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.
   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.

IMPORTANT - All information is provided, form 1120 is a tool that might help you solve the problem. The related schedules that are linked to form 1120 are useful as well, but not entirely necessary to solve the exercise. Form 1120 can be found on IRS official site.

NOTE- The solution below is not correct, do not use it to answer the question again.

Answer 1

Sunshine Corporation Taxable income & Income tax liability
Particulars	Amount
Sales	650,000
- COGS	320,000
Gross Profit	330,000
Dividend	60,000
Interest	25,000
Capital Gain	(8,000)
Total Income	407,000
Compensation to officers	28,800
Rent	5,000
Utilities	6,000
Advertising	7,000
Depriciation	65,000
Dividend paid	55,000
Taxable Income	240,200
Tax	76,928
($22250 + 39% of an amount above $100000 for a taxable income above $100000 to $335000)

b) $26,400 taxable as salary. $33,600 (56,000*60%) taxable as dividend income.Note that full $56,000 in dividends would go on Alvin's return if Alvin and Ann are MFJ.

c) Income subject to self-employment tax

None. Alvin only has salary, which is subject to FICA/employment taxes not SE Tax

d) Basis in Sunshine stock Alvin's basis = $60,000; Ann's basis = $40,000. Basis in stock is simply what we paid for it - no adjustments to basis since this isn't a flow through. Other expense Salary is earned income (not investment income). Dividend income is investment income/unearned income.