Facts in 2017-
-ABC Inc., a S Corporation, 123 Oak Dr Houston TX 77002
-Date Selection effective- 1/1/2000
-Date Incorporated 1/1/2000
-Business Activity, retail sales (product-clothing)
-Business Code 448190
-The corporation is a cash basis business
-There were no distributions made to the shareholders.
-The corporation has no debts.
-Total Assets $5,000,000
-ABC Inc. has three shareholders (Bee Jones 40%, John Smith 40% and Julie Smart 20%). All shareholders materially participate in the business.
-Gross Receipts $1,000,000
-Cost of Goods Sold $400,000 (assume no beginning and ending inventory and purchases are $400,000)
-ABC Inc. uses the lower of cost or market method for valuing inventory and uses the FIFO method for determining the cost of goods sold.
-Compensation to Bea Jones, 40% shareholder/President was $200,000
-Salaries and wages paid to employees were $50,000
-Office Rent paid for corporate office was $10,000
-Supplies expense totaled $40,000 (report as Other Deduction)
-The corporation received insurance proceeds of $150,000 for life insurance on a key executive.
-Insurance premiums paid for the year on the life insurance were $5,000.
-Beginning Balances: Accumulated Adjustments Account $100,000
-Net Income per Books was $445,000 including Life insurance proceeds of $150,000 and Life Insurance Premiums of $5,000.
-Hint - Ordinary income on page 1 line 21 is $300,000.
The corporation has engaged you to prepare the 2017 Form 1120-S (pages 1-5 excluding Schedule L on page 4) for the ABC, Inc Also, prepare the Schedule K-1 for Bee Jones, 40% shareholder (SSN: 123-45-6789).
-Be sure to sign the return as the preparer. Do not put your SSN # on the Form 1065.
-You are not required to prepare the return using Tax Act, but you may if you prefer.
Form 1120S - Additional Information
The tax return for an S Corporation is similar to the C Corporation tax return, as well as, the Partnership tax return. Exhibit 22-4 in the textbook provides a comparison of the tax consequences of the three entities. Due to the similarities, Tax Form 1120S is very similar to Tax Form 1120, and the tax form 1120S Schedule K-1 is very similar to the tax form 1065 Schedule K-1. Listed below is additional information to assist you in the preparation of the 1120S.
The tax forms can be found at IRS.gov or under Student Resources in the Library in Connect. You may also use Tax Act to prepare the return.
Tax Form 1120S
The income and expense reporting are similar to the C corporation. Remember to exclude items that are tax exempt or non-deductible.
Page 3 Schedule K
The Schedule K for tax form 1120S is very similar to the 1065 Schedule K. The only lines that need to be completed are 1, 16b, 16c and 18.
If the S corporation has any pass-through income (such as interest or dividend income) or pass-through expenses (such as charitable deductions) these items would be reported on Schedule K. This problem does not have any pass-through items to report.
However, there are two items (tax-exempt income and a non-deductible expense) that do affect the shareholder's basis and are reported on lines 16b and 16c.
The information on this page will be used to prepare Bea's Schedule K-1.
Page 4 Schedule L
You do not need to prepare Schedule L.
Page 5 Schedule M-1
This schedule is similar to the 1120 Schedule M-1. The purpose of this schedule is to reconcile the book income to the tax income. Line 8 on the Schedule M-1 should be the same as line 21 on page 1. For this return, there are two reconciling items - tax exempt income and non-deductible expense.
Page 5 Schedule M-2
You only need to prepare column (a) Accumulated Adjustments Account.
Schedule K-1 -
The preparation of the 1120S Schedule K-1 is similar to the preparation of the 1065 Schedule K-1. Use the information on Schedule K page 3 of the 1120S to complete Schedule K-1.
Remember to only include Bee's percentage of the items on Schedule K on Bee's Schedule K-1. If you are using Tax Act or another tax software, you will need to enter the other partner's information and percentages so that not all of the income and deductions are reported on Bee's Schedule K-1.
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