Expert answer:S corporation tax return assignment. short questio
Answer & Explanation:S
Corporation Tax Return Assignment
While Ben Smith and his former classmate
John Jones both studied accounting at school formed a company together. Their
company is XYZ Corporation specializes in custom-sculpted cakes for weddings,
birthdays, and other celebrations. Ben and John formed the business at the
beginning of 2014, and each contributed $50,000 in exchange for a 50 percent
ownership interest. XYZ also borrowed $200,000 from a local bank. Both Ben and
John had to personally guarantee the loan. Both owners provide significant
services for the business. The following information pertains to XYZ’s 2014
activities:
·
XYZ uses the cash method
of accounting (for both book and tax purposes) and reports income on a
calendar-year basis.
·
XYZ received $450,000 of
sales revenue and reported $210,000 of cost of goods sold (it did not have any
ending inventory).
·
XYZ paid $30,000
compensation to Ben, $30,000 compensation to John, and $40,000 of compensation
to other employees (assume these amounts include applicable payroll taxes if
any).
·
XYZ paid $15,000 of rent
for a building and equipment, $20,000 for advertising, $14,000 in interest
expense, $4,000 for utilities, and $2,000 for supplies.
·
XYZ contributed $5,000 to
charity.
·
XYZ received a $1,000
qualified dividend from a great stock investment (it owned 2 percent of the
corporation distributing the dividend) and it recognized $1,500 in short-term
capital gain when it sold some of the stock.
·
On December 1, 2014, XYZ
distributed $20,000 to Ben and $20,000 to John.
Required:
Assume Ben and John formed XYZ as an S
corporation.
(1) Complete
XYZ’s Form 1120S, page 1, Schedule K (page 3) and Page 5 (Analysis of Income,
Schedule M-1 and Schedule M-2, omit the Balance Sheet) and John’s Form 1120S,
Schedule K-1 (note that you should use 2013 tax forms).
(2) Compute
the tax basis of John’s stock in XYZ at the end of 2014.
(3) What
amount of John’s income from XYZ is subject to FICA or self-employment taxes?
(4) What
amount of income, including its character, will John recognize on the $20,000
distribution he receives on December 1?
(5) What
amount of tax does XYZ pay on the $1,000 dividend it received?
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