Returns and allowances

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Question Description

 

Please complete this form https://www.irs.gov/pub/irs-prior/f1120s–2014.pdf

C:11-64 Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

Drs. Bailey and Firth formed the corporation on January 1, 2013, and the corporation immediately elected S corporation status effective at the beginning of 2013.

Upon formation of the corporation, Dr. Bailey received common stock worth $1.2 million, and Dr. Firth received common stock worth $2.8 million.

The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:

January 1, 2014 December 31, 2014
Common stock $4,000,000 $4,000,000
Retained earnings 171,360 91,020

The $180,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Bailey’s salary.

Qualified production activities income (QPAI) still equals $2.24 million, but employer’s W-2 wages allocable to U.S. production activities equal $1.16 million (because of Dr. Bailey’s salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).

Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

C:9-58 Healthwise Medical Supplies Company is located at 2400 Second Street, City, ST 12345. The company is a general partnership that uses the calendar year and accrual basis for both book and tax purposes. It engages in the development and sale of specialized surgical tools to hospitals. The employer identification number (EIN) is XX-2016014. The company formed and began business on January 1, 2013. It has no foreign partners or other foreign dealings. The company is neither a tax shelter nor a publicly traded partnership. The company has made no distributions other than cash, and no changes in ownership have occurred during the current year. Dr. Bailey is the Tax Matters Partner. The partnership makes no special elections. Table C:9-3 contains book balance sheet information at the beginning and end of the current year, and Table C:9-4 presents a book income statement for the current year. Other information follows:

TABLE C:9-3 Healthwise Medical Supplies Company—Book Balance Sheet Information

TABLE C:9-4 Healthwise Medical Supplies Company—Book Income Statement 2013

Sales $7,000,000
Returns and allowances (350,000)
Net sales $6,650,000
Beginning inventory $1,400,000
Purchases 2,800,000
Ending inventory (1,680,000)
Cost of goods sold (2,520,000)
Gross profit $4,130,000
Expenses:
Depreciation (including Sec. 179) $ 891,840
Repairs 45,500
General insurance 49,000
Guaranteed payment (to Dr. Bailey) 180,000
Other salaries 980,000
Travel 28,000
Utilities 84,000
Rent expense 210,000
Advertising expense 42,000
Professional fees 70,000
Employment taxes 98,000
Business interest expense 33,600
Investment expenses 4,800
Investment interest expense 4,200
Meals and entertainment 21,000
Charitable contributions (cash) 56,000
Total expenses (2,797,940)
Other income:
Interest on municipal bonds 1,200
Dividend income 26,400
Gain on stock sale:
 Selling price $1,440,000
 Book value (480,000)
 Book gain 960,000
Net income per books $2,319,660