Question

Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients and he believed that many of them would follow him if he were to leave his current employer. As part of a New Year’s resolution, Jack decided he would finally do it. Jack put his business plan together and, on January 1 of this year, Jack opened his doors for business as a C corporation called Geo-Jack (GJ). Jack is the sole shareholder. Jack reported the following financial information for the year (assume GJ reports on a calendar year, uses the accrual method of accounting).

1. In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $17,500, which represented a damage deposit of $7,000 and rent for two years ($5,250 annually).
2. GJ earned and collected $415,000 performing geological-related services and selling its specialized digging tool.
3. GJ received $65 interest from municipal bonds and $2,350 interest from other investments.
4. GJ purchased some new equipment in February for $55,000. It claimed depreciation on these assets under tax basis during the year in the amount of $8,415.
5. GJ paid $8,250 to buy luxury season tickets for Jack’s parents for State U football games.
6. GJ paid Jack’s father $15,000 for services that would have cost no more than $9,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients.
7. In an attempt to get his name and new business recognized, GJ paid $8,250 for a one-page ad in the Geologic Survey. It also paid $17,500 in radio ads to be run through the end of December.
8. GJ leased additional office space in a building downtown. GJ paid rent of $33,250 for the year.
9. In November, Jack’s office was broken into and equipment valued at $6,250 was stolen. The tax basis of the equipment was $6,750. Jack received $2,500 of insurance proceeds from the theft.
10. GJ incurred a $4,625 fine from the state government for digging in an unauthorized digging zone.
11. GJ contributed $3,500 to lobbyists for their help in persuading the state government to authorize certain unauthorized digging zones.
12. On July 1, GJ paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July 1 of this year through December 31 of next year.
13. GJ borrowed $20,000 to help with the company’s initial funding needs. GJ used $2,000 of funds to invest in municipal bonds. At the end of the year, GJ paid the $1,200 of interest expense that accrued on the loan during the year.
14. Jack lives 12 miles from the office. He carefully tracked his mileage and drove his truck 6,280 miles between the office and his home. He also drove an additional 7,200 miles between the office and traveling to client sites. Jack did not use the truck for any other purposes. He did not keep track of the specific expenses associated with the truck. However, while traveling to a client site, Jack received a $275 speeding ticket. GJ reimbursed Jack for business mileage and for the speeding ticket.
15. GJ purchased two season tickets (20 games) to attend State U baseball games for a total of $1,600. Jack took existing and prospective clients to the games to maintain contact and find further work. This was very successful for Jack as GJ gained many new projects through substantial discussions with the clients following the games.
16. GJ paid $4,000 for meals when sales employees met with prospective clients.
17. GJ had a client who needed Jack to perform work in Florida. Because Jack had never been to Florida before, he booked an extra day and night for sightseeing. Jack spent $650 for airfare and booked a hotel for three nights ($245/night). (Jack stayed two days for business purposes and one day for personal purposes.) He also rented a car for $170 per day. The client arranged for Jack’s meals while Jack was doing business, but GJ paid all expenses.
18. GJ paid a total of $35,000 of wages to employees during the year and cost of goods sold was $40,000.

Required:

1. a. What amount will increase taxable income (positive) or reduce taxable income (negative) for each of the above scenarios?

2. b. As a C corporation, does GJ have a required tax year? If so, what would it be?

3. c. If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be?

4. d. If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?

Answer 1

a.

SI. NO	Particulars	Amount
1.	Rent related to the respective year is deductible. Deduction is not allowable on Rent deposit	(5,250)
2.	Revenue from service provided is taxable	4,15,000
3.	Interest on other investments is taxable.	2,350
4.	Interest on municipal bond is exempt	---
5.	Depreciation for the year	(8,415)
6.	Payment for luxury tickets for football is not a business expense. So no deduction is available	----
7.	Payment to father for service provided. Restricted to reasonable amount which will be paid to other local business for same service.	(9,000)
8.	Advertisement Expense ( 8,250 + 17,500)	(25,750)
9.	Lease Rent of building	(33,250)
10.	Loss on theft (6,750 - 2,500)	(4,250)
11.	Fine to state government is not deductible	----
12.	Lobbyist cost not deductible	-----
13.	Insurance relating to current period is deductible (1,800*6/18)	(600)
14.	Interest expense on tax free investments is not deductible (20,000-2,000) * 1,200/20,000	(1,080)
15.	Business expense (7,200*0.535)	(3,852)
16.	Purchase of season ticket for clients (1,600*50%)	(800)
17.	Meals for business discussion (4,000* 50%)	(2,000)
18.	Since the trip was for business purpose, airfair is deductible. Only portion of expense which is for business purpose relating to lodging and renting car is deductible. (650 + (2* 245) + (2*170)) = 1480	(1,480)

b. No.

As a C corporation, GJ can select any last day of the month as its ending date for the year.

c. Yes, If GJ were a sole proprietorship, it will have calender year ending 31st December as its tax year.

d. Yes, As a S corporation, GJ will have calender year as its tax year ending December 31st.