Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients and he believed that many of them would follow him if he were to leave his current employer. As part of a New Year’s resolution, Jack decided he would finally do it. Jack put his business plan together and, on January 1 of this year, Jack opened his doors for business as a C corporation called Geo-Jack (GJ). Jack is the sole shareholder. Jack reported the following financial information for the year (assume GJ reports on a calendar year and uses the accrual method of accounting).

a) In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $10,000 which represented a damage deposit of $4,000 and rent for two years ($3,000 annually).

b) GJ earned and collected $290,000 performing geological-related services and selling its specialized digging tool [see part (i)].

c) GJ received $50 interest from municipal bonds and $2,100 interest from other investments.

d) GJ purchased some new equipment in February for $42,500. It claimed depreciation on these assets during the year in the amount of $6,540.

e) GJ paid $7,000 to buy luxury season tickets for Jack’s parents for State U football games.

f) GJ paid Jack’s father $10,000 for services that would have cost no more than $6,000 if Jack had hired any other local business to perform the services.

While Jack’s dad was competent, he does not command such a premium from his other clients.

g) In an attempt to get his name and new business recognized, GJ paid $7,000 for a one-page ad in the Geologic Survey. It also paid $15,000 in radio ads to be run through the end of December.

h) GJ leased additional office space in a building downtown. GJ paid rent of

$27,000 for the year.

i) In August, GJ began manufacturing a special geological digging tool that it sells to wholesalers. QPAI from the activity for the year is $100,000

[included in revenues reported in part (b)]. GJ paid $10,000 of wages to the employees working on the project during the year and its cost of goods sold on the sales is $15,000. (Assume that taxable income does not limit the amount of the DPAD, and that no wages should be included in cost of goods sold.) Remember that cost of goods sold and wages reduce taxable income.

j) In November, Jack’s office was broken into and equipment valued at $5,000 was stolen. The tax basis of the equipment was $5,500. Jack received

$2,000 of insurance proceeds from the theft.

k) GJ incurred a $4,000 fine from the state government for digging in an unauthorized digging zone.

l) GJ contributed $3,000 to lobbyists for their help in persuading the state government to authorize certain unauthorized digging zones.

m) On July 1, GJ paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July 1 of this year through December 31 of next year.

n) GJ borrowed $20,000 to help with the company’s initial funding needs. GJ used $2,000 of funds to invest in municipal bonds. At the end of the year, GJ paid the $1,200 of interest expense that accrued on the loan during the year.

o) Jack lives 12 miles from the office. He carefully tracked his mileage and drove his truck 6,280 miles between the office and his home. He also drove an additional 7,200 miles between the office and traveling to client sites.

Jack did not use the truck for any other purposes. He did not keep track of the specific expenses associated with the truck. However, while traveling to a client site, Jack received a $150 speeding ticket. GJ reimbursed Jack for business mileage and for the speeding ticket.

p) GJ purchased two season tickets (20 games) to attend State U baseball games for a total of $1,100. Jack took existing and prospective clients to the games to maintain contact and find further work. This was very successful for Jack as GJ gained many new projects through substantial discussions with the clients following the games.

q) GJ reimbursed employee-salespersons $3,500 for meals involving substantial business discussion.

r) GJ had a client who needed Jack to perform work in Florida. Because Jack had never been to Florida before, he booked an extra day and night for sightseeing.

Jack spent $400 for airfare and booked a hotel for three nights ($120/

night). (Jack stayed two days for business purposes and one day for personal purposes.) He also rented a car for $45 per day. The client arranged for Jack’s meals while Jack was doing business. GJ reimbursed Jack for all expenses.

Required:

A) What is GJ’s net business income for tax purposes for the year?

B) As a C corporation, does GJ have a required tax year? If so, what would it be?

C) If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be?

D) If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?

83. Rex loves to work with his hands and is very good at making small figurines.

Three years ago, Rex opened Bronze Age Miniatures (BAM) for business as a sole proprietorship. BAM produces miniature characters ranging from sci-fi characters

(his favorite) to historical characters like George Washington (the most popular).

Business has been going very well for him, and he has provided the following information relating to his business. Calculate the business taxable income for BAM.

a) Rex received approval from the IRS to switch from the cash method of accounting to the accrual method of accounting effective January 1 of this year.

At the end of last year, BAM reported accounts receivable that had not been included in income under the accrual method of $14,000 and accounts payable that had not been deducted under the accrual method of $5,000.

b) In March, BAM sold 5,000 miniature historical figures to History R Us Inc.

(HRU), a retailer of historical artifacts and figurines, for $75,000.

c) HRU was so impressed with the figurines that it purchased in March that it wanted to contract with BAM to continue to produce the figurines for them for the next three years. HRU paid BAM $216,000 ($12 per figurine) on October 30 of this year, to produce 500 figurines per month for 36 months beginning on November 1 of this year. BAM delivered 500 figurines on November 30 and again on December 30. Rex elects to use the deferral method to account for the transaction.

d) Though the sci-fi figurines were not quite as popular, BAM sold 400 figurines at a sci-fi convention in April. Rex accepted cash only and received

$11,000 for these sales.

e) In January, BAM determined that it would not be able to collect on $2,000 of its beginning-of-the-year receivables, so it wrote off $2,000 of specific receivables.

BAM sold 100,000 other figurines on credit for $120,000. BAM estimates that it will be unable to collect 5 percent of the sales revenue from these sales but it has not been able to specifically identify any accounts to write off.

f ) Assume that BAM correctly determined that its cost of goods sold this year is $54,000.
g) The sci-fi convention in April was held in Chicago, Illinois. Rex attended the convention because he felt it was a good opportunity to gain new customers and to get new ideas for figurines. He paid $350 round-trip airfare, $100 for entrance to the convention, $210 for lodging, $65 for cab fare, and $110 for meals during the trip. He was busy with business activities the entire trip.
h) On August 1, BAM purchased a 12-month insurance policy that covers its business property for accidents and casualties through July 31 of next year.
The policy cost BAM $3,600.
i) BAM reported depreciation expense of $8,200 for this year.
j) Rex had previously operated his business out of his garage, but in January he decided to rent a larger space. He entered into a lease agreement on February 1 and paid $14,400 ($1,200 per month) to possess the space for the next 12 months (February of this year through January of next year).
k) Before he opened his doors for business, Rex spent $30,000 investigating and otherwise getting ready to do business. He expensed $5,000 immediately and is amortizing the remainder using the straight-line method over 180 months.
l) In December, BAM agreed to a 12-month $8,000 contract with Advertise-With-
Us (AWU) to produce a radio ad campaign. BAM paid $3,000 up front (in December of this year) and AWU agreed that BAM would owe the remaining $5,000 only if BAM’s sales increased by 15 percent over the nine-month period after the contract was signed.
m) In November of this year, BAM paid $2,500 in business property taxes (based on asset values) covering the period December 1 of this year through November 30 of next year. In November of last year, BAM paid $1,500 for business property taxes (based on asset values) covering the period December 1 of last year through November 30 of this year.