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ACC 410 Tax Return Project Summer 2020

ACC 410– Advanced Tax Accounting Summer 2020

Tax Return Project

OVERVIEW Using the information below, prepare SC, Inc.’s 2019 Federal income tax return (Form 1120), including all needed supporting statements, schedules, and forms. Unless otherwise noted, assume SC, Inc. follows the policies of making all elections to minimize its current income taxes and, to the extent possible, of conforming procedures for financial and tax accounting. Round amounts to the nearest dollar. If additional information is needed, make realistic assumptions and fill in all required data. While this assignment is not designed to be “tricky,” it may be difficult for many students, and it will most certainly require a significant input of your time. The purpose of this project is twofold. First, your ability to examine the receipts, disbursements, and situation of taxpayers, identify the relevant tax issues, and determine the appropriate tax treatment, as covered explicitly in the text, lectures, and homework, will be gauged. Second, completion of the project will require you to use forms and publications from the Internal Revenue Service to actually prepare the documents the taxpayer would be required to submit. As ACC 410 is largely focused on a more theory-based approach, rather than a practitioner-based approach, most of you have little or no experience completing actual tax forms. Completion of the project will aid in your understanding of the translation of theory and concepts into practice and returns. GUIDELINES AND INSTRUCTIONS Students must individually or in groups of no more than three students complete the final project using resources from http://www.irs.gov, lecture notes, tax texts, etc. As this is a project, and not a homework assignment, I will be providing less guidance in office hours, etc. for students, although I will strive to point everyone in the right direction. Forms downloaded from IRS.gov are in the PDF format and, using Adobe Reader software, students MUST type their answers into the blanks. For the entire project, students must assume that the taxpayers are interested in the tax- minimizing legal position. IRS forms and instructions are designed to be read, understood, and followed by taxpayers without significant accounting backgrounds. While it may be challenging at first, senior accounting students should be able to read the instructions for each form and figure out how to complete the project. When a statement is required for a line, just attach a Word document printout that states the Form and Line number, and what you put on that line. AGAIN, PLEASE USE 2019 NUMBERS AND FORMS TO COMPLETE THIS PROJECT.

ACC 410 Tax Return Project Summer 2020

The only submission required for grading is a complete 2019 U.S. Corporate Income Tax Return, which will consist of the following forms: Form 1120 with all schedules included in the PDF file Form 1120, Schedule D Form 1120, Schedule 1125-A Form 1120, Schedule 1125-E Form 1120, Schedule G Form 4562 To ease in grading, I require that the forms be TYPED and printed, that any line with an entry of -0- be left blank, and negative numbers should be indicated in parentheses. Please round all numbers to the nearest whole dollar and omit “00” in the cents column. You may work in groups of 2-3 students. Please only submit one return for each group, and your final submission is due Sunday, July 19th on Canvas. Good luck!

ACC 410 Tax Return Project Summer 2020

Please complete Stan’s Catering, Inc.’s 2019 Form 1120, U.S. Corporation Income Tax Return, based upon the information provided below. If required information is missing, use reasonable assumptions to fill in the gaps. Stan’s Catering, Inc. (SC) is organized in the state of New York as a corporation and is taxed as a “C” corporation with a calendar year-end. SC operates a delicatessen/bakery in New York City, NY that specializes in mobile food catering for events and gatherings within the tri-state area. SC’s address (unchanged since inception), employer identification number (EIN), and date of incorporation are as follows:

Stan’s Catering, Inc. 257 West 55th Avenue New York City, NY 10027 EIN: 13-9823459 Date of Incorporation: March 17, 2013

SC’s address has not changed since its inception. SC has been rapidly expanding its catering business. This expansion has required a significant amount of new equipment purchases. SC sold some of its liquid investments in order to avoid having to take on debt to fund these purchases. Further, SC invested heavily in its catering business by significantly increasing its advertising budget. SC and its officers expect that revenue increases from these expenditures will begin next year. SC is owned by four related shareholders from the same family for the entire year: Raphael Giordano (father) and his three children Silvia, Andrea, and Marco. None of SC’s shareholders are non-U.S. persons. There are currently 10,000 shares of SC common stock issued and outstanding (SC has never issued preferred stock).

