 344 2,206 1,909 $ $ $ $ $ $ $ 610 1,920 2.064 250 79 4,923 269 610 $ 5,338 Mortgage Payable Notes Payable Other Long Term Liabilities Total Liabilities $ $ $ $ 1,989 4,792 1.815 12.519 $ $ $ $ 1.810 5,120 1,394 13,662 Stockholders' Equity Common Stock $ Additional Paid-In Capital $ "Treasury Stock $ Retained Earnings $ "otal Liabilities & Stockholders' Equity $ 598 399 14,0871 8.780 19,209 598 425 14,7261 9.905 1 $ $ $ 19,864 WTF! Inc. Statement of Income For the year ended December 31, 2019 Net Sales Cost of Goods Sold Gross Profit (000's) 2019 $ 19,746 $ 13,196 $ 6,550 Marketing, Research, and Administrative Expenses Other Expenses Operating Proft $ S $ 3,673 104 2,773 Interest Income Interest Expense Income Before Income Taxes $ $ $ 20 (243) 2.550 Provision for Income Taxes Income Before Equity Interests $ $ (788) 1,762 Share of Net Income from Equity Interests Net Income S181 $ 1.943 Footnotes and other relevant information. Income Taxes (Federal) Only. The firm made four timely estimated tax payments during 2017: Q1 $200,000; Q2 $200,000; Q3 $200,000; and Q4 $250,000 Given recent employee turnover in the tax department, management estimated the Q3 and Q4 amounts and they admit they are not sure what the tax liability really is. That's why they hired you! The difference in the provision in income tax $788,000 and the total of actual tax payments (5850,000) is a reflected as a component of $62,000 in the Other Current Assets section on the balance sheet. 2. Accounts Receivable. The AR balance is reported net on the balance sheet, meaning net of the Allowance for Doubtful Accounts. Below is a summary table for the Allowance account (ooo's): Beginning Balance (CR) DR. 2017 Bad Debts Expense Estimate Partial or Totally Worthless Accounts Ending Balance 589) (Somas) $346.5 ho) The firm uses a 1% estimate of 2019 Net Sales for bad debts expense. The $346,500 account write off amounts is composed of two items. In 2017 after serious negotiations and threatened lawsuits with a national retail toy store chain, $218,000 was reclassified as a Note Receivable to be paid in four installments beginning in March 2020. The remaining amount of $448.500 represents totally worthless amounts written off during the year. 3. Inventory and Cost of Goods Sold. Below is a summary table for firm's inventory costs in 2019. go's) Cost of Goods Sold Ending Inventory Direct Materials $6,598 $1,187 Direct Labor $2,242 Overhead (excluding Dep) $3363 Soos Depreciation (GAAP) Totals $12.196 $2.73 The MACRS (tax depreciation) amounts are $1,043 in Cost of Goods Sold and $198 in ending inventory. One product qualifies for the DPAD tax opportunity. "Poopie a cute loveable squeezable four inch plastic pig that when you rub its belly it hums a children's jingle with a surprise sometime during the song. Clever, right? "People" is truly American-made! WTF! sold 20,000 units @ $10/each. The manufacturing cost to make one unit 54-50. 25,000 units were produced in 2019 leaving 5,000 units unsold. The total labor costs charged for producing the product was $25,000. was $25,000 Property, Plant and Equipment, (net). Book depreciation not included in the Cost of Goods section totaled $620,000. MACRS deduction for the same asset list is $696,790 5 Intangibles, net and Goodwill. The finite intangible assets are amortized using the straight-line method for both book and tax. Amortization expense per books totaled $23,000. Goodwill increased by $129,000 in 2019 for a merger with Wreaking Crew Sound Studios Inc. (WCSSI) in Mobile Alabama. The merger was completed on October 1, 2019. WCSSI produces the sound cards for the Marvic, and Millie the walking and talking millennial bears product line. For GAAP purposes, Goodwill was not impaired. For tax purposes, Goodwill should be amortized over 15 years using the straight line method. The tax amortization for the pre-2017 Goodwill should be $254.000. 6. Investment in Equity Companies. WTF! owns over 20% but less than 50% of three toy supply companies in the United States. The firm can exert significant influence and therefore uses the equity method for financial reporting purposes. The firm's net income from equity interests totaled $181,000 and the firm received dividends of $162,000. No impairment charges were required in 2019. 7. Warranty Liability. As the company has grown and invested in more sophisticated ideas and products, the firm has committed to assuring the public their products will last. That being said, the firm accrued 5625,000 in warranty expenses and paid $64,000 in warranty claims (refunds, replacements, repairs) in 2019. 8. Other Current Liabilities. There is one item in other current liabilities -accrued legal issues. During 2017 management was informed by its outside legal counsel that one issue meets the criteria of accruing a legal reserve (contingency). The firm accrued $300,000 for this issue that will probably be resolved in 2019. 