CORPORATE TAX RETURN PROBLEM
Required:
Complete Tofu Tacos Inc.'s (TT) Current Year'sFederal Form 1120 and all applicable schedules using a tax preparation software program of your choice and the information provided below. The return with all schedules that would be required to be filed should be put in my dropbox in pdf format. Also, Prepare a memo to the client (word file) detailing any assumptions and/or elections that you have made and any recommendations that you have for reducing their future taxes. This memorandum should put in my dropbox in word format.
Form 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.
Assume that TT does not owe any alternative minimum tax.
If any information is missing, use reasonable assumptions to fill in the gaps.
The forms, schedules, and instructions can be found at the IRS Web site. The instructions can be helpful in completing the forms if you do not use tax preparation software.
Facts:
Sal Monella, Tao Mane and Carne Asco each own one-third of the common stock of Tofu Tacos Inc. (TT). TT was incorporated on February 4, 2008. It has only one class of stock outstanding and operates as a C corporation for tax purposes. TT caters all types of social events throughout southern California.
TT is located at 1541 Dumpster Way, Huntington Beach, CA 92647
TT's Employer Identification Number is 38-7562491
TT's business activity is catering food and services. Its business activity code is 722300.
The shareholders also work as officers for the corporation as follows:
- Sal is the chief executive officer and president (Social Security number 231-54-8976).
- Tao is the executive vice president and chief operating officer (Social Security number 798-56-3241).
- Carne is the vice president of finance (Social Security number 879-21-4536).
All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
TT uses the accrual method of accounting and has a calendar year-end.
TT made four equal estimated tax payments of $20,000 each. Its tax liability last year was $70,000. If it has overpaid its federal tax liability, TT would like to receive a refund.
TT paid a dividend of $30,000 to its shareholders on November 1 of the Current Tax Year.TT had ample earnings and profits (E&P) to absorb the distribution.
The following is TT's audited income statement for Current Tax Year:
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Tofu Tacos Income Statement Current Tax Year
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|
Revenue from sales
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$2,000,000
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Cost of goods sold (Food)
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-400,000
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Gross profit from operations
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$1,600,000
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|
Other income:
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|
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Capital loss
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-20,000
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Dividend income
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30,000
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Interest income
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15,000
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Gross income
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$1,625,000
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|
Expenses:
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|
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Compensation
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-950,000
|
|
Depreciation
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-10,000
|
|
Bad debt expense
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-15,000
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|
Meals and entertainment
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-3,000
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|
Maintenance
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-6,000
|
|
Property taxes
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-11,000
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|
State income taxes
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-45,000
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|
Other taxes
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-44,000
|
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Rent
|
-60,000
|
|
Interest
|
-5,000
|
|
Advertising
|
-52,000
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|
Professional services
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-16,000
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|
Employee benefits
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-32,000
|
|
Supplies
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-5,000
|
|
Other expenses
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-27,000
|
|
Total expenses
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-1,281,000
|
|
Income before taxes
|
344,000
|
|
Federal income tax expense
|
-103,000
|
|
Net income after taxes
|
$ 241,000
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Notes:
1. TT's inventory-related purchases during Current Tax Year were $410,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to BCS.
2. Of the $15,000 interest income, $2,000 was from a City of Huntington Beach bond that was used to fund public activities (issued in 2005), $1,000 was from aCosta Mesa city bond used to fund private activities (issued in 2004), $1,000 was from a U.S. Treasury bond, and the remaining $11,000 was from a money market account at Madoff Investments.
3. TT's dividend income came from Malo Menudo. (MM). TT owned 20,000 shares of the stock in Malo Menudo at the beginning of the year. This represented 10 percent of MM outstanding stock.
4. On October 1 of the Current Tax Year, TT sold 2,000 shares of its MM stock for $25,000. It had originally purchased these shares on April 18, 2008, for $40,000. After the sale, TT owned 9 percent of MM.
5. TT's compensation is as follows:
- Sal $150,000
- Tao $150,000
- Carne $150,000
- Other $500,000
6. TT wrote off $25,000 in accounts receivable as uncollectible during the Current Tax Year.
7. TT used straight line depreciation to determine book income and accelerated depreciation for tax determination purposes. The tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.
8. The $5,000 interest expense was from a business loan.
9. Other expenses include $6,000 for premiums paid on term life insurance policies for which TTis the beneficiary. The policies cover the lives of Sal, Tao, and Carne.
The following are TT's audited balance sheets as of January 1st, and December 31st of theCurrent Tax Year
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Tofu Tacos Balance Sheets January 1st and December 31, 20XX
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20XX
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1-Jan
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31-Dec
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Assets
|
|
|
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Cash
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180,000 $
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$ 324,000
|
|
Accounts receivable
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560,000
|
580,000
|
|
Allowance for doubtful accounts
|
-60,000
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-50,000
|
|
Inventory
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140,000
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150,000
|
|
U.S. government bonds
|
20,000
|
20,000
|
|
State and local bonds
|
120,000
|
120,000
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|
Investments in stock
|
400,000
|
360,000
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Fixed assets
|
140,000
|
160,000
|
|
Accumulated depreciation
|
-50,000
|
-60,000
|
|
Other assets
|
20,000
|
21,000
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Total assets
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$1,470,000
|
$1,625,000
|
|
|
|
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Liabilities and Shareholders' Equity
|
|
|
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Accounts payable
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$ 280,000
|
$ 240,000
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|
Other current liabilities
|
20,000
|
18,000
|
|
Other liabilities
|
40,000
|
26,000
|
|
Capital stock
|
400,000
|
400,000
|
|
Retained earnings
|
730,000
|
941,000
|
|
Total liabilities and shareholders' equity
|
$1,470,000
|
$1,625,000
|