Tax return-problem 7: C corporation
Instructions:
Please complete the required federal corporation income tax return forms for Express Catering, Inc. for
the 2012 tax year based upon the facts presented below. Also, if required information is missing, use
reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations and
do not prepare any AMT related forms.
Express Catering, Inc. (EC) is organized in New York as a corporation and is taxed as a “C” corporation
with a calendar year-end. EC operates a delicatessen/bakery in New York City, NY that specializes in
mobile food catering for events and gatherings within the tri-state area. EC’s address, employer
identification number (EIN), and date of incorporation are as follows:
Express Catering, Inc.
257 West 55th Avenue
New York City, NY 10027
EIN- 13-9823459
Date Incorporated- March 17, 2007
EC has been at the same address and has not changed its same since inception.
EC has only common shares issued (no preferred stock). There are currently 10,000 shares of EC
common stock issued and outstanding.
EC is owned by four shareholders from the same family: Raphael Giordano (father) and his three
children Silvia, Andrea, and Marco. 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
EC uses the accrual method of accounting and follows GAAP. EC is not a subsidiary nor is it in an
affiliated group with any other entity. EC is not audited by a CPA firm and has never had a restatement
of its income statement.
In addition, EC reported the following information for the current year:
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EC did not pay dividends in excess of its current and accumulated earnings and profits.
None of the stock of EC is owned by non U.S. persons
EC has never issued publicly offered debt instruments.
EC is not required to file a Form UTP
EC made several payments in the current year that required the filing of federal Form(s) 1099.
These Forms 1099 were filed timely by EC.
During the year, none of the shareholders of EC changed.
EC has never disposed of more than 65% (by value) of its assets in a taxable, non-taxable, or taxdeferred transaction.
EC did not receive any assets in Section 351 transfers during the year.
All of the questions on Schedule B, Form 1120 are no for the year.
Additional information:
EC has been expanding rapidly its catering business. This expansion has required a significant amount of
new equipment purchases. EC sold some of its liquid investments in order to avoid having to take on
debt to fund these purchases. Further, EC invested heavily in its catering business by significantly
increasing its advertising budget. EC and its officers expect that revenue increases from these
expenditures will begin next year.
Despite being profitable the past few years, EC does not want to carryback any net operating loss (if any)
generated in the current year. EC believes the next few years will be far more profitable and the losses
will be of a greater benefit in the future.
The dividends received by EC during the year were paid by Apple, Inc.
EC had its sole municipal bond (New York City) redeemed (bought back) in the current year. EC
originally purchased the New York City bonds on February 1, 2009 for $100,000 (no premium or
discount paid). The bond was redeemed by New York City on February 1, of the current year for
$100,000. EC received a Form 1099-B to reflect the transaction. Box A of the 1099- B was checked.
EC purchased 200 shares of Apple, Inc. on October 10, 2009 for $100,000 (including commission). On
July 10, of the current year, EC sold the 200 shares of Apple, Inc. for $350 a share (including
commission). EC received a 1099-B reporting the sale proceeds. Box A was checked on the 1099-B.
During the year EC contributed $8,000 to the American Lung Association.
On December 10, of the current year, EC 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.
EC expects that the services will be provided and delivered to EC on about June 30, of next year.
EC prepaid its insurance premium of $21,000 in October. The new policy is effective November 1, of this
year through October 31, of next year. EC’s regular tax depreciation for the year is correctly calculated
as $350,000 before considering the current year fixed asset additions of $840,000. EC wants to claim
the fastest recovery method(s) possible on these asset additions without electing any §179 expensing.
Total current year asset additions are as follows (all the equipment purchased was new):
Description
5 Year MACRS Property
7 year MACRS Property
Delivery Truck (over
6,000 lbs)-5 Year
MACRS Property
Date Purchased
October 2, 2012
September 10, 2012
October 12, 2012
Amount
$480,000
$320,000
$40,000
EC officer information for the current year is as follows (compensation amounts included in total wages
on the income statement for all employees):
Name
Social Security
number
Raphael Giordano
Silvia Costa
Andrea Giordano
Marco Giordano
356-87-4322
284-58-4583
423-84-2343
487-27-4797
Percent of time
devoted to
business
100%
100%
100%
100%
Percent of stock
owned
Amount of
compensation
55%
15%
15%
15%
150,000
130,000
130,000
120,000
As reported on the balance sheet (see below), on December 31 of last year, the accrued wages were
$44,500 and the accrued bonuses were $45,000. The wages and bonuses were payable to Raphael,
Silvia, Andrea, and Marco. These accrued wages and bonuses were paid on January 20, of this year.
