1. Project 3: Corporate Taxation
  2. Introduction:

For next weeks, you will be assigned to one client, Mike’s Sporting Goods. All of the information you need to provide Mike with exceptional tax preparation services will be provided to you separate emails (Appendices below).

My expectations regarding this task in the Corporate Taxation Department are also provided below. Please don’t hesitate to get in touch if you run into any problems. I am here to help you succeed here at Tax Pros CPA Firm.

  1. Steps to Completion:

Research Tax Topics

Step 1: Review:

Read through all of the appendices (A-G) below. As you read through the information about the client, keep in mind all you have learned so far.

Step 2: Research:

On the IRS Website, find and print the most recent Form 1120 and instruction.

Step 3: Complete Form 1120 (and all accompanying forms) for

Mike’s Sporting Goods, for the most recent completed year (e.g., if you are taking the course in 2019, assume you are doing it for 2018, and use 2018 forms, etc.). NOTE: To complete Form 1120, you will be required to complete other forms. See IV. Deliverables below for a list

See Appendix A – G

Step 4: ProConnect Tax Software

Enter all of the client information included in Appendix A – G in ProConnect.

IV. Deliverables:

  • Form 1120
  • Schedule G
  • Form 1125-E
  • Form 5884
  • Schedule D: Net Long-Term Capital Gains or Losses
  • Form 8949: Totals for Proceeds, Basis, & Gain/Loss
  • Form 1125-A: Total for Cost of Goods Sold
  • Form 3800: General Business Credit: Credit Allowed for the Current Year
  • ProConnect Tax Software tax forms

Make sure you include all schedules that the forms ask for, including

any working papers for any calculations.

V. Hints and Tips:

  • Ask your supervisor (professor) questions as needed.
  • Submit the project before it is due.

VI. Rubric:

Criteria

Exceeds Performance Expectations
30 points

Meets Performance Expectations
26.67 points

Does Not Meet Performance Expectations
0 points

Correct Forms

The correct forms are used, easy to read and understand. Anything requiring labeling are properly labeled. The work has a professional appearance.

The correct forms are used, mostly easy to read and understand. Anything requiring labeling are properly labeled. The work has a somewhat professional appearance.

The correct forms are not used and/or are not easy to read and understand. Proper labels missing. The work appeared unprofessional. Or did not submit.

Accuracy of numbers

All numbers on the are accurate and in the correct place.

Most of the numbers on the work are accurate and in the correct place.

Most of the numbers on the work are inaccurate and/or are in the wrong place. Or did not submit.

Understanding of Topic

Indicates an exceptional understanding of the topic, connecting it with our readings or other sources.

Indicates a satisfactory understanding of the topic.

Indicates a limited understanding of the topic, reflecting what other students have already posted or repeating information that was in the assigned reading. Or did not submit.

Overall Score

Exceeds Performance Expectations
90 or more

Meets Performance Expectations
80 or more

Does Not Meet Performance Expectations
0 or more

Appendix A: Client General Information

As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike’s Sporting Goods, Inc. for the most recently completed calendar year (the company uses a calendar year for tax filing).

Mike’s Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports. Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college.

Starting the company was Mike’s idea, he owns the largest percentage of stock, and is the only owner who works in the business. The other three investors brought money to the table, but never planned on working in the sporting goods store. Therefore, no one questioned Mike when he suggested naming the corporation Mike’s Sporting Goods, Inc. In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation.

Location
As the old saying goes, Location, location, location. Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses. After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts. As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent.

The building was built just a few years ago, so minimal expense was projected for maintenance and repairs. For last year, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott.

Corporate investments
For last year, Mike’s Sporting Goods, Inc. received the following investment income:

  • Interest from its own Accounts Receivables = $1,500
  • Interest from corporate bonds = $4,000
  • Interest from tax-exempt state bonds = $5,000
  • Dividends from various U.S. corporations = $10,000
    • Mike’s Sporting Goods, Inc. owns 20% of the stock of one corporation

Since Mike’s Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2.

Year-end 20X5, includes a $3,600 capital loss from the sale of securities.

Revenue from Sales
The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,010,000 in gross sales in 20X5. Just less than 1% of gross sales were returned, thus bringing net sales to $1,990,000. Thanks to Mike’s purchasing savvy, cost of goods sold was $1,520,000, which is less than the industry standard of 80% of sales.

Other Expenses:

Advertising
While the stockholders had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development.

Bad debt expense
The corporation uses the specific account write off method for uncollectible accounts receivable. A total of $1,600 in accounts receivable were written off in 20X5.

Charitable contributions
During the year, Mike’s Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund.

Depreciation

On Line 8(a) of the Schedule M of the 1120, Mike’s Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation’s books.

Total depreciation from Form 4562 (not illustrated) is $17,600. $12,400 is included as cost of goods sold in Line 5 of the Form 1125-A. Enter the balance of $5,200 on line 20. Book Depreciation is $15,980.

Interest expense:
Mike’s Sporting Goods incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up. Elroy is a securities broker with a national brokerage firm therefore he handles all corporate investments. For last year, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.

Salaries
When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow. Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders. Thereby, total officers’ salaries will be $70,000 per year for the first five years. Hint: use Schedule E.

Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales. Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC. Their goal was to keep wages below $50,000 per year. For last year, Mike managed to keep total wages at $44,000.

All other expenses
All other expenses of operating Mike’s Sporting Goods, Inc. total $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return.

