Tax return-problem: C corporation
Instructions:
Please complete the Express Catering, Inc.'s 2014 tax return based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations and do not prepare any AMT related forms.
Express Catering, Inc. (EC) is organized in the state of New York as a corporation and is taxed as a "C" corporation with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY that specializes in mobile food catering for events and gatherings within the tri-state area. EC's address, employer identification number (EIN), and date of incorporation are as follows:
Express Catering, Inc.
257 West 55th Avenue
New York City, NY 10027
EIN- 13-9823459
Date Incorporated: March 17, 2009
EC's address has not changed since its inception.
EC has only common shares issued (no preferred stock). There are currently 10,000 shares of EC common stock issued and outstanding.
EC is owned by four shareholders from the same family: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. Their personal information is provided below:
Raphael Giordano
160 West 57th Avenue
New York City, NY 10027
SSN: 356-87-4322
Shares owned 5,500
Silvia Giordano Costa
250 South Main
Hoboken, New Jersey 07030
SSN: 284-58-4583
Shares owned 1,500
Andrea Giordano
65 East 55th Avenue
New York City, NY 10027
SSN: 423-84-2343
Shares owned 1,500
Marco Giordano
160 West 57th Avenue
New York City, NY 10027
SSN-487-27-4797
Shares owned 1,500
EC uses the accrual method of accounting and follows GAAP. EC is not a subsidiary nor is it in an affiliated group with any other entity. EC is not audited by a CPA firm and has never had a restatement of its income statement.
EC reported the following information for the year:
• EC did not pay dividends in excess of its current and accumulated earnings and profits.
• None of the stock of EC is owned by non U.S. persons.
• EC has never issued publicly offered debt instruments.
• EC is not required to file a Form UTP.
• EC made several payments in the current year that required the filing of federal Forms 1099. These Forms 1099 were filed timely by EC.
• During the year, none of the shareholders of EC changed.
• EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or tax-deferred transaction.
• EC did not receive any assets in Section 351 transfers during the year.
• All of the questions on Schedule B, Form 1120 should be checked "no" for the year.
Additional information:
EC has been rapidly expanding its catering business. This expansion has required a significant amount of new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on debt to fund these purchases. Further, EC invested heavily in its catering business by significantly increasing its advertising budget. EC and its officers expect that revenue increases from these expenditures will begin next year.
Despite being profitable the past few years, EC does not want to carryback net operating loss (if any) generated in the current year. EC believes the next few years will be far more profitable and the losses will be of a greater tax benefit in the future.
The dividends received by EC during the year were paid by Apple, Inc.
EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC originally purchased the New York City bonds on February 1, 2011 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2014 for $100,000. EC received a Form 1099-B to reflect the transaction. Box 6b of the 1099-B was checked.
EC purchased 200 shares of Apple, Inc. on October 10, 2011 for $100,000 (including commission). On July 10, of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share (including commission). EC received a 1099-B reporting the sale proceeds. Box 6b was checked on the Form 1099-B.
During the year EC contributed $8,000 to the American Lung Association.
On December 10, EC paid Madison Advertising $27,500 to design a new catering advertisement campaign for next year. This money represented half of the total $55,000 contract price. EC expects that the services will be provided and delivered to EC on about June 30, 2015.
EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2014 through September 30, 2015
EC's regular tax depreciation for the year is correctly calculated as $350,000 before considering the current year fixed asset additions of $840,000 (see table below). EC wants to claim the fastest recovery method(s) possible on these asset additions without electing any §179 expensing.
Total current year asset additions are as follows (all the equipment purchased was new):
Description Date Purchased Amount
5-year MACRS Property October 2, 2014 $480,000
7-year MACRS Property September 10, 2014 $320,000
Delivery Truck (over 6,000 lbs): 5-year MACRS Property October 12, 2014 $40,000
EC officer information for the year is as follows (compensation amounts included in total wages on the income statement for all employees):
Name Social Security number Percent of time devoted to business Percent of stock owned Amount of compensation
Raphael Giordano 356-87-4322 100% 55% 150,000
Silvia Costa 284-58-4583 100% 15% 130,000
Andrea Giordano 423-84-2343 100% 15% 130,000
Marco Giordano 487-27-4797 100% 15% 120,000
As reported on the balance sheet (see below), on December 31, 2013 the accrued wages were $44,500 and the accrued bonuses were $45,000. The wages and bonuses were payable to Raphael, Silvia, Andrea, and Marco. These accrued wages and bonuses were paid on January 20, of 2014. Also as reported on the balance sheet, on December 31, 2014, the accrued wages were $51,500. The wages were owed to Raphael, Silvia, Andrea, and Marco. The accrued wages were paid on January 22, 2015.
