Question

Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss items for the current year:

Sales	$650,000
Corporate dividend (from 5% owned corporation)	60,000
Municipal bond interest	25,000
Long-term capital gain	0
Short-term capital loss	(8,000)
Cost of goods sold	320,000
Depreciation	65,000
Nondeductible fines	4,000
Advertising	7,000
Utilities	6,000
Rent	5,000

Furthermore, Sunshine’s liabilities (all recourse) increased from $0 on 1/1 to $300,000 on 12/31 of the current year.

1. Assume that Sunshine Company is an s-corporation. Alvin contributed $60,000 in exchange for 60% of the stock while his wife’s best friend, Ann, contributed $40,000 in exchange for the remaining 40% of the stock when the corporation was formed this year. Alvin received a $2,400 per month salary ($28,800 in total). Ann doesn’t work for the company so she received no salary. The company made a $55,000 partial distribution of profits at the end of the year. (9 points)
   1. Calculate Sunshine’s ordinary income and separately stated items to be reported on Form 1120S.
   2. What amount and type of income must Alvin report on his individual Form 1040 tax return?
   3. What amount of Alvin’s income will be subject to self-employment tax?
   4. What is Alvin’s basis in his Sunshine Company stock at the end of the year?

Note that you do not need to complete Form 1120-S but this form and related schedules will be a useful guide in completing this portion of the assignment.

Answer 1

Computation of Income of Sunshine company (S corporation)

Particulars	Amount($)
Sales	650000
Add: Muncipal bond interest	25000
Less:
Cost of goods sold	320000
Depreciation	65000
Advertising	7000
Utilities	6000
Rent	5000
Salary	28800
Net Income	243200
Distribution of Dividend	60000
Short term capital loss	(8000)

1. Consider Muncipal bond interest is Tax free income

2. Non deductible fine not deducted. It is distributed to share holders that reduce tax basis.

3. Corporate dividend is profit distributed by S corporation taxable as corporate dividend in the hands of shareholder

4. Short term loss distributed on shareholders. up tp the amount of tax basis.

Q.1 Sunshines ordinery income and separately stated income

*ORDINERY INCOME

Income from business operation =$243200

*SEPARATELY STATED INCOME

Muncipal bond Interest =$25000

Short term capital loss =$8000

Long term capital gain=0

Q.2

Type of income must Alvin report on his individual Form 1040 tax return

I

	Amount $
Income from salary	28800
Partial income distribution by Sunshine. Alvin holding 60% of shares $55000 * 60%=33000	33000
Total	61800
Less: Short term loss 8000 * 60%= $4800	4800
Net income	57000
Add;
Dividend taxable (60000 * 60%)	36000
Interest from on muncipal bond (Tax free) $25000*60%=$	15000
NET	108000

Q.3 Self employment tax

Person required to self employment taxes if net earnings from self employment is $400 or more. This consist 12.4%for social security and 2.9 % medicare taxes. Applicable on Net earnings

Net earnings for self employment tax = $108000.

Q.4 calculation of Alvin’s stock basis in his Sunshine Company stock at the end of the year

At the year end adjustment in stock basis is required

	Amount $
Alvins contribution	60000
Increase
Net income of Scorp $ 243200*60%=	145920
Dividend	36000
Interest on bond	15000
Decrease
Short term capital loss	4800
Non deductible expenses = 4000*60%=	2400
Stock basis at year end	249720