Question

Debbie Rader, William Allen, and Jeffrey Townsend are owners in “RAT, Inc.” – a “C” Corporation engaged in pest control services. Pertinent information regarding RAT, Inc. is summarized below.

-Social security numbers are as follows; Debbie – 623-98-0123; William – 410-63-4297; Jeffrey – 855-21-1750. Debbie is the President of the company.

-The address of the company is 1421 Ocean View Drive, Anderson, ME 04842.

-The company was formed and began operations on January 1, 2013.

-The business code is 541990.

-The federal identification number is 67-4598288

-The corporation uses the cash method of accounting and the calendar year for reporting.

-The corporation recorded $14,002 depreciation for book purposes but $21,602 for income tax purposes (using MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes.

-All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest.

-The owners original capital contributions are as follows: Rader - $100,000 for 50% ownership; Allen - $60,000 for 30% ownership; and Townsend $40,000 for a 20% ownership in the stock of the business. No capital contributions occurred in 2017.

-Salary payments were made to the owners as follows: Rader - $90,000, Allen and Townsend - $30,000 EACH.

-Each of the owners were paid a dividend as follows: Rader - $60,000; Allen - $36,000; Townsend - $24,000. There were no distributions of any non-cash property.

-The equipment loan is nonrecourse debt to the shareholders. .

-None of the stockholders sold any portion of their ownership interests during the year.

-The company has no available tax credits and is not subject to AMT. The company’s operations are entirely restricted to the local geographic area in Maine. All shareholders are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or foreign corporations. The company’s stock is not publicly traded.

-The company is not subject to the consolidated audit procedures. The company files its federal tax return in Cincinnati, Ohio.

-Debbie Rader lives at 415 Knight Ct., Anderson, ME 04842, William Allen lives at 692 Radford Dr., Anderson, ME 04842; and Jeffrey Townsend lives at 342 Coastal Rd., Anderson, ME 04842.

-No ownership changes occurred during the year.

-The company’s marketable securities represent small investments (<1%) in a number of publicly traded companies and mutual funds. It sold its holdings of XYZ common stock (carried as Marketable Securities on the balance sheet) on July 20 for $15,000. The corporation purchased this investment several years ago for $25,000.

The current income statement for the corporation reflected book net income of $98,100 AFTER book depreciation has been taken on the equipment and the loss on the sale of XYZ common stock. The following information was taken from the partnership’s financial statements for the current year.

Cash Receipts:

Service Fees Collected	$803,000
Taxable dividend income	$6,600
Taxable Business Interest Income	$2,400
Tax Exempt Interest	$1,600
Proceeds from sale of XYZ common stock	$15,000
Total Receipts	$828,600

Cash Disbursements:

Compensation (salary) to owners	$150,000
Customer refunds	$5,000
Office rent	$29,000
Federal income tax payments ($10K/quarter)	$40,000
Utilities	$7,498
Employee Salaries	$350,000
Business and Professional Licenses	$3,000
Cash Contribution to Red Cross	$1,000
Meals and Entertainment (100%)	$2,200
Travel	$6,000
Office supplies and expense	$10,400
Accounting (professional) fees	$11,000
Advertising	$18,000
Payroll Taxes	$48,600
Business interest (on equipment loan)	$1,600
General Liability Insurance Expense	$3,200
Principal Payments on equipment loan	$12,000
Dividend payments to owners	$120,000
Equipment rental	$5,000
Total disbursements	$823,498

The current income statement for the company reflects a book net income of been made to record regular depreciation in the amount of $14,002.

The balance sheets for the corporation were as follows for the current year:

Account	January 1, 2017	December 31, 2017
Cash	$95,761	?
Tax-Exempt securities (at cost)	$32,000	$32,000
Marketable Securities (at cost)	$125,000	?
Machinery & equipment	$85,000	$85,000
Accumulated depreciation	($36,761)	?
Total Assets	$301,000	?
Nonrecourse equipment loan	$35,000	?
Common stock	$40,000	?
Additional Paid-in Capital	$160,000	?
Retained Earnings	$66,000	?
Total Liabilities and capital	$301,000	?

REQUIRED:            1. Prepare a 2017 Form 1120 for the corporation including Schedule D and Form 4562. (Do NOT prepare a state return). Prepare supporting schedules as necessary if adequate information is provided.    (Hint: If you use a computerized software program, you may override the Form 4562 with asset and current and accumulated depreciation entries).

Answer 1

FORM 1120

1	1a	Gross Receipt or Sale								803,000.00
	1b	Return and allowances								5,000.00
	1c	balance (1a-1b)									798,000.00
2		Cost of good sold									-
3		Gross Profit (2-1c)									798,000.00
4		Dividend									6,600.00
5		INTerest									4,000.00
11		Total income. Add lines 3 through 10									808,600.00
12		Compensation of officers (see instructions—attach Form 1125-E)									150,000.00
13		Salaries and wages (less employment credits)									350,000.00
14		Repairs and maintenance									-
15		Bad debts .									-
16		Rents									29,000.00
17		Taxes and licenses									91,600.00
18		Interest									1,600.00
19		Charitable contributions									1,000.00
20		Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562)									14,002.00
21		Depletion									-
22		Advertising									18,000.00
23		Pension, profit-sharing, etc., plans .									-
24		Employee benefit programs									2,200.00
25		Domestic production activities deduction (attach Form 8903)									-
26		Other deductions (attach statement)									53,068.00
27		Total deductions. Add lines 12 through 26									710,470.00
28		Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11.									98,130.00
	29a	Net operating loss deduction (see instructions
	b	Special deductions (Schedule C, line 20)
	c	Add lines 29a and 29b .									-
30		Taxable income. Subtract line 29c from line 28. See instructions									98,130.00

Schd D

Part II Long-Term Capital Gains and Losses—Assets Held More Than One Year
See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to	Proceeds (sales price)	(e) Cost (or other basis)	(g) Adjustments to gain or loss from Form(s) 8949, Part II, line 2, column (g	(h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g)
Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b . . . . .	15,000.00	25,000.00	-	(10,000.00)
15 Net long-term capital gain or (loss).				(10,000.00)

Other deduction detail

Utilities	7,468.00
Travel	6,000.00
office supplies and expenses	10,400.00
accounting	11,000.00
General Liability Insurance Expense	3,200.00
equipment rent	5,000.00
Loss on sale of common stock	10,000.00
	53,068.00

Balance sheet items

Accounts	Jan, 1 2017	dec, 31 2017
cash	95,761.00	100,863.00
tax exemption securities	32,000.00	32,000.00
marketable securities	125,000.00	100,000.00
machinery and equipement	85,000.00	85,000.00
Accumlated dep	(36,761.00)	(50,763.00)
Total Assets	301,000.00	267,100.00
Noncourse equipment loan	35,000.00	23,000.00
Common stock	40,000.00	40,000.00
additional paid up share capita	160,000.00	160,000.00
retained earning	66,000.00	44,100.00
Total liabilities and capital	301,000.00	267,100.00

Notes for explanation

Notes Capital & Retained earning
Common stock			40,000.00
Additional capital			160,000.00
Retained earning	66,000.00
Add : profit after Dividend payment	(21,870.00)		44,130.00
			244,130.00
Notes
Net Proft (ignoring Tax)			98,130.00
Less Dividend paid
Paid to radar		60,000.00
Paid to allen		36,000.00
paid to townsend		24,000.00	120,000.00
Profit after dividend			(21,870.00)