Filing Taxes for a Corporation

Anonymous
timer Asked: Jun 29th, 2018

Question description

C:9-58 Healthwise Medical Supplies Company is located at 2400 Second Street, City, ST 12345. The company is a general partnership that uses the calendar year and accrual basis for both book and tax purposes. It engages in the development and sale of specialized surgical tools to hospitals. The employer identification number (EIN) is XX-2016014. The company formed and began business on January 1, 2013. It has no foreign partners or other foreign dealings. The company is neither a tax shelter nor a publicly traded partnership. The company has made no distributions other than cash, and no changes in ownership have occurred during the current year. Dr. Bailey is the Tax Matters Partner. The partnership makes no special elections. Table C:9-3 contains book balance sheet information at the beginning and end of the current year, and Table C:9-4 presents a book income statement for the current year. Other information follows:

Information on Partnership Formation:

Two individuals formed the partnership on January 1, 2013: Dr. Leisa H. Bailey (1200 First Pike, City, ST 12345) and Dr. Thomas J. Firth (3600 Third Blvd., City, ST 54321). For a 30% interest, Dr. Bailey contributed $1.2 million cash. She is an active general partner who manages the company. For a 70% interest, Dr. Firth contributed $2.32 million cash and 1,000 shares of Fastgrowth, Inc. stock having, at the time of contribution, a $480,000 fair market value (FMV) and a $96,000 adjusted basis. Dr. Firth is an active general partner who designs and develops new products. For book purposes, the company recorded the contribution of stock at fair market value.

Inventory and Cost of Goods Sold (Form 1125-A):

The company uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected in Schedule A. No other costs or expenses are allocated to cost of goods sold. Note: the company is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous year was less than $10 million [Sec. 263A(b)(2)(B)].

Line 9 (a) Check (ii)

(b)–(d)

Not applicable

(e) & (f)

No

Capital Gains and Losses (Schedule D):

The company sold all 1,000 shares of the Fastgrowth, Inc. common stock on July 2, 2014, for $1.44 million. Dr. Firth acquired the stock on January 2, 2011, for $96,000 and contributed the stock to the company on January 1, 2013, when its FMV was $480,000.

TABLE C:9-1 Dapper-Dons Partnership Income Statement for the 12 Months Ending December 31 of the Current Year (Problem C:9-57)

Sales $2,357,000

Returns and allowances (20,000)

$2,337,000

Beginning inventory (FIFO method) $ 200,050

Purchases 624,000

Labor 600,000

Supplies 42,000

Other costsa 12,000

Goods available for sale $1,478,050

Ending inventoryb (146,000) (1,332,050)

Gross profit $ 1,004,950

Salaries for employees other than partners (W-2 wages) $51,000

Guaranteed payment for Dapper 85,000

Utilities expense 46,428

Depreciation (MACRS depreciation is $74,311)c 49,782

Automobile expense 12,085

Office supplies expense 4,420

Advertising expense 85,000

Bad debt expense 2,100

Interest expense (all trade- or business-related) 45,000

Rent expense 7,400

Travel expense (meals cost $4,050 of this amount) 11,020

Repairs and maintenance expense 68,300

Accounting and legal expense 3,600

Charitable contributionsd 16,400

Payroll taxes 5,180

Other taxes (all trade- or business-related) 1,400

Total expenses 494,115

Operating profit $ 510,835

Other income and losses:

Gain on sale of AB stocke

$ 18,000

Loss on sale of CD stockf

(26,075)

Sec. 1231 gain on sale of landg

5,050

Interest on U.S. Treasury bills for entire year ($80,000 face amount)

2,000

Dividends from 15%-owned domestic corporation

11,000 9,975

Net income $ 520,810

a Additional Sec. 263A costs of $7,000 for the current year are included in other costs.

b Ending inventory includes the appropriate Sec. 263A costs, and no further adjustment is needed to properly state cost of sales and inventories for tax purposes.

c The partnership reports a $10,000 positive AMT adjustment for property placed in service after 1986. Dapper-Dons acquired and placed in service $40,000 of rehabilitation expenditures for a certified historical property this year. The appropriate MACRS depreciation on the rehabilitation expenditures already is included in the MACRS depreciation total.

d The partnership made all contributions in cash to qualifying charities.

e The partnership purchased the AB stock as an investment two years ago on December 1 for $40,000 and sold it on June 14 of the current year for $58,000.

f The partnership purchased the CD stock as an investment on February 15 of the current year for $100,000 and sold it on August 1 for $73,925.

g The partnership used the land as a parking lot for the business. The partnership purchased the land four years ago on March 17 for $30,000 and sold it on August 15 of the current year for $35,050.