All of the other employees' wages and bonuses were paid on December 31, 2014.
As of December 31, 2013 and December 31, 2014, respectively, EC had accrued vacation payable on its books of $62,500 and $73,000. All of the 2013 vacation accrual was paid during the period from April 1 through November 30, 2014. As of March 15, 2015 EC had paid none of its 2014 accrual. All of the vacation accrual amounts for both years were owed to employees other than Raphael, Silvia, Andrea, and Marco. None of the officers had accrued vacation at December 31, 2013 or 2014.
On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2015 at the insurance company's annual meeting in New York City. The money is fully refundable up until January 15, 2015. Thereafter, half of the deposit becomes non-refundable.
EC maintains an inventory of several items. Inventory is valued at cost. EC has never has never changed it inventory method. EC uses specific identification for its inventory. EC has never written down any subnormal goods. The rules of Section 263A (UNICAP) do not apply to EC.
EC did not pay a dividend in the current year.
EC made no estimated tax payments during the current year.
Financial Statements (kept on a GAAP basis):
Express Catering, Inc.
Balance Sheet
Assets: 1/01/2014 12/31/2014
Cash $ 62,500 $ 44,000
Accounts Receivable 145,000 177,000
Less: Allowance for Bad Debts (32,000) (41,000)
Inventory 59,000 96,000
Publicly traded securities 100,000 0
Tax-exempt bond 100,000 0
U.S. Treasury Bonds 125,000 125,000
Fixed Assets 2,115,000 2,955,000
Less: Acc. Depreciation (436,500) (715,000)
Prepaid Insurance 0 15,750
Prepaid Rent 38,500 39,500
Prepaid Advertising 0 27,500
Total Assets: $2,276,500 $2,723,750
Liabilities and Shareholders' Equity:
Accounts Payable 102,000 131,000
Accrued Bonuses 45,000 0
Accrued Vacation 62,500 73,000
Accrued Wages 44,500 51,500
Event Deposits 0 100,000
Deferred Tax Liability 45,910 14,000
Note Payable-First Bank of NY (Credit Line) 424,000 657,000
Note Payable-EG Capital Equipment Leasing 1,243,000 1,415,000
Capital Stock 1,000 1,000
Additional paid-in Capital 99,000 99,000
Retained Earnings-Unappropriated 209,590 182,250
Total Liabilities and Shareholders' Equity: $2,276,500 $2,723,750
Income Statement for the period ending December 31, 2014
Item Amount
Income:
Gross Sales $ 2,925,000
Less: Returns (8,500)
Net Sales 2,916,500
Cost of Goods Sold (1,129,850)
Gross Profit 1,786,650
Dividend Income 2,800
Interest Income -Bank 150
Interest Income-U.S. Treasury 3,000
Municipal Bond Interest Income 1,400
Capital Loss-Apple, Inc. (30,000)
Total Income: 1,764,000
Expenses:
Employee Salaries 743,500
Repairs and Maintenance 19,000
Bad Debts 44,000
Rent 230,000
Payroll Taxes 60,000
Licensing Fees 4,500
Property Taxes 12,500
Interest Expense 140,000
Depreciation 278,500
Office Supplies 5,400
Employee Training 3,600
Employee Benefits 24,000
Charitable Contribution 8,000
Advertising 70,000
Meals and Entertainment 3,400
Travel 600
Insurance 19,750
Utilities 142,000
Telephone 14,500
Federal income tax expense/(benefit) (31,910)
Total Expenses: 1,791,340
Net Income (Loss): ($27,340).