Also as reported on the balance sheet, on December 31 of this year, the accrued wages were $51,500.
The wages were owed to Raphael, Silvia, Andrea, and Marco. The accrued wages were paid on January
22, of next year.
All of the other employees’ wages and bonuses were paid on December 31.
As of December 31, last year and December 31 of this year, respectively, EC had accrued vacation
payable on its books of $62,500 and $73,000. All of the prior year vacation accrual was paid during the
period from April 1 through November 30 of the current year. As of March 15 of next year, EC had paid
none of its current year accrual. All of the vacation accrual amounts for both years were owed to
employees other than Raphael, Silvia, Andrea and Marco. None of the officers had accrued vacation at
December 31 of either year-end.
On November 1, a large insurance company paid EC a $100,000 deposit to reserve catering event
services on March 18 of next year at the insurance company’s annual meeting in New York City. The
money is fully refundable up until January 15 of next year. Thereafter, half of the deposit becomes nonrefundable.
EC maintains an inventory of several items. Inventory is valued at cost. EC has never has never changed
it inventory method. EC uses specific identification for its inventory. EC has never written down any
subnormal goods. The rules of Section 263A (UNICAP) do not apply to EC.
EC did not pay a dividend in the current year.
EC made no estimated tax payments during the current year.
Financial Statements (kept on a GAAP basis):
Express Catering, Inc.
Balance Sheet
Assets:
Cash
Accounts Receivable
Less: Allowance for Bad Debts
Inventory
Publicly traded securities
Tax-exempt bond
U.S. Treasury Bonds
Fixed Assets
Less: Acc. Depreciation
Prepaid Insurance
Prepaid Rent
Prepaid Advertising
Total Assets:
1/01/CY
$
62,500
145,000
(32,000)
59,000
100,000
100,000
125,000
2,115,000
(436,500)
0
38,500
0
$2,276,500
12/31/CY
$
44,000
177,000
(41,000)
96,000
0
0
125,000
2,955,000
(715,000)
17,500
39,500
27,500
$2,725,500
Liabilities and Capital:
Accounts Payable
Accrued Wages
Accrued Bonuses
Accrued Vacation
Event Deposits
Note Payable-First Bank of NY (Credit Line)
Note Payable-EG Capital Equipment Leasing
Capital Stock
Additional paid-in Capital
Retained Earnings-Unappropriated
Total Liabilities and Capital:
102,000
44,500
45,000
62,500
0
424,000
1,243,000
131,000
51,500
0
73,000
100,000
657,000
1,415,000
1,000
99,000
255,500
1,000
99,000
198,000
$2,276,500
$2,725,500
Income Statement for the period ending December 31, CY
Item
Amount
Income:
Gross Sales
Less: Returns
Net Sales
Cost of Goods Sold
Dividend Income
Interest Income -Bank
Interest Income-U.S. Treasury
Municipal Bond Interest Income
Capital Loss-Apple, Inc.
Total Income:
$ 2,925,000
(8,500)
2,916,500
(1,129,850)
2,800
150
3,000
1,400
(30,000)
1,764,000
Expenses:
Employee Salaries
Repairs and Maintenance
Bad Debts
Rent
Payroll Taxes
Licensing Fees
Property Taxes
Interest Expense
Depreciation
Office Supplies
Employee Training
Employee Benefits
Charitable Contribution
Advertising
Meals and Entertainment
Travel
Insurance
Utilities
Telephone
Total Expenses:
Federal income tax expense
Net Income:
743,500
19,000
44,000
230,000
60,000
4,500
12,500
140,000
278,500
5,400
3,600
24,000
8,000
70,000
3,400
600
18,000
142,000
14,500
$ 1,821,500
0
($57,500)