ACC 410 Tax Return Project Summer 2020

The shareholders are also employees of SC and its only corporate officers. The relevant shareholder and officer information for the current year is provided below. Officer compensation is included in Employee Salaries on the income statement. Their personal information is provided below:

Raphael Giordano 160 West 57th Avenue New York City, NY 10027 SSN: 356-87-4322 Shares owned 5,500 Silvia Giordano Costa 250 South Main Hoboken, New Jersey 07030 SSN: 284-58-4583 Shares owned 1,500 Andrea Giordano 65 East 55th Avenue New York City, NY 10027 SSN: 423-84-2343 Shares owned 1,500

Marco Giordano 160 West 57th Avenue New York City, NY 10027 SSN-487-27-4797 Shares owned 1,500 SC follows the accrual method of accounting (GAAP) and is not a member of any consolidated or affiliated group of entities. SC is not audited by a CPA firm and has never had to restate its financial statement information. Supplementary Details:

• The dividends received by SC during the year were paid by Apple, Inc. (SC owns less than 20% of Apple, Inc.’s stock).

• SC had its sole municipal bond (New York City) redeemed (bought back) in the current year. SC originally purchased the New York City bonds on February 1, 2016 for $100,000 (no premium or discount paid). The bond was redeemed by New York City on February 1, 2019 for $100,000. Both tax basis and proceeds received on this transaction were reported to SC on a Form 1099-B.

• SC purchased 200 shares of Apple, Inc. on October 10, 2016 for $100,000 (including commission). On July 10, of the current year, SC sold the 200 shares of Apple, Inc. for

ACC 410 Tax Return Project Summer 2020

$350 a share (including commission). Both tax basis and proceeds received on this transaction were reported to SC on a form 1099-B.

• During the year, SC contributed $8,000 to the American Lung Association. • On December 10, SC paid Madison Advertising $27,500 to design a new catering

advertisement campaign for next year. This money represented half of the total $55,000 contract price. SC expects that the services will be provided and delivered to SC on about June 30, 2019.

• SC prepaid an insurance premium of $21,000 in September. The new policy is effective October 1, 2019 through September 30, 2020.

• SC’s regular tax depreciation for the year is correctly calculated as $350,000 before considering the current year fixed asset additions of $840,000 (see table below). SC wants to claim the fastest recovery method(s) possible on these asset additions without electing any §179 expensing.

• SC acquired the following new fixed assets from unrelated parties in 2019:

Description Date Purchased Amount 5-year MACRS

Property October 2, 2019 $480,000

7-year MACRS Property September 10, 2019 $320,000

Delivery Truck (over 6,000 lbs): 5-year MACRS Property

October 12, 2019 $40,000

• SC reports employee compensation amounts that remained unpaid at year-end in Accrued

Bonuses, Accrued Vacation and Accrued Wages on the balance sheet, as applicable. The table below provides a summary of the balances in these accounts for December 31, 2018 and 2019.

Balance

Sheet Date Account

Description Account Balance

Applicable Employees

Payment Date

12/31/2018 Accrued Bonuses $45,000 SC’s Shareholders (father and children) 01/20/2019

12/31/2018 Accrued Vacation $62,500 Unrelated Employees 04/01/2019

– 11/30/2019

12/31/2018 Accrued Wages $44,500 SC’s Shareholders (father and children) 01/20/2019

12/31/2019 Accrued Vacation $73,000 Unrelated Employees Unpaid as

of 03/15/2020

12/31/2019 Accrued Wages $51,500 SC’s Shareholders (father and children) 01/22/2020

ACC 410 Tax Return Project Summer 2020

Supplementary Details (continued):

• On November 1, a large insurance company paid SC a $100,000 deposit to reserve catering event services on March 18, 2020 at the insurance company’s annual meeting in New York City. The deposit is fully refundable until January 15, 2020. Thereafter, half of the deposit becomes non-refundable.

