Business 123A Corporate Tax Return Assignment Facts You (The Paid Tax Preparer) Your name is William Baker. You are a CPA and Senior Tax Manager in the CPA firm of Jones and Miller
Business 123A
Corporate Tax Return Assignment
Facts
You (The Paid Tax Preparer)
Your name is William Baker. You are a CPA and Senior Tax Manager in the
CPA firm of Jones and Miller, LLP, Your preparer tax identification number
(PTIN) is PO0389571.
Your Firm ¥ ik For)
Jones and Miller’s address is 230 Hollister Avenue – San Francisco, CA 94131
and its phone number is (650) 686-7777. The firm’s EIN is: 40-3698221.
The Client
Your client is Daisy Music Village Inc. Its address is: 1060 Gilman Avenue —
Jacinto, TX 77015. Its phone number is; (512) 333-3333. Daisy Music Village
is a seller of musical instruments at the wholesale level.
Its Employer Identification Number is 61-2085417. It was incorporated in
Texas on 10/15/2001. It is a non-publicly traded (private) corporation.
The only corporate officer authorized to sign its tax returns is Kimberly Brown.
Her social security number is 357-89-2145 and she is a citizen of the United
States. She is the President of the corporation. Kimberly owns 78% of the
shares of the corporation. She has owned 78% of the shares since the
corporation was formed in 2001. She spent 2,125 hours working for the
corporation in 2019. She was paid base wages of $1,380,000 as well as a
$107,000 cash bonus in 2019 (the cash bonus was paid to her in 2019, but it
related to the financial success of the corporation for 2018). She received no
other bonuses or other incentive-based compensation in 2019. For years the
corporation had an employment contract in place with Kimberly since she was
hired back in 2001. It was the same employment contract for many years,
However, the contract was completely changed, with material changes, on
December 31, 2018.
Kimberly’s home address is 1003 Oakwood Way — Jacinto, TX 77029. Her
phone number is (530) 555-5555.
‘The Chief Financial Officer of the corporation is Maggie Chen. She spent 2,452
hours working for the corporation in 2019. She was paid base wages of
$858,612 in 2019. Maggie’s social security number is 109-20-4586 and her
home address is 222 Rosemary Way — Jacinto, TX 77015. Maggie does not own
any shares in the corporation. She is also a citizen of the United States. She is
also the interim Treasurer and Secretary of the corporation until they can find
individuals to fill those officer positions.
Neither Kimberly nor Maggie worked anywhere else other than at Daisy Music
Village in 2019.
There are no other officers for the corporation. In addition, the only shares in
the corporation are in the form of common stock. There are no preferred shares.
There is one other shareholder in the corporation: Don Smiths. Don owned 22%
of the shares of the corporation throughout the year. He has owned the same
percentage of the corporation’s stock since it was incorporated in 2001. He is a
citizen of the United States.
Don’s social security number is 210-39-4732 and his home address is 2147
Gallatin Way — Jacksonville, TX 75766. His phone number is (409) 555-5555.
Daisy Music Village uses the cash basis of accounting for both financial
accounting and tax return purposes.
Ithas a December 31 year-end for both financial accounting and tax purposes.
Tts 2019 financial accounting-based income statement and balance sheet starts
on the following page.
2019 Income Statement
Revenues
Gross sales: $16,077,000
Less: Customer returns $(182,600)
Dividends: $204,000
Interest (from Bank Accounts): $326
Interest on U.S. Treasury Bonds: $1,598
Interest on Bolt Corp. Bonds $853
State of Georgia Bond Interest: $516
City of Jacinto, TX Bond Interest $405
Cost of Goods Sold
Inventory as of 1/1/19 $3,395,216
Inventory purchased during 2019 $7,423,679
Inventory as of 12/31/19 $3,430,490
[Note: All inventory figures are valued based on original cost
and using the specific identification method because their
computer systems can track the cost of each individual item sold.
IRC Sect. 263A (UNICAP) does not apply to the corporation;
there were no changes in the method of valuing inventories; and
there were no writedowns of subnormal goods in 2019.]
