CCS Corporate Tax Return Problem

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corp_tax_return-1141-6.pdf

 

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CCS  Corporate  Tax  Return  Problem     Rachael  Ray,  Paula  Deen  and  Gordon  Ramsay  each  own  one-­‐third  of  the  common  stock  of   Celebrity  Catering  Services,  Inc.  (CCS).    CCS  is  incorporated  on  February  2,  2009.    It  has  only  one   class  of  stock  outstanding  and  operates  as  a  C  corporation  for  tax  purposes.    CCS  caters  to  all   types  of  social  events.  

• CCS  is  located  at  540  Waverly  Way  Burbank,  CA  91501   • Its  employer  ID  is  38-­‐4743474   • CCS’s  business  activity  is  catering  food  services.    Its  business  activity  code  is  722300.   • The  shareholders  also  work  as  officers  for  the  corporation  as  follows:  

o Rachael  is  the  chief  executive  officer  and  president,  (SS#  231-­‐54-­‐8976).  Her   salary  this  year  is  $200,000.  

o Paula  is  the  executive  VP  and  Chief  operating  officer  (SS#798-­‐56-­‐3241).  Her   salary  this  year  is  $140,000.  

o Gordon  is  the  VP  of  Finance  (SS#  879-­‐21-­‐4536).    His  salary  this  year  is  $130,000.   • All  officers  devote  100%  of  their  time  to  the  business  and  all  of  the  officers  are  US  

citizens.   • CCS  uses  the  accrual  method  of  accounting  and  has  a  calendar  year-­‐end.   • CCS  made  four  equal  quarterly  estimated  tax  payments  of  $20,000  each.    Its  tax  liability  

last  year  was  $70,000.    If  it  has  overpaid  its  federal  tax  liability,  CCS  would  like  to  receive   a  refund.  

• CCS  paid  a  dividend  of  $30,000  to  its  shareholders  on  November  1.    CCS  had  ample   earnings  and  profits  (E&P)  to  absorb  the  distribution.    

The  following  is  CCS’s  income  statement  for  2012:    

Income  Statement     Income         Sales     $1,800,000   Sales  returns  and  allowances     (5,000)   Net  sales       1,795,000   Cost  of  goods  sold     350,000   Gross  profit       1,445,000   Capital  loss     ($15,000)   Dividend  income     25,000   Interest  income     10,000   Total  income         $1,465,000   Expenses       Salaries-­‐officers   $470,000     Salaries  and  wages  –  other   525,000     Bad  Debt   15,000     Meals  &  Entertainment   3,000     Repairs  and  Maintenance   6,000    

 

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Property  Taxes   13,000     State  Income  Tax     43,000     Other  Taxes   44,000     Rent   30,000     Interest     5,000     Advertising   52,000           Professional  Services   16,000     Supplies        5,000     Depreciation   10,000       Employee  benefits  Programs   32,000     Other  Expenses   12,000     Total  expenses       1.281,000   Net  income  before  taxes       $184,000   Federal  income  taxes     [62,000]   Net  income  after  taxes       $122,000  

  Notes:  

1. CCS’S  inventory-­‐related  purchases  during  2012  were  $360,000.    It  values  its  inventory   based  on  cost  using  FIFO  inventory  cost  flow  method.    Assume  the  rules  of  §263A  do  not   apply  to  CCS.  

2. Of  the  $10,000  interest  income,  $1,200  was  from  a  City  of  Irvine  bond  that  was  used  to   fund  public  activities  (issued  in  2006),  $1,900  was  from  an  Oceanside  City  bond  used  to   fund  public  activities  (issued  in  2005),  $1,100  was  from  a  US  Treasury  Bond  and  the  rest   was  from  a  money  market  account.  

3. CCS’s  dividend  income  came  from  Sinful  Desserts,  Inc.  (SD)    CCS  owned  10,000  shares  of   stock  in  CC  at  the  beginning  of  the  year  this  represented  10%  of  SD’s  outstanding  stock.  

4. On  October  1,  2012  CCS  sold  1,000  shares  of  SD  stock  for  $25,000.    It  had  originally   purchased  these  shares  on  April  18,  2009  for  $40,000.    After  the  sale  CCS  owns  9   percent  of  SD.  

5. CCS  wrote  off  $25,000  in  accounts  receivable  as  uncollectible  during  the  year.   6. CCS  regular  tax  depreciation  was  $28,000.    None  of  the  depreciation  could  be  claimed  

on  1125A   7. The  $5,000  interest  was  from  a  business  loan.   8. Other  expenses  include  $6,000  for  premiums  paid  on  term  life  insurance  policies  for  

which  CCS  is  the  beneficiary.    The  policies  cover  Rachael,  Paula  and  Gordon.  

 

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Balance  Sheet    

Assets   1/1/2012   12/31/12   Cash   $180,000     $185,000   Trade  and  accounts  receivables     560,000   570,000   Allowance  for  Doubtful  Accounts   (60,000)   (50,000)   Inventories   140,000   150,000   U.S.  government  bonds   20,000   20,000   State  &  Local  bonds   120,000   120,000   Investment  In  Stock   400,000   360,000   Prepaid  federal  income  taxes   0   35,169     Property,  plant  and  equipment   140,000   160,000     Accumulated  depreciation   (50,000)   (60,000)   Other  assets   20.000   15,831   Total  Assets   $1,470,000   $1,506,000   Liabilities  and  Owners'  Equity       Accounts  payable   $280,000     $240,000   Other  current  liabilities     20,000   21,000   Other  Liabilities   40,000   23,000   Capital  stock   400,000   400,000   Retained  earnings   730,000   822,000   Total  Liabilities  and  Owners'  Equity   $1,470,000   1,506,000       Required:  

• Complete  Celebrity  Catering  Service  Inc.’s  (CCS)  2012  Form  1120,  1125-­‐A,  1125-­‐E  and  all   related  schedules-­‐Schedules  C,  G,  J,  K,  L,  M-­‐1,  and  M-­‐2.  Be  sure  to  attach  schedules  for   any  line  item  which  indicates  one  is  required  on  the  1120.  

• FORM  4562  is  not  required.  (Do  not  complete  Form  4562  [depreciation  calculation]  since   you  do  not  have  all  the  information).    

• If  any  information  is  missing,  use  reasonable  assumptions  to  fill  in  the  gaps  and  list  those   assumptions  as  an  attachment.  

• The  forms  schedules  and  instructions  can  be  found  at  www.irs.gov  and  download  the   necessary  forms.