Tax Return: S Corporation
Instructions:
Please complete the 2019 tax return for Modern Day Clothing, Inc. based upon the facts presented below. Most of the return is done but another staff accountant was working on it and had a family emergency. Prepare the 1120 S, Schedule ?K, M-2 and Taylor K-1 and Williams K-1???????????. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore any Alternative Minimum Tax (AMT) calculations or reporting.
Modern Day Clothing, Inc. (MD) is organized as a corporation in the state of North Carolina and is taxed as an “S” corporation with a calendar-year end (additional information about MD can be found in the table below). MD operates four small boutique clothing outlet stores (family clothing stores) in the North Carolina cities of Charlotte, Durham, Raleigh, and Winston-Salem.
| Name | Address (has not changed since inception) | Employer IdentificationNumber | Date Incorporated | S Election Effective Date | Shares Issued andOutstanding |
| Modern Day Clothing, Inc. | 1515 North Lincoln Highway Charlotte, NC 28201 | 14-2953556 | February 2, 2002 | January 1, 2018 | 10,000commonshares |
MD is owned by four unrelated shareholders (shareholder-specific information is provided in the table below). There were no stock transfers or changes in stock ownership during the current tax year.
| Name | Address | Social SecurityNumber | SharesOwned | Officer Title | 2019 OfficerCompensation |
| JenniferLyons | 85 Shady ElmCharlotte, NC 28201 | 524-31-3493 | 4,300 | Chief ExecutiveOfficer | $112,000 |
| RobertNewberry | RD Route 843Rural Hall, NC 27045 | 482-26-5241 | 2,300 | Chief FinancialOfficer | $90,000 |
| LamarTaylor | 35 S. Main StreetMt. Airy, NC 27030 | 545-16-4239 | 2,200 | Chief OperatingOfficer | $80,000 |
| LacreciaWilliams | 9851 Old Colonial HighwayCharlotte, NC 28201 | 429-82-9384 | 1,200 | Not an officer | N/A |
MD was taxed as a C corporation from inception through the S election effective date. The table below provides pertinent account balances as of December 31, 2018 for MD:
| Description | 12/31/2018 Balance |
| Net unrecognized built-in gain (NUBIG)* | $400,000 |
| Accumulated earnings and profits | $500,000 |
| Accumulated adjustments account | $125,000 |
| Other adjustments account | $17,000 |
*NUBIG was entirely attributable to unimproved land that MD originally purchased for $250,000 on June 16, 2003. The land was held by MD as an investment asset only and was not connected with its clothing business. On August 1, 2019, MD sold the unimproved land for $850,000 (net of selling commissions).
MD did not receive a Form 1099-B reflecting the sale.
Additional information:
· None of the expenses incurred by MD during the year relate to the production or carrying of the tax-exempt securities held in portfolio. The tax-exempt securities are maintained in a separate brokerage account distinct from otherholdings.
· MD values its inventory at cost and has always used the specific identification method for reporting purposes. The company has never written down inventory for any reason and the rules of Section 263A (UNICAP) do not apply toMD.
· MD leases all its realproperty.
· On December 1, 2019, MD made a pro rata distribution to all common stockholders,totaling
$794,400.
· On July 1, 2019, MD purchased $640,000 of new office equipment (5-year MACRS property) that it used to expand its Charlotte store. Excluding the $640,000 of 2019 additions, MD’s regular and AMT tax depreciation for the current year is $275,000. MD desires to maximize its current year cost recovery deductions related to the 2019additions.
· Other than the unimproved land, MD did not dispose of any assets during theyear.
· MD maintains a life insurance policy on the life of the CEO, Jennifer Lyons. MD is the beneficiary of thatpolicy.
· During the current year, MD contributed $32,000 in cash to the Red Cross to assist with hurricane disaster clean-up in the North Carolinaarea.
· MD reports employee compensation amounts that remained unpaid at year-end in Accrued Employee Wages, Accrued Officer Bonuses and Accrued Employee Vacation on the balance sheet, as applicable. The table below provides a summary of the balances in these accounts for December 31, 2018 and2019.
| Balance Sheet Date | Account Description | Account Balance | Applicable Employees | Payment Amount | Payment Date |
| 12/31/2018 | Accrued Employee Wages | $27,000 | All employees (including officers) | $27,000 | 01/15/2019 |
| 12/31/2018 | Accrued Officer Bonuses | $110,000 | Officers only | $110,000 | 07/01/2019 |
| 12/31/2018 | Accrued Employee Vacation | $19,000 | Non-officer employees | $3,000 | Thru 03/15/2019 |
| 12/31/2019 | Accrued Employee Wages | $31,000 | All employees (including officers) | $31,000 | 01/15/2020 |
| 12/31/2019 | Accrued Officer Bonuses | $145,000 | Officers only | $145,000 | 07/01/2020 |
| 12/31/2019 | Accrued Employee Vacation | $21,000 | Non-officer employees | $9,000 | Thru 03/15/2020 |
· MD made the following Federal and North Carolina estimated income tax payments on April 15th, June 15th, September 15th and December 15th,2019:
o Federal: $21,000 each quarter, $84,000 for the 2019 taxyear
o North Carolina: $5,000 each quarter, $20,000 for the 2018 taxyear
Supplementary Details:
· MD uses the accrual method ofaccounting.
