Question

Corporation (Form 1120) Fall 2018 Rick Smith, Bill Thomas, Diane Asche, and Jill Renteria are equal owners in “STAR, Inc.” – a corporation engaged in HR consulting. Pertinent information regarding STAR is summarized below. • Social security numbers are as follows; Rick – 648-98-4321; Bill – 486-63-4297; Diane – 855-21-1750; and Jill – 896-49-2341. Rick is the President of the company. • The address of the company is 2835 Bay View Drive, Wilmington, NC 26812. • The company was incorporated and began operations on January 1, 2012. • The business code is 561900. • The federal identification number is 67-1234576 • The company uses the cash method of accounting and the calendar year for reporting. • The company claimed $8,119 depreciation for book purposes, but $11,919 for tax purposes (under a MACRS methodology). Assume none of the depreciation creates a tax preference or adjustment for AMT purposes. The company is NOT a personal holding company. • All loan borrowings were used exclusively for acquisition of equipment, consequently, all interest is considered business interest. • No compensation was paid to Thomas, Asche, or Renteria, but each of the four owners withdrew $35,000 as a dividend of operating profits. There was no distribution of any non-cash property. • The equipment loan is nonrecourse debt to the owners. All initial equity contributions were paid equally and each individual owns 25% of the common stock. • None of the owners 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 North Carolina. All owners are U.S. citizens. The company had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other corporations. The company is not publicly traded. • The company is not subject to the consolidated audit procedures. The company files its return in Cincinnati, OH. • Rick Smith lives at 572 Knowles Ct., Wilmington, NC 26811, Bill Thomas lives at 942 Richland Dr., Wilmington, NC 26812; Diane Asche lives at 1342 Coastal Rd., Wilmington, NC 26812; and Jill Renteria lives at 550 Rocker Ave., Wilmington, NC 26812. • The company’s marketable securities represent small investments (<1% ownership) in a number of publicly traded companies and mutual funds. • The company sold its holdings of XYZ Corporation (carried as Marketable Securities on the balance sheet) on July 10 for $5,000. The corporation purchased this investment several years ago for $9,000. (The proceeds from this sale are listed as a cash receipt below. The company has no prior-year capital gains or losses.) The current income statement for the company reflected book net income of $ 159,900 AFTER book depreciation has been taken on the equipment, and the loss on the sale of XYZ Mutual Fund, and $44,000 of recorded federal income tax expense. The following information was taken from the corporation’s financial statements for the current year. Cash Receipts: Fees collected $755,000 Taxable qualified dividend income 3,600 Taxable business interest income 2,400 Tax Exempt interest 2,600 Proceeds from sale of XYZ Corp. common stock $ 5,000 Total Receipts $768,600 Cash Disbursements: Compensation to Rick Smith $120,000 Dividend payments to shareholders ($35K each) 140,000 Customer Refunds 3.000 Office Rent 26,000 Utilities 6,700 Administrative employee salaries 310,000 Federal income tax payments ($11,000/Qtr.) 44,000 Business & Professional Licenses 2,000 Cash Contribution to United Way 1,000 Business Meals (100%) 3,600 Business Travel 7,000 Office supplies & expense 12,000 Accounting (Professional) fees 8,000 Advertising 7,000 Taxes (Payroll, State, Local) 28,600 Business interest (on equipment loan) 4,481 Principal payments on equipment loan 15,000 General Liability Insurance Expense 3,200 Equipment rental 5,000 Total Disbursements 746,581 Journal entries have been made to record regular (book) depreciation in the amount of $8,119. MACRS tax depreciation was not recorded in the book records. Principal payments against the equipment loan amounted to $15,000 for the year. The balance sheets (book basis) for the company were as follows for the current year: Account January 1, 2018 December 31, 2018 Cash $ 86,576 $ ? Tax-exempt securities (at cost) 52,000 52,000 Marketable Securities (at cost) 120,000 ? Office furniture & equipment 65,000 65,000 Accumulated depreciation ( 36,576) ________? Total assets $ 287,000 $ ? Nonrecourse equipment loan $ 47,000 $ ? Common Stock $ 48,000 $ ? Retained Earnings $ 192,000 $_______? Total liabilities and capital $ 287,000 $ ? REQUIRED: 1. Prepare a Form 1120 for the corporation for 2018 including Form 4562. (Do NOT prepare a state return). Prepare supporting schedules as necessary if adequate information is provided. You will need to log into the IRS website and print the blank DRAFT forms for 2018. (Final forms are not yet available). Go to: www.irs.gov/draftforms and type “Form 1120” in the search box.

Answer 1

SOLUTION =   "STAR, Inc."

SCHEDULE M1

1.NET INCOME(LOSS) AS PER BOOKS $ 159,900

2. FEDERAL INCOME TAX AS PER BOOKS $ 44,400

3.EXCESS OF CAPITAL LOSS OVER CAPITAL GAIN $ 4,000

4.INCOME SUBJECT TO TAX NOT RECORDED

5.EXPENSES RECOEDED BUT NOT DEDUCTED

a. DEPRECIATION   

b.CHARITABLE CONTRIBUTION $ 1,000

c. TRAVEL AND ENTERTAINMENT EXPENSES

d.OTHERS

6. ADD LINE 1 TO 5 $ 208,300

7.INCOME RECORDED ON BOOKS BUT NOT TO INCLUDED THIS RETURN

a. TAX EXEMPT INTEREST AND OTHERS $2,600

8.DEDUCTION ON THIS RETURN NOT CHARGED AGAINST BOOK INCOME THIS YEAR

a. DEPRECIATION $3,800

b.CHARITABLE CONTRIBUTION

9. ADD LINE 7 AND 8 $6,400

10. INCOME LINE 6 - LINE 9 $201,900

2) Account                                             January 1, 2018        December 31, 2018

Cash                                                               $    86,576                 $ 108,595

Tax-exempt securities (at cost)                            52,000                       52,000

Marketable Securities (at cost)                          120,000 111,000

Office furniture & equipment                               65,000                       65,000

Accumulated depreciation                                ( 36,576) (44,695)

           Total assets                                         $  287,000                 $ 291,900

Nonrecourse equipment loan                          $  47,000                   $ 32,000

Common Stock                                             $  48,000                   $ 48,000

Retained Earnings                                          $ 192,000                   $ 211,900

           Total liabilities and capital                  $ 287,000                   $ 291,900

CALCULATIONS >

1. CASH OPENING + RECEIVED - PAID = $ 86,576+768,600-746,581=$108,595

2.MARKETABLE SECURITY = OPENING - COST OF SOLD SECURITIES = $120,000-$9,000= $111,000

3.DEPRECIATION = OPENING + BOOK DEP. =36,576+8,119 = 44,695

4.RETAINED EARNING = OPENING + BOOK PROFIT - DIVIDEND = $192,0000+159,900- 140,000= $211,900

5. NON RECOURSE EQUIPMENT LOAN = OPENING - REPAYMENT = $48,000- $15,000= $32,000.

CHARITABLE CONTRIBUTION IS UNDER LIMIT.