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 a c corporation. Alvin contributed $60,000 to purchase 60% of the stock while his wife’s best friend, Ann, contributed $40,000 to purchase 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 distributed some profits at the end of the year by paying out a $55,000 dividend. (11 points)
   1. Calculate Sunshine Corporation’s taxable income and income tax liability to be reported on Form 1120.
   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 stock at the end of this year?

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

Answer 1

a. Calculation of taxable income and income tax liability for Sunshine Corporation:

Business Income:                                                                                          ($)

Sales      650,000
Cost of goods sold      (320,000)
Gross profit    330,000
Advertising        (7,000)
Utilities        (6,000)
Rent        (5,000)
Profit before interest           312,000
depreciation & tax  
Depreciation                       (65,000)
Interest expense    (25,000)    
Profit before tax                                         222,000

Capital Gains:
Short term capital loss                                             (8,000)

Other Sources Income:
Dividend    60,000

Taxable Income        $ 274,000
Tax @ 21%    $ 57,540

b. Alvin must show the following income received from Sunshine Corporation :

Salary income = $ 28,800
Dividend Income = $ 33,000 (since he holds 60% of the stock in the company, he will receive 60% of the total dividend distributed of $55,000)

c. The dividend income of $33,000 received by Alvin will be subject to self employment tax.

d. Company's profit after tax = $ (274,000 - 57540) = $ 216,460

Alvin's share = 60% of 216,460 = $129, 876

Thus, Alvin's total basis in stock = $ (60,000+129,876)
                                                    = $ 189,876