· MD is not a subsidiary nor is it in an affiliated group with any otherentity.
· MDdoesnotowndirectly20%,or,directlyandindirectly,20%ormoreofanyotherentity (including corporations orpartnerships).
· MD has never issued any restrictive stock or publicly traded debt nor been required to file a Form8918.
· MD’s average annual gross receipts have never exceeded$26,000,000.
· MD did not have any non-shareholder debt that was cancelled or was forgiven nor had the terms modified so as to reduce the principal amount of the debt during the taxyear.
· MD has never made nor caused to be made a qualified subchapter S subsidiary election(Qsub).
· MD has never caused a Qsub election to be revoked orterminated.
· MD made payments in the current year that required the filing of Forms 1099. All Forms 1099 were filedtimely.
· MD’s activities all represent qualified trades or businesses, and none constitute a specified trade or business. MD paid $723,000 in W-2 wages in2019.
· MD’s original, unadjusted basis in all its assets is consistent with historical cost on the balance sheet.
· MD’s three officers devoted 100% of their time to thecompany.
| Financial Statements (kept on a GAAP basis):Modern Day Clothing, Inc.Balance Sheet | ||
| Assets: | 12/31/2018 | 12/31/2019 |
| Cash | $ 340,000 | $ 496,6000 |
| Accounts Receivable-Credit Cards | 205,000 | 232,000 |
| Accounts Receivable-Trade | 63,000 | 58,000 |
| Less: Allowance for Bad Debts | (13,000) | (11,500) |
| Inventory | 2,908,000 | 3,010,000 |
| Tax-exempt Securities | 100,000 | 100,000 |
| U.S. Treasury Bonds | 200,000 | 200,000 |
| Fixed Assets | 4,010,000 | 4,650,000 |
| Less: Acc. Depreciation | (2,875,000) | (3,055,000) |
| Land-Unimproved (tax and GAAP basis) | 250,000 | 0 |
| PrepaidRent 165,000 168,000 | ||
| Total Assets: | $5,353,000 | $5,848,100 |
| Liabilities and Shareholders’ Equity: Accounts Payable | 99,000 | 93,000 |
| Accrued Employee Wages | 27,000 | 31,000 |
| Accrued Officer Bonuses | 110,000 | 145,000 |
| Accrued Employee Vacation | 19,000 | 21,000 |
| Note Payable-First Bank of NC (Credit Line) | 536,000 | 812,000 |
| Note Payable-First Bank of Charlotte | 3,655,000 | 3,139,750 |
| Capital Stock | 1,000 | 1,000 |
| Additional paid-in Capital | 99,000 | 99,000 |
| RetainedEarnings 807,000 1,506,350 |
Total Liabilities andShareholders’Equity $5,353,000 $5,848,100
Income Statement for the year ending December 31, 2019
Item AmountIncome:
| Gross Sales | $8,936,500 |
| Less: Returns | (354,000) |
| Net Sales | 8,582,500 |
| Cost of Goods Sold | (4,910,500) |
| Gross Profit | 3,672,000 |
| Gain on Sale of Unimproved Land | 600,000 |
| Interest Income -Bank | 3,750 |
| Interest Income-U.S. Gov’t | 6,000 |
| Municipal Bond Interest Income | 2,650 |
| Total Income: | $4,284,400 |
| Expenses: | |
| Officer Salaries | $317,000 |
| Employee Salaries | 437,000 |
| Repairs and Maintenance | 12,600 |
| Bad Debts | 22,000 |
| Rent | 765,000 |
| Payroll Taxes | 84,500 |
| Licensing Fees | 10,750 |
| Property Taxes | 12,500 |
| Interest Expense | 175,500 |
| Depreciation | 180,000 |
| Office Supplies | 5,300 |
| Employee Training | 13,750 |
| Key employee Insurance | 12,000 |
| Advertising | 58,500 |
| Employee Benefit Programs | 133,000 |
| Meals and Entertainment | 3,750 |
| Travel | 8,500 |
| Charitable Contribution | 32,000 |
| Federal Income Taxes (built-in gains tax) | 84,000 |
| State Income Taxes (built-in gain tax) | 20,000 |
| Insurance | 18,000 |
| Utilities | 243,000 |
| Telephone | 142,000 |
| Total Expenses: | $2,790,650 |
| Net Income (Loss): | $1,493,750 |
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