Expenses (Other than Cost of Goods Sold)
Warehouse rent: $220,126
Accounting Services: $31,125
Office Supplies: $26,458
Repairs and maintenance: $5,217
Depreciation: $1,600
Mortgage Interest Expense: $2,390
Lobbying $9,500!
Entertainment: $17,200
Meals: $9,145
(meals: by employees, while out of town on business trips)
Travel: $28,165
(travel: by employees, while out of town on business trips — includes airfare and hotels)
Charitable Contributions (cash) $52,360
Wages – Officers: $2,345,612
Wages (other employees): $614,755? &?
2 Amounts paid to an outside lobbylst who went ta various members of Congress to ask for support of legislation to
relaxthe Federal rules on small musical instrument safety. No legislation was even written in 209 by any member
of Congress.
2 Three of the employees were certified by a designated local agency as being a member of a targeted WOTC group.
Employee #1, Robert Rodriguez, worked 2,200 hours for the year and was paid $26,400 in wages.
the “regular® WOTC group. Emplayee #2, Joanne Cao, worked 315 hours for the year andl was paid $3,780 in
wages. She is also in within the “regular* WOTC group. Employee #3, Maria Garcia, worked 1,800 haurs for the year
and was pald $25,200 in wages. She Is certified to be n the long-term family assistance recipients WOTC category.
Robert and Joanne were hired and started work on January 1, 2019. Maria was hired and started work the prior
year on January 1, 2018,
* One of ts employees, Erin Huang (Social Security number 615-15-2561), was pald $3,800 In specially designated
paid family leave for four weeks so she could take care of her sick mother who had a very serious health condition.
Erin’s normal salary is $1,000 per week and she has worked for the company since 2005. She earned $38,500 of
‘wages in the prior tax year (2018). Daisy Music Village’s family and medical leave program meets all of the
requirements of IRC Sect. 45S and the guidance set forth in IRS Notice 2018-71, None of the $3,800 was paid out of
Federal Payroll Taxes: $110,280
Fines and Penalties $8,600
Other Income/Expense
Gain on sale of Government Debt Investments* $7,060
Loss on sale of corp. debt investments* ($500)
Gain on the Sale of Business Assets® $43,000
Gain on the exchange of real property” $400,000
HHH
NET INCOME $222222 the client was too busy to
calculate this figure, and they have asked you to complete this for them as a separate engagement from the
preparation of the tax returns.)
Erin’s sick time or vacation time. It was specifically pald through the terms of the company’s written family and
‘medical leave plan. The $3,800 paid under the plan is already included in the total amount of wages paid to
rnon-oflicers of the corporation for the year. Daisy Music Village’s written Family and Medical Leave program/policy
comply with the “noninterference” language requirement under pertinent laws.
* Sold some of its State of Georgia bonds on 8/1/19 for $12,160 to an unrelated party. The bonds that were sold
were purchased on 12/06/14 for $5,100, Daisy Music Village received an IRS Form 1095-8 showing the sale of these
bonds, but the tax basis of these bonds was not provided to the IRS on the 1099-8,
* Sold some of its Bolt Corp. bonds on 10/1/19 for $900 (Its fair market value) to Kimberly Grown. The bonds that
were sold were purchased on 12/15/12 for $1,400. Daisy Music Village did not receive an IRS Form 1099-8 showing,
the sale of these bonds.
© The $43,000 gain on the sale of business assets In 2019 refers to the sale of the forklift to an unrelated party on
4/3/13 for $47,000. Daisy Music Village paid @ $4,000 commission expense to a braker related to the sale of the
fork See additional details an the forklift in footnote #9 below.
? See additional details in footnote #8 below.
