TAX RETURN PROJECT
Tax Return Instructions
Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.
Assume that MFG does not owe any alternative minimum tax.
If any information is missing, use reasonable assumptions to fill in the gaps.
In addition, you must attach supporting schedules for line items in the tax return whenever required, e.g., Line 26 of Form 1120. DO NOT complete Form 2220: Underpayment of Estimated Tax by Corporations.
2. When completing the return, round amounts to the nearest dollar (and leave the cents columns blank). Do not place zeros on lines for which there is no amount (unless the instructions tell you to do so); merely leave the line blank. You must prepare the return by hand. You must use a pencil when preparing your return; no ink, no typing, no computer-generated print.
3. You may work in a group (maximum of three persons per group), or you may prepare the return by yourself. A group should submit only one tax return.
4. Prior to turning in your return you must staple it (including supporting schedules) in the upper left-hand corner. If you prefer, you may use a binder clip rather than staple the return. Also, place your name (or names, if a group) in the upper right-hand corner. All forms and schedules must be in the correct order.
5. Please submit your project in an envelope (9” x 12” or larger). No folders. Late returns will penalized 5% each day.
Mika’s Fine Gifts, Inc., (MFG) was formed in 2007 by Rich Rones and Katie Sikes. Rich and Katie officially incorporated their store on June 12, 2008. MFG sells (retail) all kinds of fine gifts. Rich owns 60 percent of the outstanding common stock of MFG and Katie owns the remaining 40 percent.
MFG is located at 424 Winter Road, Amherst, New York 14228.
MFG’s Employer Identification Number is 31-5522119.
MFG’s business activity is retail sales of fine gifts. Its business activity code is 451140.
Officers of the corporation are as follows:
Rich is the chief executive officer and president (Social Security number 565-000-6789).
Katie is the executive vice president (Social Security number 123-22-8886).
Korey Elaire is the vice president of operations (Social Security number 789-12-3456).
John Abode is the secretary (Social Security number 321-54-6789).
All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
Neither Korey nor John owns any stock in MFG.
MFG uses the accrual method of accounting and has a calendar year-end.
MFG made four equal estimated tax payments of $70,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, MFG would like to receive a refund.
MFG paid a dividend of $80,000 to its shareholders on December 1. MFG had ample earnings and profits (E&P) to absorb the distribution.
MFG has a capital loss carryover to this year from last year in the amount of $5,000.
MFG’s inventory-related purchases during the year were $1,134,000. MFG values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to MFG.
Of the $15,000 interest income, $2,500 was from a City of Amherst bond, $3,500 was from a Lackawanna city bond, $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
MFG sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of $4,000 of book depreciation on the asset and a cumulative total of $6,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under §1245.
MFG’s dividend income came from Katco, Inc., a publicly held corporation. MFG owned 15,000 shares of the stock in Katco at the beginning of the year. This represented 15 percent of Katcos outstanding stock.
On July 22, 2016, MFG sold 2,500 shares of its Katco stock for $33,000. It had originally purchased these shares on April 24, 2012, for $25,000. After the sale, MFG owned 12.5 percent of Katco.
MFG’s compensation is as follows:
MFG wrote off $10,000 in accounts receivable as uncollectible during the year.
Regular tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.
Of the $62,000 of interest expense, $56,000 was from the mortgage on MFG’s building and the remaining $6,000 of interest is from business-related loans.
The pension expense is the same for both book and tax purposes.
Other expenses include $3,000 for premiums paid on term life insurance policies for which MFG is the beneficiary. The policies cover the lives of Rich and Katie.
MFG Income Statement
For year ending December 31, 2017
Revenue from sales
Sales returns and allowances
Cost of goods sold
Gross profit from operations
Gain from disposition of fixed assets
Bad debt expense
Meals and entertainment
State income taxes
Income before taxes
Federal income tax expense
Net Income after taxes
Allowance for doubtful accounts
U.S. government bonds
State and local bonds
Investments in stock
Building and other depreciable assets
Liabilities and Shareholders’ Equity
Other current liabilities
Total liabilities and shareholders’ equity