Taxes and credits
Taxes:

At December 31, of last year, the corporation had $55,387 in accrued federal income taxes.

Mike’s Sporting Goods made four estimated tax payments totaling $69,711 as follows:

  • $17,280 on April 15 of last year
  • $17,280 on June 15 of last year
  • $17,280 on September 15 of last year
  • $17,871 on January 15 of the current calendar year as an estimate for last year’s tax liability.

See the cancelled checks in Appendix F.

Tax Credits:

The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs. Given the high unemployment rate of college students, Mike’s Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit based on 24,000 hours of work. Hint: use Form 5884. The credit will then carry over to the Schedule J of the 1120.

Reconciling Book to Return:

Mike’s Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books:

Premiums paid on term life insurance on corporate officers

$9,500

Interest paid to purchase tax-exempt state bonds

850

Nondeductible contributions

500

Reduction of salaries by work opportunity credit

6,000

Total

$16,850

Deductible state and local taxes (not federal income tax) totaled $15,000

If Mike’s Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes.

Appendix B: Corporate Ownership Information

Corporate Name

Mike’s Sporting Goods, Inc.

Social Security #

Ownership %

Corporate Address

422 Bruce Lane

Annapolis, MD 21401

Federal Tax ID

52-9746858

Corporate officers:

President/CEO

Michael S. Duke

585-11-4711

40%

Vice President

Juan Delaross

247-88-7896

20%

Treasurer

Elroy Mulcane

585-85-1212

20%

Secretary

Scott Barnett

555-11-4741

20%

Appendix C: List of select Accounts and Balances per Book

Partial Trial Balance of Revenues and Expenses per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120. Hint: You will need these items to prepare Schedule M of the 1120.

Account

Debit

Credit

Advertising

8,700

Bad debts

1,600

Charitable Contributions to Not-for-Profit organizations

24,000

Charitable Contributions to political campaigns

500

Compensation of officers

70,000

Cost of goods sold

1,520,000

Depreciation–indirect

3,580

Dividends received

10,000

Federal income tax accrued

55,387

Interest expense on note to buy tax-exempt state bonds

850

Interest expense on note to buy corporate bonds

27,200

Interest income on tax exempt state bonds

5,000

Interest income on taxable corporate bonds

5,500

Loss on securities

3,600

Maintenance and Repairs

800

Net income per books after tax

147,783

Other expenses of operations

78,300

Premiums on life insurance

9,500

Proceeds from life insurance

9,500

Rental expense

9,200

Salaries and wages–indirect

44,000

Sales – gross

$2,010,000

Sales returns and allowances

20,000

Taxes

15,000

Total

$2,040,000

$2,040,000

Appendix D: Income Statement per Books

Income Statement per Book (financial, not tax)

Mike’s Sporting Goods, Inc.

Income Statement (per Books)

Revenue:

Gross sales

$ 2,010,000

Less: Returns & allowances

20,000

Net sales

1,990,000

Cost of goods sold

1,520,000

Gross Margin

470,000

Operating expenses:

Advertising

8,700

Bad debt

1,600

Charitable contributions:

Deductible

24,000

Non-deductible

500

24,500

Depreciation

3,580

Equipment rental

9,200

Life insurance

9,500

Maintenance & repairs

800

Officers compensation

70,000

Salaries and wages

44,000

Total operating expenses

171,880

Operating Income

298,120

Other revenue and gains:

Dividend income

10,000

Interest income: Maryland bonds

5,000

Interest income: All other bonds

5,500

Proceeds from life insurance

9,500

Total other revenue and gains

30,000

Other expenses and losses:

Accrued federal income taxes

55,387

Other operating expenses

78,300

Loss on investments

3,600

Total other expenses and losses

137,287

Total income before interest and taxes

190,833

Interest expense on note to purchase tax-exempt bonds

850

Interest expense on all other notes

27,200

28,050

Income before tax

162,783

Less: Income tax

15,000

Net income per books after tax

147,783

Appendix E:

Mike’s Sporting Goods, Inc.

Balance Sheet per Books

As of December 31, of Previous Two Completed Years

Two Years Previous

Last Year

Assets

Cash

14,700

28,331

Accounts receivable (net)

98,400

103,700

Inventory

126,000

298,400

Tax-exempt securities

100,000

120,000

Other current assets

26,300

17,266

Other investments

100,000

80,000

Buildings

272,400

296,700

Accumulated depreciation

88,300

184,100

104,280

192,420

Land

20,000

20,000

Other assets

14,800

19,300

Total assets

684,300

879,417

Liabilities & Stockholder’s Equity

Accounts payable

28,500

34,834

Notes payable (short term)

4,300

4,300

Other current liabilities

6,800

7,400

Notes payable (long term)

176,700

264,100

Stockholder’s Equity

Common stock

200,000

200,000

Retained earnings: Appropriated

30,000

40,000

Retained earnings: Unappropriated

238,000

328,783

Total liabilities & Stockholder’s equity

684,300

879,417

Appendix F: General Ledger: Retained Earnings (T-acct)

General Ledger

Retained Earnings Account

Explanations:

Debits

Credits

Explanations:

Contingencies

10,000

238,000

Beg balance

Accrued income tax

55,387

203,170

Net Income before tax

Dividends paid

65,000

18,000

Income tax refund

Ending balance

328,783

Appendix G: Canceled checks

16

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