12/31/2018 Year-End Balance Sheet
Cash: $4,318,952
Inventory: $3,395,216
Land® $400,000
Stock in Jadis Corp. $60,000
US. Treasury Stock $45,000
State of Georgia Bonds $90,000
City of Jacinto, TX Bonds $30,000
Bolt Corp. Bonds $15,500
Forklift (Cost)? $250,000
Less: Accumulated Depreciation on Personal Property ($250,000)
Fixed Assets (Personal Property) — Net Book Value $0
Liabilities
Mortgage Payable $35,000
Shareholders’ Equity
Common Stock $1,000,000
* While Daisy Music Vilage rents the warehouse in which It operates t owned a vacant piece of property 3 miles
‘away for many years. The property Was used to store some of ts excess packaging in case they did not have room
in their warehouse. The property was originally purchased for $400,000 on 9/13/2012, The address for this
property was 28 Newhall Way- Jacinto, TX 75011, On May 28, 2019, this property was exchanged with another,
Unrelated taxpayer, for another vacant lot that will also be used as a place to store excess packaging.
‘The fair market value of the 28 Newhall Way property at the time of the exchange was $800,000.
‘The replacement property is located at 2333 Bolero Road – Waco, TX 76708. The fair market value of the Bolero
Road property at the time of the exchange was $765,000. There were no expenses related to the exchange and the
‘other party assumed the mortgage on the Newhall Way property {a $35,000 liability at the time of the exchange}.
* Originally purchased for $250,000 and placed in service on 03/15/2008, Was fully depreciated for financial
‘accounting and tax purposes prior to 2029. Sold for $47,000 on 4/3/19, but incurred $4,000 of commission
expenses related tothe sale. This was the only fixed asset forthe corporation as of 12/32/18 other than the land,
Retained Earnings – Unappropriated’° $7,319,668
12/31/2019 Year-End Balance Sheet
Assets
Cash: $4,599,946
Inventory: $3,430,490
Land: $765,000
Stock in Jadis Corp. $60,000
U.S. Treasury Stock $45,000
State of Georgia Bonds $84,900
Bolt Corp. Bonds $14,100
City of Jacinto, TX Bonds $30,000
Pre-Paid Federal Inc. Tax”! $500,000
New Copier (Cost)? $30,000
Less: Accumulated Depreciation $1,500)
New Desk for Maggie (Cost)”? $5,000
Less: Accumulated Depreciation ($100)
Fixed Assets (Personal Property) — Net Book Value $33,400
29 All retained earings are unappropriated.
* 2019 Federal estimated taxes were paid in 2019. They were pad in four installments as follows: $125,000 on
‘4/11/19; $225,000 on 6/14/19; $125,000 on 9/13/19 and $125,000 on 12/13/19.
2 purchased and placed In service on 5/04/19. Dalsy Music Village elects to take the maximum cost recovery on
this asset in 2029 under IRC Sect 179, and if applicable, they do not elect aut af first-year bonus deprecation
purchased and placed in service on 7/4/19. Daisy Music Village does not elect to take any cost recovery on this
‘asset in 2019 under IRC Sect 179. However, if applicable, they do not elect out of first-year bonus depreciation.
3) Also, [THIS IS’VERY IMPORTANT] include filing extension forms for
BOTH Form 1120 AND for the 1099 forms (two 1099-MISC forms and two 1099-
DIV forms) for the 2019 tax year (attach these extensions behind the 1120 form (and
behind the forms/schedules attached to the 1120)).
Tfan extension form has a required date field on the form, use the date that would have
been the last day that the extension form would have been required to be filed
4) All of the repairs and maintenance services were performed to Daisy Music Village by
another corporation (Repairs R Us, Inc, — 578 Culture Drive — Jacinto, TX 75011; EIN
~177-1581297; Phone (713) 555-5556.
5) The entertainment expenses were for tickets for the Houston Rockets NBA basketball
team, Daisy Music Village took out its biggest clients and vendors to discuss business
matters at all of the games,
6) In addition to signing the tax return as the paid preparer, for purposes of this project
also actually sign the return as the taxpayer (keeping in mind you would not do this
in real practice).
7) You do not need to make payroll tax returns or forms (such as the W-2 or W-3)
for the client (Maggie handles the payroll tax returns herself for the corporation).
Other Important Items:
1) The landlord for the warehouse that Daisy Music Village rents is Kevin Lee.
Kevin’s address is 578 Jay Way, Menlo Park, CA 94025. His tax ID is
20-1484863 and his phone number is (650) 555-8888.