TABLE C:9-2 Dapper-Dons Partnership Balance Sheet for January 1 and December 31 of the Current Year (Problem C:9-57)

Balance January 1 Balance December 31

Assets:

Cash

$ 10,000 $   40,000

Accounts receivable

72,600 150,100

Inventories

200,050 146,000

Marketable securitiesa

220,000 260,000

Building and equipment

374,600 465,000

Minus: Accumulated depreciation

(160,484) (173,100)

Land

185,000 240,000

Total assets

$901,766 $1,128,000

Liabilities and equities:

Accounts payable

$ 35,000 $ 46,000

Accrued salaries payable

14,000 18,000

Payroll taxes payable

3,416 7,106

Sales taxes payable

5,200 6,560

Mortgage and notes payable (current maturities)

44,000 52,000

Long-term debt

210,000 275,000

Capital:

  Dapper

236,060 289,334

  Dons

354,090 434,000

 Total liabilities and equities

$901,766 $1,128,000

a Short-term investment.

TABLE C:9-3 Healthwise Medical Supplies Company—Book Balance Sheet Information

TABLE C:9-4 Healthwise Medical Supplies Company—Book Income Statement 2013

Sales $7,000,000

Returns and allowances (350,000)

Net sales $6,650,000

Beginning inventory $1,400,000

Purchases 2,800,000

Ending inventory (1,680,000)

Cost of goods sold (2,520,000)

Gross profit $4,130,000

Expenses:

Depreciation (including Sec. 179)

$ 891,840

Repairs

45,500

General insurance

49,000

Guaranteed payment (to Dr. Bailey)

180,000

Other salaries

980,000

Travel

28,000

Utilities

84,000

Rent expense

210,000

Advertising expense

42,000

Professional fees

70,000

Employment taxes

98,000

Business interest expense

33,600

Investment expenses

4,800

Investment interest expense

4,200

Meals and entertainment

21,000

Charitable contributions (cash)

56,000

Total expenses (2,797,940)

Other income:

Interest on municipal bonds

1,200

Dividend income

26,400

Gain on stock sale:

 Selling price

$1,440,000

 Book value

(480,000)

 Book gain

960,000

Net income per books $2,319,660

Fixed Assets and Depreciation (Form 4562):

The company acquired the equipment on January 2, 2013, and placed it in service on that date. The equipment, which originally cost $1.6 million, is MACRS seven-year property. The company did not elect Sec. 179 expensing in the acquisition year and elected out of bonus depreciation. The company claimed the following depreciation on this property:

Year Book and Regular Tax Depreciation AMT Depreciation

2013 $228,640 $171,360

2014 391,840 306,080

On March 1, 2014, the company acquired and placed in service additional equipment costing $500,000. The company made the Sec. 179 expensing election for the entire cost of this new equipment. No depreciation or expensing is reported on Schedule A.

Other Information

The company paid Dr. Bailey a $180,000 guaranteed payment for her management services.

The company made a $56,000 cash contribution to Fort Sanders Hospital System on December 1 of the current year.

During the current year, the company made a $720,000 cash distribution to Dr. Bailey and a $1.68 million cash distribution to Dr. Firth.

The municipal bonds, acquired in 2013, are general revenue bonds, not private-activity bonds. Assume that no expenses of the company are allocable to the tax-exempt interest generated from the municipal bonds.

Assume qualified production activities income (QPAI) equals $2.24 million. Employer’s W-2 wages allocable to U.S. production activities equal $980,000. The company, being an eligible small pass-through partnership, uses the small business simplification overall method for reporting these activities (see discussion for Line 13d of Schedule K and Line 13 of Schedule K-1 in the Form 1065 instructions).

Use book numbers for Schedule L, Schedule M-2, and Line 1 of Schedule M-1. Also use book numbers for Item L of Schedule K-1, and check the box for Sec. 704(b) book.

The partners share liabilities, which are recourse, in the same proportion as their ownership percentages.

Required: Prepare the 2014 partnership tax return (Form 1065), including the following additional schedules and forms: Schedule D, Form 4562, and Schedule K-1.Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

  • Drs. Bailey and Firth formed the corporation on January 1, 2013, and the corporation immediately elected S corporation status effective at the beginning of 2013.
  • Upon formation of the corporation, Dr. Bailey received common stock worth $1.2 million, and Dr. Firth received common stock worth $2.8 million.
  • The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:
    January 1, 2014December 31, 2014
    Common stock$4,000,000$4,000,000
    Retained earnings171,36091,020
  • The $180,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Bailey’s salary.
  • Qualified production activities income (QPAI) still equals $2.24 million, but employer’s W-2 wages allocable to U.S. production activities equal $1.16 million (because of Dr. Bailey’s salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).
  • Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

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