Sample Return 1 (SR1)
Information for Corporate Tax Return
with
Explanations and Completed Tax Forms
The Spicers and Bill’s Market
Facts
William Spicer owns 80 percent of the stock in Bill’s Market, a cash basis corporation
located at 387 Spring Street, Raleigh, NC 29288. William’s wife, June, owns the other 20 percent
of the outstanding stock of the corporation but she is not active in the business. The Market’s EIN
is 79-7979797 and its business code is 445290. It was incorporated on July 15, 1993. During the
last tax year, the Market had the following results from its operations:
Gross sales
Beginning inventory (cost)
Purchases
Ending inventory (cost)
Expenses:
Advertising
Charitable contributions
Cleaning/maintenance
Depreciation (MACRS pre-2002 purchases
Sec. 179 Expense (6/1/02 display case)
FICA taxes (excluding FICA on William's salary)
FICA on William's salary
William's salary
Health insurance
Insurance (excludes health)
Interest
Licenses/fees
Meals/entertainment
Office expenses
Rent
Salary/wages
Travel
Utilities
$2,700,000
320,000
2,000,000
340,000
$40,000
2,000
12,000
3,000
5,000
18,000
8,164
200,000
15,000 *
18,000
1,000
4,000
1,000
14,000
120,000
210,000
8,000
16,000
*Includes $3,000 for health insurance for William and his family.
The market sold a unique piece of equipment for $13,000. It had originally cost $5,000
when purchased on March 5, 2000; it had an adjusted basis of $3,000 when sold on August 15,
2002. The market also sold a display case for $1,000 on December 12, 2002 that had cost $12,000
when purchased on June 6, 1998; it had an adjusted basis of $4,000 when sold. These results of
sales are the same for tax and financial accounting.
For financial accounting, the corporation does not expense the new display case but takes
$1,000 of depreciation for the equipment. The corporation has a beginning balance of $200,000 in
its retained earnings account.
The corporation made estimated payments for its own taxes of $10,000 and withheld
$45,000 from William’s salary for income taxes.
The corporation makes a $25,000 dividend distribution to its shareholders on December
31 of the current tax year.
The corporation’s beginning and ending accrual basis balance sheets for 2002 are shown
below:
January 1, 2002
December 31, 2002
Assets
Cash
$ 62,000
$ 51,836
Accounts Receivable
37,500
37,500
Inventory
320,000
340,000
Tax Refund
5,150
Plant, Prop. and Equipment
$ 80,000
$68,000
Less: Accum. Depreciation
62,000
18,000
59,000
9,000
Total Assets
$437,500
$443,486
Liabilities and Equities
Deferred Tax Liability
Note Payable
Common Stock
Retained Earnings
Total Liabilities and Equities
$ 12,500
225,000
200,000
$437,500
1,360
12,500
225,000
204,626
$443,486
The Spicers’ Individual Tax Return Information
The Spicers live at 2345 Carolina Avenue, Durham, NC 27212. William’s Social
Security number is 123-45-6789 and June’s is 987-65-4321. They do not contribute to the
Presidential campaigns. They have two dependent children—Sophie is 9 (SS#333-33-3333) and
Carl is 4 (SS#444-44-4444).
The following information pertains to the completion of the Spicers’ personal tax return:
Interest income
$500
Dividend income
1,300
Loss on stock sale (long-term)
(14,000)
Unreimbursed doctor’s bills
$8,000
Unreimbursed hospital bills
12,000
Dental bills
2,000
Mortgage interest
14,000
Real estate taxes
4,000
Contributions to their church
1,500
June is a volunteer at the children’s school but otherwise does not work outside the home.
Her total mileage for her trips to and from the school was 1,200 miles. She also had unreimbursed
out-of-pocket expenses for teaching materials of $232. Additionally, she spent $1,500 on
childcare so that she could be there during after-school hours to tutor at-risk students.
Bill’s Market does not have any pension plan for its employees, so Bill and June
contribute $3,000 each to their IRAs.
The completed Form 1120, Schedule D, and Forms 4562 and 4797 for the corporation
and Form 1040, Schedules A, B, and D for the Spicers follow along with an explanation of
various items.
2
Explanation
Two returns are filed—one for the corporation (Form 1120) and a second one for the
Spicers (Form 1040). The Spicers do not have to wait until the corporation completes it tax return
to complete theirs. Because Bill is an employee, he will receive a Form W-2 from the corporation
and as shareholders, they will receive a Form 1099-DIV by the end of January showing their
$25,000 dividend distribution.