2) All of the amounts paid in 2019 for accounting services was paid to Jones
and Miller, LLP.
3) Daisy Music Village Corporation is not a subsidiary in an affiliated group or
a parent-subsidiary group.
4) Daisy Music Village Corp. purchased 6,000 shares in Jadis Corporation, a
U.S.-based corporation that specializes in the management of junkyards on
October 5, 2012 for $60,000. Jadis Corp. had 19,500 shares outstanding
throughout 2019. On October 31, 2019, Daisy Music Village received a
$204,000 dividend check from Jadis Corporation. Jadis Corporation’s
Employer Identification Number is 77-2573648.
5) The two shareholders in Daisy Music Village Inc, had the same ownership in
the corporation throughout the year.
6) Daisy Music Village has an $10,000 NOL carryover into the 2019 tax year.
7) For Schedule K of Form 1120, you are given that the answers to question
nos. 14, 17, 18, 19, 20, 21, 22, 23, 24 and 25 are “no” and the checkbox to
no. 8 is to be unchecked.
8) Your client has asked you to file the return with the fewest number of
required schedules filled-out on the 1120 form as legally possible.
9) $60,000 of cash distributions from Daisy Music Village Corp. were made in
2019. Each of the two shareholders received cash distributions based on their
percentage ownership in the corporation. All cash distributions were paid on
December 30, 2019.
10)On 10/15/2001, the corporation issued common stock to its two initial (and
still current) shareholders — with the two shareholders paying the following
amounts for the stock: $780,000 for Kimberly and $220,000 for Don
11) If there is an amount due for the year on the 1120, the client (as a
corporation) will need to pay the IRS electronically (i.c., not via check).
However, for purposes of this tax return project, if tax is due for the year
you do not need to prepare any payment documentation — simply show the
amount due on the appropriate line(s) of the 1120 tax retum accordingly.
‘Also, if tax is due for the year, you do not need to calculate any penalties or
interest — just the base tax due.
On the other hand, if there is a refund due to the client on the 1120 tax
return for the year, the client wants to receive the refund in the form of a
check (i.e. they do not want any portion of the refund credited to next year’s
Federal income taxes).
12)All amounts contributed to charitable organizations for the year were made
in cash, all of the charities were IRS-qualified charities, and the charities all
provided the client with the required documentation in a timely manner.
13) All wages paid to sharcholders are ordinary, necessary, and reasonable in
amount, with none being disguised dividends.
14) All expenses — including wages paid to sharcholders – are ordinary,
necessary, and reasonable, with none being disguised dividends.
15)None of the entertainment expenses are lavish or extravagant.
16)None of the wages are includable in cost of goods sold.
17)All of the corporate bonds that were owned either at the beginning of the
year or at the end of the year mature more than five years after the end of
the 2019 tax year and the client did not expect to sell them or convert any of
them into cash until they mature. The small sale of corporate bonds in 2019
was unexpected and it was not easy to sell these particular bonds as they
were not readily traded on an exchange (they were not liquid assets that
were readily convertible into cash).
18)For Schedule K of Form 1120, you are given that the answers to question
nos. 14, 17, 18, 19, 20, 21, 22, 23, 24 and 25 are “No” and the checkbox to
no. 8 is to be unchecked.
19)For Schedule J, you can skip lines 3; 5a; Sb; 5d; 5e; 9a-9f; 10; 12; 13; 15;
17; 18; 20a-20d; 21and 22, Any other parts that are applicable in Schedule J
must be completed, For a non-skip line in Schedule J, you will need to
determine if a figure goes on that line. There is a possibility that at least one
non-skip line in Schedule J is still not applicable. If not applicable, simply
put “0” for that line,
20)For Form 3800, you skip: all of Part I (but put down “0” for line 6); Lines
10a-c, 18-26 and 31-35 of Part II
21) Your client allows you to discuss its tax return with the IRS.
22) The client has never had its financial statements audited nor has it ever had
to restate its financial statements.
Answer Tax Corporation Assignment
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