On June 6, 2001, Joe Mooney and Guy Flick formed Sun and Fun Beach Products to manufacture and sell beach gear, toys, and accessories. For several years prior, Joe had run a smaller shop "Cheap Beach Stuff" which operated as a cash basis sole proprietorship. Cheap Beach Stuff reported the following balance sheet:
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June 6, 2001
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Tax Basis
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Fair Value
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Cash
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6,137
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6,137
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Accounts Receivable
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0
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24,558
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Inventory
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60,647
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129,305
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Building
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55,250
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110,000
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Land
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29,750
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55,000
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151,784
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325,000
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Accounts Payable
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0
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13,189
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Notes Payable
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24,000
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24,000
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Mortgage on Land/Building
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40,000
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40,000
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Equity
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87,784
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247,811
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151,784
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325,000
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Joe transfers all of the assets and liabilities of Cheap Beach Stuff for 70% of the common stock in Sun & Fun.
Guy contributes cash of $40,000, inventory worth $56,205 (basis of $38,013) and provides services to help organize the corporation worth $10,000 for the remaining 30% of the common stock in Sun & Fun.
General Information regarding the corporation is summarized as follows:
- The business address is 350 Main Street, White Sands, Florida
- The employer identification number is 75-3392543; the principal business activity code is 339900.
- Joe is president of the company and Guy is the secretary-treasurer. Both are full-time employess of the corporation. Joe's compensation is $150,000 (SSN 123-45-6789). Guy's compensation is $90,000 (SSN 333-22-4444).
- The corporation uses the accrual method of accounting and reports on a calendar year basis. Inventory has been consistently valued at lower of cost or market under the FIFO method. Inventory capitalization rules of IRC 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 corporation was not a grantor to a foreign trust, nor does the corporation maintain a foreign bank account or foreign security account.
- No net operating loss, capital loss, general business credit, prior year minimum tax credit, or other carryovers to 2012 exist.
Detailed information regarding some of Sun & Fun's activities and transactions during the year:
1. Sun & Fun purchased some new manufacturing equipment (7-year-property) that cost $13,580. MACRS on all other existing depreciable assets totaled $69,163 for 2012.
2. Sun & Fun purchased at par $50,000 of Seabrook Station Utility bonds. Interest of $1,500 was received on the bonds during the year.
3. Sun & Fun sold a warehouse for $30,000. The consolidated their warehouse activities and chose not to replace the warehouse. The warehouse cost $40,000. Accumulated depreciation for book purposes was $14,000. Cost recovery for tax purposes totaled $7,179.
4. Sun & Fun sold machinery for $6,900. The machine cost $15,350. Accumulated depreciation for book purposes was $7,246. Cost recovery for tax purposes totaled $9,596.
5. Sun & Fun has a qualified retirement plan which covers all of their employees. During 2012 they made total contributions of $23,900 to this plan, of which $10,000 was for Joe and Guy ($5,000 each).
6. Included in employee benefits expense are $532 and $420 premiums for $50,000 (face value) group term life insurance for Joe and Guy, respectively. Family members are named as beneficiaries in the policies.
7. The key-man life insurance provided $500,000 coverage on Joe and Guy. The company is the owner and the beneficiary of the policies.
8. Contributions for the year included:
a. World Wildlife Fund, Inc. ...................................29,963
b. American National Red Cross...............................3,000
c. Woodbury Church Food Pantry............................1,969
9. An analysis of the Allowance for Doubtful Accounts reveals:
Balance - December 31, 2011....................................$15,782
2012 Transactions
Bad Debt Expense ..............................................3,105
Recovery of account previously written off......1,200
Accounts written off as uncollectible...............(4,756)
Balance - December 31, 2012......................................$15,331
10. Taxes included:
Property Taxes.........................21,244
Payroll Taxes............................51,883
Other Misc. Taxes ......................2,168
11. Interest expense was on loans for the following purposes:
Purchase of buildings, machinery and equipment......................77,779
Purchase of Seabrook Station Utility Bonds..................................1,300
Cover shortfall in working capital..................................................3,798
12. Information regarding the sale of investments in common stock during the year:
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Asset
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Acquired
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Sold
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Basis
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Proceeds
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"A" Stock (100 Shares)
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2-15-06
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8-13-12
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5,000
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7,085
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"B" Stock (200 Shares)
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3-2-12
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7-7-12
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12,295
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8,300
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"C" Stock (50 Shares)
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1-3-07
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12-7-12
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10,000
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8,320
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**Note: The "C" stock was sold to Joe Mooney**
13. Dividend income from less than 20% investments is from the following sources:
Plastics Corporation Common Stock...........................................................4,244
International Manufacturing Corporation Common Stock........................2,731
Stow-n-Go Corporation preferred stock......................................................3,798
14. Sun & Fun owns 30% of the outstanding common stock of Hobby Corporation. During 2012 Hobby reported $1,000,000 of income. For book purposes Sun & Fun accounted for its investment in Hobby under the equity method. Hobby Corporation also distributed a $100,000 dividend to Sun & Fun.
15. Sun & Fun distributed cash dividends totaling $160,000.
16. Sun & Fun Corporation made timely estimated federal income tax payments of $130,000 to the U.S. Treasury. (Ignore deferred income taxes for book purposes.)
17. Sun & Fun's qualified production activities income (QPAI) is $200,000.
18. After taking a physical count of inventory at December 31, 2012, ending inventory was computed as $641,774
19. The accumulated E & P balance at December 31, 2011 was $520,960. Depreciation expense computed under ADS for E&P purposes was $40,000. The increase in the cash surrender value of the life insurance was $374. (Note: Ignore the +/- E&P adjustment for differences in the gain (loss) from the sale of business properties.)
Requirements:
1. Mr. Mooney, Sun & Fun's President, has asked you to prepare Sun & Fun's 2012 corporate tax return. Mr. Mooney has asked you to minimize Sun & Fun's taxable Income (ignore any AMT). Round your computations to the nearest dollar. Clearly state any assumptions made in completing the return. Include any supporting schedules you feel are necessary. When submitting the forms, please place in sequence according to the appropriate order (i.e. ascending sequence number). Place all supporting schedules after the forms to which they directly relate, making sure they are properly referenced.
The following forms (and instructions) are available via the link in Class Content>Final Project. DO NOT prepare the return with commercial tax prep software.
- Form 1120: US Corporate Income Tax Return (and accompanying schedules C, K, L, M-1, and M-2)
- Schedule D (Form 1120): Capital Gains and Losses (ignore Form 8949 - Assume Box "A" is checked for the sale of all investments in common stock)
- Form 4562: Depreciation and Amortization
- Form 4797: Sales of Business Property
Note: For Schedule L - complete the ending balance sheet ONLY
2. Include a memo to the client informing them of the following:
- How much tax they owe or how much is to be refunded to them.
- Instructions for paying estimated taxes for the 2013 tax year.
- Any carryforwards they may have.
3. What amounts will Joe and Guy report on their individual Form 1040's related to Sun & Fun's 2012 activities?