Dive Deep Waters, Corp. Federal Tax Return
Dive Deep Waters Corp. is owned by James Conway and his wife, Connie Conway. The corporation manufactures scuba gear (business activity code number 339900). The corporation has reported positive financial and taxable incomes since inception. The company is located at 723 Felspar Street, San Diego, CA 92109. The company's employer identification number is 54-3321321, and the calendar year is used for tax purposes. The date of incorporation was January 1, 2009.
James Conway (social security number 123-45-6789) is a 77 percent shareholder and president of the company. Connie Conway (social security number 111-11-1111) is a 23 percent shareholder and vice president of the company. Both persons devote 100 percent of their time to the corporation. James's compensation is $233,333 per year, and Connie's compensation is $81,110 per year.
The corporation is not a personal holding company. While the corporation is a 'closely-held C corporation,' it does not engage in activities to which the at-risk or passive activity loss limitations apply.
The corporation files its tax return on the accrual method. Inventory has been consistently valued at Cost under the FIFO method using the full absorption procedure. Inventory capitalization rules of Internal Revenue Code Section 263A do not apply due to the 'small business exception' (average annual gross receipts for the three preceding taxable years do not exceed $10 million). The accounting records are computerized.
ADDITIONAL INFORMATION
1. Dive Deep Waters Corp. made estimated tax payments attributable to 2016 of $65,000. The corporation also had a credit from an overpayment of its prior year Federal income taxes of $5,000 that it elected to apply against its 2016 tax liability. Apply any overpayment to 2017.
2. Ignore state income taxes.
3. Dividend income is from the following sources:
Deep Mask Inc. (Dive Deep owns 60% of all outstanding stock) - $7,950
Runners, Inc.(owns 9% of all outstanding stock) - 1,750
Splash, Inc. (owns 25% of all outstanding) - 10,500
Total - $20,200
4. An analysis of the Allowance for Doubtful Accounts reveals:
Balance, 01/01/16 - $17,998
2016 Transactions--
Provision for bad debts - 4,145
Recoveries of bad debts - -0-
Accounts written off as uncollectible - (2,004)
Balance, 12/31/16 - $20,139
5. Goodwill of $28,395 arose on purchase of another business on 03/31/09. Amortization is not being taken for financial purposes.
6. Assume that deductions for tax depreciation (i.e., Modified Accelerated Cost Recovery) for the year total $143,912. For this practice set do not complete Form 4562 (Depreciation and Amortization).
7. $73,073 of the Accrued Wages as of 12/31/15 were paid by 3/15/16. $52,342 of the Accrued Wages as of 12/31/16 were paid by 3/15/17. The M-1 should be adjusted through the Wage Expense.
8. Contributions included:
American Cancer Society - $3,400
Committee to Elect Bob Paul, Mayor - 1,000
St Theresa Church - 2,500
Total - $6,900
All contributions were paid in cash during the year except for the Church contribution which was pledged by the corporation (i.e., approved by the Board of Directors) on December 27, 2016 and paid on April 1, 2017.
In addition to the cash contributions above Dive Deep Waters Corp. donated inventory to a local charity. The fair market value of the inventory was 2,750 and the cost basis was 700.
9. Included in interest income is $650 from State of California General Obligation Bonds held throughout the current year. These bonds are included in the marketable securities account.
10. On 12/29/16 the corporation sold 2,000 shares of Runner, Inc. common stock for $11,763. The stock had been purchased on 06/17/12 for $13,976.
11. Form 4626 (Alternative Minimum Tax-Corporations) must be included in the return. For that purpose, assume the adjustment for depreciation of tangible property placed in service after 1986 (Form 4626, Line 2a) is a $93,423 positive adjustment. Assume the Adjusted Current Earnings (ACE) Adjustment on Line 4e is $-0-. [This assumption removes the ACE adjustment from this practice set].
12. Disregard any penalty on underpayment of estimated tax.
13. Assume that compensation of officers and other salaries and wages do not relate to production activities. This assumption removes the Domestic Production Activities deduction from this practice set.
REQUIRED -
From the above information, prepare Dive Deep Waters Corp.'s 2016 Federal income tax return (Form 1120), including all needed supporting statements, schedules, and forms. Unless otherwise noted, assume Dive Deep Waters Corp. follows the policies of making all elections to minimize its current income taxes and, to the extent possible, of conforming procedures for financial and tax accounting. Round amounts to the nearest dollar. If additional information is needed, make realistic assumptions and fill in all required data. The forms that you will need to complete include Forms 1120, 1125-A, 1125-E, 4626, Schedule D and Schedule G. These forms can be found at https://apps.irs.gov/app/picklist/list/formsPublications.html. You will complete these forms in the PDF format. Just type or neatly write in the amounts on the various lines and then print those forms off when complete. You will also need to complete a Tax Provision related to this return. I will not accept electronic documents. Instructions to the Forms can be very beneficial in the preparation of the tax forms.
Attachment:- Assignment Files.rar