Tax Return – Problem 7: C corporation
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Tax Return – Problem 7: C corporation
Instructions:
Please complete Express Catering, Inc.’s 2018 Form 1120, U.S. Corporation Income Tax Return, based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. You may ignore any Alternative Minimum Tax (AMT) calculations and should 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 (unchanged since inception), 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 of Incorporation: March 17, 2012
EC’s address has not changed since its inception.
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.
EC is owned by four related shareholders from the same family for the entire year: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. None of EC’s shareholders are non-U.S. persons. There are currently 10,000 shares of EC common stock issued and outstanding (EC has never issued preferred stock).
The shareholders are also employees of EC and its only corporate officers. The relevant shareholder and officer information for the current year is provided below. Officer compensation is included in Employee Salaries on the income statement. 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 follows the accrual method of accounting (GAAP) and is not a member of any consolidated or affiliated group of entities. EC is not audited by a CPA firm and has never had to restate its financial statement information.
Supplementary Details:
• The dividends received by EC during the year were paid by Apple, Inc. (EC owns less than 20% of Apple, Inc.’s stock).
• 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, 2015 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2018 for $100,000. Both tax basis and proceeds received on this transaction were reported to EC on a Form 1099-B.
• EC purchased 200 shares of Apple, Inc. on October 10, 2015 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). Both tax basis and proceeds received on this transaction were reported to EC on a 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, 2019.
• EC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2018 through September 30, 2019.
• 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.
• EC acquired the following new fixed assets from unrelated parties in 2018:
Description Date Purchased Amount
5-year MACRS Property October 2, 2018 $480,000
7-year MACRS Property September 10, 2018 $320,000
Delivery Truck (over 6,000 lbs): 5-year MACRS Property October 12, 2018 $40,000
• EC reports employee compensation amounts that remained unpaid at year-end in Accrued Bonuses, Accrued Vacation and Accrued Wages on the balance sheet, as applicable. The table below provides a summary of the balances in these accounts for December 31, 2017 and 2018.
Balance Sheet Date Account Description Account Balance Applicable Employees Payment Date
12/31/2017 Accrued Bonuses $45,000 EC’s Shareholders (father and children) 01/20/2018
12/31/2017 Accrued Vacation $62,500 Unrelated Employees 04/01/2018 – 11/30/2018
12/31/2017 Accrued Wages $44,500 EC’s Shareholders (father and children) 01/20/2018
12/31/2018 Accrued Vacation $73,000 Unrelated Employees Unpaid as of 03/15/2019
12/31/2018 Accrued Wages $51,500 EC’s Shareholders (father and children) 01/22/2019
Supplementary Details (continued):
• On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event services on March 18, 2019 at the insurance company’s annual meeting in New York City. The deposit is fully refundable until January 15, 2019. Thereafter, half of the deposit becomes non-refundable.
• Meal expenses were incurred for clients and EC staff at important meetings where business was conducted. EC did not incur any entertainment-related expenses in 2018.
• EC values its inventory at cost and has always used the specific identification method for reporting purposes. The company has never written down any inventory for any reason and the rules of Section 263A (UNICAP) do not apply to EC.
• EC made the following estimated Federal income tax payments:
o April 15th, 2018: $2,000
o September 15th, 2018: $2,000
o June 15th, 2018: $1,500
o December 15th, 2018
• If applicable, EC wants any overpayment credited to its 2019 estimated taxes.
Miscellaneous Information:
• EC did not make any dividend distributions or distributions in excess of current and accumulated earnings and profits during the current year.
• EC does not have any net operating loss carryforward amounts available for the current year.
• EC has never issued publicly offered debt instruments.
• EC is not required to file a Schedule UTP, Uncertain Tax Position Statement.
• EC made several payments during the current year that were required to be reported on Forms 1099; all required Forms 1099 were filed timely by EC.
• 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 questions on Schedule B, Form 1120 should be checked “no” for the current year.
• EC’s gross receipts have never exceeded $5 million annually.
Express Catering, Inc.
Financial Statements (kept on a GAAP basis):
Balance Sheet
Assets: 12/31/2017 12/31/2018
Cash $ 62,500 $ 1,037,000
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 $3,716,750
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
Income Tax Payable 0 $46,820
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 1,128,430
Total Liabilities and Shareholders’ Equity: $2,276,500 $3,716,750
Income Statement for the period ending December 31, 2018
Item Amount
Income:
Gross Sales $ 3,925,000
Less: Returns (8,500)
Net Sales 3,916,500
Cost of Goods Sold (1,129,850)
Gross Profit 2,786,650
Dividend Income 2,800
Interest Income -Bank 150
Interest Income-U.S. Treasury 3,000
Municipal Bond Interest Income 1,400
Capital Loss-Shares of Apple, Inc. (30,000)
Total Income: 2,764,000
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 3,400
Travel 600
Insurance 19,750
Utilities 142,000
Telephone 14,500
Federal income tax expense/(benefit) 21,910
Total Expenses: 1,845,160
Net Income (Loss): $918,840
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