CLC - Entity Tax Return
The first step in preparing a tax return is to determine what type of return you are preparing. The four main types of returns are: individual (Form 1040), corporation (Form 1120), S corporation (Form 1120-S), and partnership (Form 1065). This tutorial is for an S corporation tax return (Form 1120S), but similar step would apply for a partnership return.
Step 1: Refer to the assignment details in the digital classroom to determine which tax form you need. Download the entity tax return forms from the Internal Revenue Service website (www.irs.gov).
Use the current year menu option to find forms if you are completing the tax return assignment during the Fall semester. If you are completing the tax return assignment during the Spring semester you will need to use the prior year menu option to locate the correct year for the tax forms for the assignment:
Step 2: Review the instructions in the textbook for the applicable problem. For an S corporation return the textbook problem will provide financial statement information. Below is an example of a partial income statement from the textbook:
Much of the information from the income statement will be reported on page 1 of Form 1120-S. However, there are items on the income statement that are separately stated and belong on Schedule K of Form 1120-S. Review both page 1 and schedule K of Form 1120-S to determine where items should be reported.
Below is an example of Form 1120-S page 1 (partial), which is the tax basis income statement. You will use the data from the income statement in the textbook to report the applicable taxable items on the return.
There are notes included with the textbook financial data regarding book-tax differences. These notes give you information about how to change the GAAP, i.e., book, based numbers and update them, as appropriate, for the tax return. An example of the extra data that requires you to adjust the financial data from “books” to “tax” is shown below:
The balance sheet given in the textbook problem should be reported on Schedule L of Form 1120-S. The total assets, liabilities, and equity values should be the same, but they may need to be placed in different categories based on the options available on the tax return balance sheet template.
Step 3: Use the financial data and additional tax-specific details to prepare the Form 1120-S. You will complete page 1 and schedule K somewhat simultaneously to account for all the income statement items between the two pages/schedules. Partial Form 1120 S page 1 and schedule K pages are shown below:
Step 4: Once the Form 1120-S, including the schedule K, are completed, prepare the Form Schedule K-1 for Form 1120-S for the applicable shareholder(s). The line numbers on the Schedule K-1 should mirror the numbers on the schedule K of Form 1120-S. If the line numbers are not for the same for each line item, you are using the incorrect Schedule K-1. Be sure to adjust the values from Form 1120-S to the applicable percentage of ownership of the shareholder(s). A partial Schedule K-1 is shown below:
Step 5: Refer to the check figures document located in the learning management system for additional information about which boxes to check and schedules to complete for the entity level return.
Step 6: Prepare any additional forms necessary for the entity return, such as:
· Schedule D (for Form 1120-S)
· This form is used to report any sale of stocks by the entity. Do not include any sales of stock related to the individual taxpayer(s).
· Note: Use the Schedule D for Form 1040 as there are multiple versions of Schedule D forms depending on the entity type.
· Form 1125A (cost of goods sold):
· The information for this form is found on the entity income statement. The net result of cost of goods sold should be the same value that is reported on the textbook income statement.
· Note: This form does not have a year stamp on the right side of the page. Use the most recent revision date.
· Form 1125-E (officer compensation):
· This form is optional. Report the amount of officer compensation as provided in the textbook problem details.
· Note: This form does not have a year stamp on the right side of the page. Use the most recent revision date.
· Form 4562 (depreciation/amortization):
· Use Form 4562 to report depreciation, amortization and any Sec. 179 associated with the entity. Remember, use the depreciation value that is for tax (i.e., MACRS), not the book value.
· Form 4797 (sale of business assets):
· Use the information from the textbook problem to report any sales of business assets.
Step 7: Once the Form 1120S and Schedule K-1 forms are completed, refer to the assignment instructions for a list of tax forms needed for the individual tax return. Access the IRS website, www.irs.gov, as provided in Step 1 to download and save or print all the forms.
Step 8: Review the information provided as extra assignment details for the individual taxpayers. Determine which items are treated as income versus deductions. Generally, Form 1040 will be prepared last as most of the information from the other forms flows to the Form 1040. However, some forms require the AGI value from Form 1040. Try to complete as many of the other tax forms as you can as the amounts flow from various forms to page 1 of Form 1040.
Step 9: Separate the income and expenses based on the applicable form on which it is reported:
· Schedule 1 reports: additional income and “for” AGI deductions.
· Include any amounts from the Schedule K-1 that are applicable to the taxpayer.
· The subtotals on this form flow to Form 1040, page 1.
· Schedule 2 reports: other taxes, such as SE tax.
· The subtotals on this form flow to Form 1040, page 2.
· Schedule A reports: itemized deductions.
· The four main categories of itemized deductions are: medical, state taxes, interest, and charitable contributions. The interest section of Schedule 1 includes mortgage interest and investment interest expense.
· Include any amounts from the Schedule K-1 that are applicable to the taxpayer.
· The subtotal on this form flows to Form 1040, page 1.
· Schedule B reports: interest income and dividend income.
· Include any amounts from the Schedule K-1 that are applicable to the taxpayer.
· The subtotals on this form flow to Form 1040, page 1.
· Note: use the Schedule B for Form 1040 as they are multiple versions of Schedule B forms depending on the entity type.
· Schedule D reports: capital gains from sale of stock (summary)
· Include any amounts from the Schedule K-1 that are applicable to the taxpayer.
· Determine if the additional detail provides information about any carryover losses and include that information on the applicable line of Schedule D.
· The subtotals on this form flow to Form 1040, page 1.
· Note: use the Schedule D for Form 1040 as there are multiple versions of Schedule D forms depending on the entity type.
· Form 8949 reports: details from capital gain transactions.
· The subtotals on both pages of this form flow to Schedule D, page 1.
· Schedule E reports: rental real estate (page 1), S corporation income/expense (page 2).
· For the Topic 8 assignment, page 1 should be blank except for the taxpayer’s name and identification number.
· Page 2 should be completed for the applicable flow-through income and deductions from the Schedule K-1.
· The subtotal on this form flows to Form 1040, page 1.
· Form 8995 (qualified business income deduction).
· Refer to the instructions for Form 8995 to determine the amounts to include as Qualified Business Income as well as any applicable deductions in calculating the overall QBI deduction.
Step 10: Compress the file as per the instructions provided in the digital classroom prior to uploading to the gradebook. Refer to the Class Resources for more information.
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