CORPORATE TAX
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Memo: Whomever
Date: A few minutes ago ¡
From: Maire, Advanced Federal Taxation P.C.
Re: 2007 Tax Return for New Client
I received a call late last night from a prospective new client: Sunset Surfing, Inc. If we impress them ¨C one way or the other -- they likely will tell people about us. They even went out of the way to come by my office very early this morning before a breakfast meeting.
The information they gave me is summarized in Corporations, S Corporation, and Partnerships Practice Sets beginning on page 1. Note that this is the information they gathered for their 2006 tax return, which was filed on time by their last accountant. They have been too busy to get us a copy of the last return.
They gave me this information because they did pretty much the same in 2007 as in 2006. Also, they could give me nothing else -- no previous returns or current information -- because everything was on Jared¡¯s laptop and the hard drive crashed on the flight into L.A. yesterday.
They asked me to prepare 2007 tax return based on the information provided and gave me 20 questions. You are to provide me with the answers to the 20 questions.
They want the answers to the questions as soon as possible.
Prepare the Corporate Return (Form 1120) for Sunset Surfing, Inc. and give the amount for each of the following line items.
1. Gross Profit (line 3) ______________
2. Dividends (line 4) ______________
3. Total Income (line 11) ______________
4. Charitable Contribution (line 19) ___ ____
5. Depreciation (line 20) _$172,204_given___
6. Total Deductions (line 27) _______________
7. Special Deductions (line 29b) ______________
8. Taxable Income (line 30) ______________
9. Total Tax (line 31) ______________
10. Tax due (line 34) ______________
11. Overpayment (line 35) ______________
12. Waterman Compensation Sch. E) ______________
13. Method of Accounting (Sch. K, line 1) ______________
14. Tax Exempt Interest Rec (Sch. K line 9) ______________
15. Total Assets at Yearend (Schedule L) ______________
16. Year end Unappropriated
Retained Earnings (Sch L) ______________
17. Net Income (loss) per books (Sch M-1) ______________
18. Beginning Unappropriated
Retained Earnings (Sch. M-2,line 1) ______________
19. Distributions (Schedule M-2, line 5) ______________
20. Ending Unappropriated
Retained Earnings (Schedule M-2 line 8) _$512,272__given_
To prepare the Corporate Return (Form 1120) for Sunset Surfing, Inc. and find the amounts for each of the line items, you will need the relevant information. The information provided for the 2006 tax return can be used as a basis for the 2007 tax return since they did pretty much the same in both years.
However, there are some missing pieces of information, such as the previous returns and current information, as they were on Jared's laptop and the hard drive crashed. Therefore, you will have to make some assumptions and fill in missing information.
To find the answers to the 20 questions, you will need to follow these steps:
1. Start by calculating the Gross Profit (line 3). This can be calculated by subtracting the Cost of Goods Sold (COGS) from the Net Sales. The COGS information might be available in the information provided. If not, you will have to make an assumption or estimate.
2. Calculate the Dividends (line 4). This can be calculated based on the information provided regarding any dividends paid or received by Sunset Surfing, Inc. during the year.
3. Determine the Total Income (line 11). This is the sum of all the incomes earned by the company during the year, including the Gross Profit, dividends, and any other sources of income.
4. Find the Charitable Contribution (line 19). This should be the amount contributed by Sunset Surfing, Inc. to qualified charitable organizations during the year. This information might be available in the provided information.
5. The Depreciation (line 20) seems to be given as $172,204. If this is the correct amount, you can use this figure for line 20. Otherwise, you will need to calculate the depreciation based on the assets and their respective depreciation schedules.
6. Calculate the Total Deductions (line 27). This should include all allowable deductions for the company, such as salaries, rent, utilities, and any other business expenses. This information should be available in the provided information.
7. Determine the Special Deductions (line 29b). These are specific deductions that might apply to Sunset Surfing, Inc. based on their industry or specific circumstances.
8. Calculate the Taxable Income (line 30). This is the Total Income minus the Total Deductions and Special Deductions.
9. Find the Total Tax (line 31). This can be calculated based on the Taxable Income using the applicable corporate tax rate for the year.
10. Calculate the Tax Due (line 34). This is the Total Tax minus any credits or estimated tax payments made by Sunset Surfing, Inc.
11. Determine the Overpayment (line 35). If the Total Tax is less than the Tax Due, there is an overpayment that might be refunded or applied to future tax liabilities.
12. The Waterman Compensation (Sch. E) is not specified in the provided information. You will need to determine the compensation of Waterman based on available salary information or assumptions.
13. Find the Method of Accounting (Sch. K, line 1). This should be the accounting method used by Sunset Surfing, Inc., such as cash or accrual basis.
14. Determine the Tax Exempt Interest Rec (Sch. K line 9). This should be the amount of tax-exempt interest received by Sunset Surfing, Inc. during the year.
15. Calculate the Total Assets at Yearend (Schedule L). This should be the total value of all assets owned by Sunset Surfing, Inc. at the end of the year.
16. Find the Year-end Unappropriated Retained Earnings (Sch. L). This should be the accumulated profits of the company that have not been distributed as dividends or allocated for other purposes at the end of the year.
17. Calculate the Net Income (loss) per books (Sch M-1). This should be the net income or loss reported by the company in its books and records.
18. Find the Beginning Unappropriated Retained Earnings (Sch. M-2, line 1). This should be the retained earnings balance from the previous year.
19. Determine the Distributions (Schedule M-2, line 5). This should be the amount of distributions made by Sunset Surfing, Inc. to its owners or shareholders during the year.
20. The Ending Unappropriated Retained Earnings (Schedule M-2, line 8) is given as $512,272. If this is the correct amount, you can use this figure for line 20. Otherwise, you will need to calculate the ending balance of unappropriated retained earnings based on the beginning balance, net income (loss) per books, distributions, and any other adjustments.
By following these steps and using the available information, you should be able to fill in the amounts for each of the line items on the Corporate Return (Form 1120) for Sunset Surfing, Inc.