9. Long-term Debt. All long-term debt (mortgage payable, notes payable, etc.) are treated the same for book and tax purposes. 10. Stockholders' Equity. The firm has be active buying Treasury Stock as management prefers to have a smaller group of outside shareholders as the majority shareholders continue building the company with the intent of an IPO in the near future. Dividends paid in 2019 totaled $1,066,000. (ODD's) 217 $ 308 S as $ 160 11. Details of WTF! Operating Expenses. Detail of Marketing Research, and Administrative Expenses Research Expenses Advertising Expenses Wages and Benefits (not reflected in COGS) Charitable Contributions Travel & Entertainment Bad Debts Expense Warranty Expense Repairs & Maintenance Professional Fees (legal & Accounting) Depreciation & Amortization Total $ S 198 as 643 $ 3,673 12. Travel & Entertainment Expenses - includes $10,000 of speeding tickets, environmental fines, political contributions and bribes. 13. Management compensation listed in #11 above totaled $500,000. a. Dr. Frankenfutter CEO $150,000 b. Janet Weiss CFO S100,000 c. Rock E. Horror, VP - R&D $100,000 d. Brad Majors, VP - Sales $75,000 e. Richard (Rift) Raff, VP - Operations $75,000. 14. Charitable Contributions. WTF! believes in making a difference! In 2019 the firm make $135.000 in cash donations to a variety of legitimate SS13 organizations based upon employee recommendations. For the first time in company history the firm donated inventory to a childrens' charity- the lovable, huggable, snuggable - Marie and Millie talking millennial bears. Gently squeeze the bears' ear and it talks millennial! It also has a phone charge plug (located strategically in the back side) so the child will never be without his/her phone. This is a great gift for college kids too. It helps them deal with the stress, pressure, and time commitments of going to dass maybe 3 to 4 hours per day. The firm donated 2,000 units (bears) in October. The manufacturing cost per bear is $12.50 and normally sells for $30. The firm expensed the inventory gift at cost. 15. All interest income is taxable and all of the interest expense is tax- deductible. WTF! Inc. Balance Sheet As of December 31, 2019 and 2018 (0009) 12/31/2018 (000) 12/31/2019 $ $ 798 2,566 $ $ Current Assets Cash & Cash Equivalents Accounts Receivable, net INote Receivable Inventories Other Current Assets otal Current Assets 876 2.472 218 2.373 389 6,328 $ $ $ 2,033 467 5,864 Property, Plant & Equipment, net Investment in Equity Companies Goodwill Other Intangibles, net Other Long Term Assets "otal Assets $ $ $ $ $ $ 8,033 355 3,275 310 1,372 19,209 8,356 374 3,404 287 1.115 19,864 $ $ Current Liabilities Current Portion of LT Debt Accounts Payable Other Current Liabilities Dividends Payable Warranty Payable Total Current Liabilities 344 2,206 1,909 $ $ $ $ $ $ $ 610 1,920 2.064 250 79 4,923 269 610 $ 5,338 Mortgage Payable Notes Payable Other Long Term Liabilities Total Liabilities $ $ $ $ 1,989 4,792 1.815 12.519 $ $ $ $ 1.810 5,120 1,394 13,662 Stockholders' Equity Common Stock $ Additional Paid-In Capital $ "Treasury Stock $ Retained Earnings $ "otal Liabilities & Stockholders' Equity $ 598 399 14,0871 8.780 19,209 598 425 14,7261 9.905 1 $ $ $ 19,864 WTF! Inc. Statement of Income For the year ended December 31, 2019 Net Sales Cost of Goods Sold Gross Profit (000's) 2019 $ 19,746 $ 13,196 $ 6,550 Marketing, Research, and Administrative Expenses Other Expenses Operating Proft $ S $ 3,673 104 2,773 Interest Income Interest Expense Income Before Income Taxes $ $ $ 20 (243) 2.550 Provision for Income Taxes Income Before Equity Interests $ $ (788) 1,762 Share of Net Income from Equity Interests Net Income S181 $ 1.943 Footnotes and other relevant information. Income Taxes (Federal) Only. The firm made four timely estimated tax payments during 2017: Q1 $200,000; Q2 $200,000; Q3 $200,000; and Q4 $250,000 Given recent employee turnover in the tax department, management estimated the Q3 and Q4 amounts and they admit they are not sure what the tax liability really is. That's why they hired you! The difference in the provision in income tax $788,000 and the total of actual tax payments (5850,000) is a reflected as a component of $62,000 in the Other Current Assets section on the balance sheet. 