The completion of the Form 1120 for the corporation is straightforward. The income and
expense items are reported on Form 1120 except for the following items. Form 4797 is used to
report the asset sales including the depreciation recapture, which is included directly in corporate
income on line 9, Form 1120. The $5,000 Sec. 1231 net gain is entered on line 7, Schedule D, and
also becomes part of the corporate taxable income on line 8. Form 4562 includes the depreciation
expense and the Sec. 179 expense. These items are combined and deducted from corporate
income. The FICA taxes on William’s salary of $200,000 is determined ($8,164) and deducted
from taxable income along with the other deductible corporate expenses. (The schedule of other
deductions appears below.) The corporation deducts the health insurance paid for William and his
family as he is an employee. The deduction for the charitable contribution is not limited as it does
not exceed 10 percent of corporate net income. The corporation pays an income tax of $4,850 on
its taxable income of $32,336. The overpayment of $5,150 is refunded to the corporation.
Form 1120 and Related Schedules and Forms
File Name
SR1f1120return.pdf
Forms Included
Form 1120: U.S. Corporate Income Tax Return
Schedule D: Capital Gains and Losses
Form 4562: Depreciation and Amortization
Form 4797: Sales of Business Property
Schedule of Other Deductions:
Bill's Market EIN: 79-7979797
Form 1120
Page 1, Line 26, Other deductions:
Meals/entertainment@ 50%
Office expense
Travel
Insurance
Utilities
$ 500
14,000
8,000
18,000
16,000
$56,500
Schedule of Other Assets:
Form 1120, Page 4, Line 6
Tax refund due = $5,150
Schedule of Other Liabilities:
Form 1120, Page 4, Line 21
Deferred taxes = $1,360
Determining Book Income and the Tax Provision:
Taxable income:
$32,336
Subtract nondeductible portion of meals (permanent difference)
500
3
Book income before temporary differences
Add depreciation difference
Book income before tax:
$31,836
4,000
$35,836
Tax Provision:
Tax liability: $32,336 x .15 = $4,850.
Permanent difference: $500 nondeductible meals
Temporary differences: $4,000 depreciation
Deferred tax liability: $4,000 x .34 = $1,360
Book tax expense: $4,850 current tax liability + $1,360 deferred tax liability = $6,210
Adjusting entry to books for book tax expense and tax provision:
Tax Expense
$6,210
Deferred Tax Liability
Taxes Payable
$1,360
4,850
Book income after tax: $35,836 - $6,210 = $29,626
$10,000 estimated payments - $4,850 taxes payable = $5,150 refund due
Form 1040 and Related Schedules
The Spicer’s Form 1040 is also straightforward. William’s Form W-2 prepared by the
corporation reports his salary of $200,000 and withholding income taxes of $45,000 (and FICA
withholding). Thus, William’s salary income of $200,000 is reported on line 7, Form 1040. They
include the $25,000 dividend on Schedule B with their other dividends and their interest income.
They have neither self-employment taxes nor any deduction for the health insurance premium
paid by the company. They report their $14,000 capital loss on their Schedule D. They are
allowed to deduct only $3,000 currently and they have an $11,000 capital loss carryforward.
Including these items, the Spicers have AGI of $217,800. They can now complete their Schedule
A. June is allowed to deduct 14 cents per mile for the 1,200 driven ($168) for her volunteer work
along with her out-of-pocket expenses of $232. She cannot, however, claim any child care credit
for the babysitting expenses incurred doing the volunteer work. Completing the rest of Schedule
A is straightforward except that they have to reduce their itemized deductions (by 3 percent of
AGI in excess of $137,300). After completing Schedule A, the Spicers can calculate their taxable
income by deducting their allowable itemized deductions of $23,150 and exemptions of $10,800
($3,000 x 3 x 90%) from their AGI. Their taxable income is $183,850 on which they have a tax
liability of $46,161. They are not able to benefit from the child tax credit as their AGI is too high.
After deducting William’s withholding, they owe $1,161. There is no penalty for under
withholding as their underpayment is less than 10 percent of their tax due.
Form 1040 and Related Schedules
File Name
SR1f1040return.pdf
Forms Included
Form 1040: U.S. Individual Income Tax Return
Schedule A: Itemized Deductions
Schedule B: Interest and Dividends
Schedule D: Capital Gains and Losses
4