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S Corporaton Tax Return. John Forsythe (SSN 555555555) began a custom cabinet manufacturing business, John's Cabinets (EIN 861122334 and Business Code 321000), four years ago as of July 1 of the current tax year. John incorporated the business, and the corporaton made a tmely electon to be Problem Assignments 563 Dennis-c11.indd 563 6/1/2016 6:09:37 PM 564 CHAPTER 11 Sole Proprietorships and Flow-Through Enttes taxed as an S corporaton. The business has been highly successful, but to bring in additonal capital for expansion, it sold 10,000 shares of previously unissued stock to John's friend, Tom Jones (SSN 666666666), on March 1 of the current year for $80,000. John contnues to hold his original 15,000 shares that were issued at incorporaton for his contributon of money and property valued at $120,000. The business used the additonal capital to purchase $20,000 of new woodworking machines (7year property) on October 15 and $60,000 as a down payment on the purchase of a new building for its manufacturing and office operatons located at 7620 N. Commerce Place, Beavercreek, OH 45440. The business claimed only the basic MACRS depreciaton deductons for these acquisitons. The total cost of the building was $320,000 and the S corporaton began using it on October 1. In the month the business began, the S corporaton purchased $60,000 of used woodworking machinery. It elected to use ADS for cost recovery on the 7year property to reduce any potental losses in the frst years of the business. On September 15 of the current year, the business sold one of the old machines that had cost $10,000 originally for $5,000. When moving to the new building, a second machine that had cost $5,000 originally fell off the truck used to move it and was a total loss. The loss was not covered by insurance. John works fulltme in the business and takes a salary of $9,000 per month. Wages for his seven employees for the year were $220,000. (None of those employees made less than $7,000 or more than the FICA maximum.) Additonal data for the completon of the S corporaton tax return are Sales revenue $850,000 Sales returns 12,000 Purchases 335,000 Rent 36,000 Repairs 4,000 Insurance* 21,000 Truck rental 3,000 Taxes and licenses** 14,000 Advertsing 2,000 Interest expense 4,000 Charitable contributon 10,000 Meals and entertainment 1,000 Fines for improper permitting 2,000 Beginning inventory (at cost) 25,000 Ending inventory (at cost) 30,000 *Includes $500 for John's group term life insurance of $200,000 and $3,000 for medical and dental insurance premiums for him and his family. The balance is for insurance for other employees. **Excludes FICA and FUTA taxes for John and the other employees. The FUTA rate is 6 percent. For its books prepared for banks and other creditors, the company shows $2,000 as an additon to its allowance for bad debt for the current year, depreciaton of $8,200, a gain on the sale of the machine of $1,500, and a loss of $2,500 on the destructon of the machine. The corporaton is a calendaryear S corporaton and uses the hybrid method of accountng, recording all but its sales and cost of goods sold on the cash method of accountng. It has a balance of $35,700 in it accumulated adjustments account at the beginning of the year. John's home address is 100 Main Street, Kettering, OH 45435 and Tom's home address is 222 Williams Street, Fairborn, OH 45422. Prepare Form 1120S for this corporaton, excluding Schedule L. Complete the schedule K1s for John and Tom as well as any other required forms. Assume that the Secton 263A rules do not apply and that you do not have to apporton any other costs to inventory. Use the latest available tax forms from the IRS Web site at www.irs.gov. Dennis-c11.indd 564 6/1/2016 6:09:37 PM Answers to Test Yourself 565 1. b. $22,300. The Secton 1231 gain and the charitable contributons are reported separately. 2. b. $22,300. The Secton 1231 gain and the charitable contributons are reported separately. 3. c. $47,900. $26,000 beginning basis + $18,000 net income + $600 tax exempt income $1,200 capital loss + $4,500 share of liability. Guaranteed payments reduce ordinary income. 4. a. $140,100. $84,000 beginning basis + $30,000 guaranteed payment + $42,000 net income + $1,400 taxexempt income $2,800 capital loss + $10,500 share of liability $25,000 cash withdrawal. 5. a. $43,400. $26,000 beginning basis + $18,000 net income + $600 tax exempt income $1,200 capital loss