2. Accounts Receivable. The AR balance is reported net on the balance sheet, meaning net of the Allowance for Doubtful Accounts. Below is a summary table for the Allowance account (ooo's): Beginning Balance (CR) DR. 2017 Bad Debts Expense Estimate Partial or Totally Worthless Accounts Ending Balance 589) (Somas) $346.5 ho) The firm uses a 1% estimate of 2019 Net Sales for bad debts expense. The $346,500 account write off amounts is composed of two items. In 2017 after serious negotiations and threatened lawsuits with a national retail toy store chain, $218,000 was reclassified as a Note Receivable to be paid in four installments beginning in March 2020. The remaining amount of $448.500 represents totally worthless amounts written off during the year. 3. Inventory and Cost of Goods Sold. Below is a summary table for firm's inventory costs in 2019. go's) Cost of Goods Sold Ending Inventory Direct Materials $6,598 $1,187 Direct Labor $2,242 Overhead (excluding Dep) $3363 Soos Depreciation (GAAP) Totals $12.196 $2.73 The MACRS (tax depreciation) amounts are $1,043 in Cost of Goods Sold and $198 in ending inventory. One product qualifies for the DPAD tax opportunity. "Poopie a cute loveable squeezable four inch plastic pig that when you rub its belly it hums a children's jingle with a surprise sometime during the song. Clever, right? "People" is truly American-made! WTF! sold 20,000 units @ $10/each. The manufacturing cost to make one unit 54-50. 25,000 units were produced in 2019 leaving 5,000 units unsold. The total labor costs charged for producing the product was $25,000. was $25,000 Property, Plant and Equipment, (net). Book depreciation not included in the Cost of Goods section totaled $620,000. MACRS deduction for the same asset list is $696,790 5 Intangibles, net and Goodwill. The finite intangible assets are amortized using the straight-line method for both book and tax. Amortization expense per books totaled $23,000. Goodwill increased by $129,000 in 2019 for a merger with Wreaking Crew Sound Studios Inc. (WCSSI) in Mobile Alabama. The merger was completed on October 1, 2019. WCSSI produces the sound cards for the Marvic, and Millie the walking and talking millennial bears product line. For GAAP purposes, Goodwill was not impaired. For tax purposes, Goodwill should be amortized over 15 years using the straight line method. The tax amortization for the pre-2017 Goodwill should be $254.000. 6. Investment in Equity Companies. WTF! owns over 20% but less than 50% of three toy supply companies in the United States. The firm can exert significant influence and therefore uses the equity method for financial reporting purposes. The firm's net income from equity interests totaled $181,000 and the firm received dividends of $162,000. No impairment charges were required in 2019. 7. Warranty Liability. As the company has grown and invested in more sophisticated ideas and products, the firm has committed to assuring the public their products will last. That being said, the firm accrued 5625,000 in warranty expenses and paid $64,000 in warranty claims (refunds, replacements, repairs) in 2019. 8. Other Current Liabilities. There is one item in other current liabilities -accrued legal issues. During 2017 management was informed by its outside legal counsel that one issue meets the criteria of accruing a legal reserve (contingency). The firm accrued $300,000 for this issue that will probably be resolved in 2019. 9. Long-term Debt. All long-term debt (mortgage payable, notes payable, etc.) are treated the same for book and tax purposes. 10. Stockholders' Equity. The firm has be active buying Treasury Stock as management prefers to have a smaller group of outside shareholders as the majority shareholders continue building the company with the intent of an IPO in the near future. Dividends paid in 2019 totaled $1,066,000. (ODD's) 217 $ 308 S as $ 160 11. Details of WTF! Operating Expenses. Detail of Marketing Research, and Administrative Expenses Research Expenses Advertising Expenses Wages and Benefits (not reflected in COGS) Charitable Contributions Travel & Entertainment Bad Debts Expense Warranty Expense Repairs & Maintenance Professional Fees (legal & Accounting) Depreciation & Amortization Total $ S 198 as 643 $ 3,673 12. Travel & Entertainment Expenses - includes $10,000 of speeding tickets, environmental fines, political contributions and bribes. 13. Management compensation listed in #11 above totaled $500,000. a. Dr. Frankenfutter CEO $150,000 b. Janet Weiss CFO S100,000 c. Rock E. Horror, VP - R&D $100,000 d. Brad Majors, VP - Sales $75,000 e. Richard (Rift) Raff, VP - Operations $75,000. 14. Charitable Contributions. WTF! believes in making a difference! In 2019 the firm make $135.000 in cash donations to a variety of legitimate SS13 organizations based upon employee recommendations. For the first time in company history the firm donated inventory to a childrens' charity- the lovable, huggable, snuggable - Marie and Millie talking millennial bears. Gently squeeze the bears' ear and it talks millennial! It also has a phone charge plug (located strategically in the back side) so the child will never be without his/her phone. This is a great gift for college kids too. It helps them deal with the stress, pressure, and time commitments of going to dass maybe 3 to 4 hours per day. The firm donated 2,000 units (bears) in October. The manufacturing cost per bear is $12.50 and normally sells for $30. The firm expensed the inventory gift at cost. 15. All interest income is taxable and all of the interest expense is tax- deductible