• Meal expenses were incurred for clients and SC staff at important meetings where business was conducted. SC did not incur any entertainment-related expenses in 2019.

• SC values its inventory at cost and has always used the specific identification method for reporting purposes. The company has never written down any inventory for any reason and the rules of Section 263A (UNICAP) do not apply to SC.

• SC made the following estimated Federal income tax payments: o April 15th, 2019: $2,000 o September 15th, 2019: $2,000 o June 15th, 2019: $2,000 o December 15th, 2019: $1,000

• If applicable, SC wants any overpayment credited to its 2020 estimated taxes.

Miscellaneous Information:

• SC did not make any dividend distributions or distributions in excess of current and accumulated earnings and profits during the current year.

• SC does not have any net operating loss carryforward amounts available for the current year.

• SC has never issued publicly offered debt instruments. • SC is not required to file a Schedule UTP, Uncertain Tax Position Statement. • SC made several payments during the current year that were required to be reported on

Forms 1099; all required Forms 1099 were filed timely by SC. • SC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable,

or tax-deferred transaction. • SC did not receive any assets in Section 351 transfers during the year. • All questions on Schedule B, Form 1120 should be checked “no” for the current year. • SC’s average annual gross receipts have never exceeded $5 million annually.

ACC 410 Tax Return Project Summer 2020

Stan’s Catering, Inc. Financial Statements (kept on a GAAP basis): Balance Sheet Assets: 12/31/2018 12/31/2019 Cash $ 62,500 $ 1,037,000 Accounts Receivable 145,000 177,000 Less: Allowance for Bad Debts (32,000) (41,000) Inventory 59,000 96,000 Publicly traded securities 100,000 0 Tax-exempt bond 100,000 0 U.S. Treasury Bonds 125,000 125,000 Fixed Assets 2,115,000 2,955,000 Less: Acc. Depreciation (436,500) (715,000) Prepaid Insurance 0 15,750 Prepaid Rent 38,500 39,500 Prepaid Advertising 0 27,500 Total Assets: $2,276,500 $3,716,750 Liabilities and Shareholders’ Equity: Accounts Payable 102,000 131,000 Accrued Bonuses 45,000 0 Accrued Vacation 62,500 73,000 Accrued Wages 44,500 51,500 Event Deposits 0 100,000 Income Tax Payable 0 $46,820 Deferred Tax Liability 45,910 14,000 Note Payable-First Bank of NY (Credit Line) 424,000 657,000 Note Payable-EG Capital Equipment Leasing 1,243,000 1,415,000 Capital Stock 1,000 1,000 Additional paid-in Capital 99,000 99,000 Retained Earnings-Unappropriated 209,590 1,128,430 Total Liabilities and Shareholders’ Equity: $2,276,500 $3,716,750

ACC 410 Tax Return Project Summer 2020

Income Statement for the period ending December 31, 2019 Income: Gross Sales $ 3,925,000 Less: Returns (8,500) Net Sales 3,916,500 Cost of Goods Sold (1,129,850) Gross Profit 2,786,650 Dividend Income 2,800 Interest Income -Bank 150 Interest Income-U.S. Treasury 3,000 Municipal Bond Interest Income 1,400 Capital Loss-Shares of Apple, Inc. (30,000) Total Income: 2,764,000 Expenses: Employee Salaries 743,500 Repairs and Maintenance 19,000 Bad Debts 44,000 Rent 230,000 Payroll Taxes 60,000 Licensing Fees 4,500 Property Taxes 12,500 Interest Expense 140,000 Depreciation 278,500 Office Supplies 5,400 Employee Training 3,600 Employee Benefits 24,000 Charitable Contribution 8,000 Advertising 70,000 Meals 3,400 Travel 600 Insurance 19,750 Utilities 142,000 Telephone 14,500 Federal income tax expense/(benefit) 21,910 Total Expenses: 1,845,160 Net Income (Loss): $918,840