Reference no: EM13890653
Tax Return Problem-
Max Martin (SSN 111-11-1111) and Sandra Smith (SSN 987065-4321) are 60% and 40% respectively owners of Cotton, Inc. (EIN 12-3456789), a textile manufacturing company located at 1824 Church Street, Concord, NC 28025. The company was incorporated on January 1, 1998 and operated as a C corporation until January 1, 2008 when an S election was made. Below are the income statement, balance sheet, and retained earnings for financial statement purposes for the year ended December 31, 2014. Cotton, Inc. is an accrual basis taxpayer using December 31 as its taxable year. The company uses the FIFO method of accounting for inventory. Both Max and Sandra materially participate in the business and Max owns 600 shares and Sandra 400 shares.
Income Statement
Gross Sales $4,150,600
Cost of goods sold:
Beginning inventory $84,200
Direct labor 688,500
Direct materials purchased 1,574,800
Depreciation (MACRS $134,000) 112,000
Ending inventory(98,400)(2,361,100)
Gross profit 1,789,500
Expenses:
Advertising expense 27,400
Bad debt expense 18,900
Charitable contributions 30,800
Depreciation expense (MACRS $18,400) 16,000
Employee benefit programs 26,200
Interest expense 27,500
Insurance premiums-property 11,200
Insurance premiums-officers' life 5,700
Meals and entertainment 16,400
Other deductions 21,500
Penalties and fines 3,200
Pension plan expense 54,000
Rent 60,000
Repairs 9,600
Salaries and wages-employees 384,800
Salaries and wages-officers 508,000
Taxes-payroll 42,600
Taxes-property 18,4001,282,200
Income before other income $507,300
Other income:
Dividends from domestic corporations 3,800
Interest income - corporation bonds 1,200
Interest income - state & local bonds 800 5,800
Net income $513,100
Beginning retained earnings 946,600
Shareholder distributions (200,000)
Ending retained earnings $1,259,700
Balance Sheet
December 31,2013 December 31, 2014
Cash $ 248,600 $284,400
Accounts receivable 466,500 452,000
Inventories 84,200 98,400
Prepaid expenses 16,800 12,400
Machinery & Equipment 1,764,400 2,612,800
Accumulated depreciation (680,800) (808,800)
1,899,700 2,651,200
Accounts payable 366,100 384,200
Notes payable, current 58,000 158,300
Notes payable, long-term 270,000 590,000
Common stock 50,000 50,000
Paid-in capital 209,000209,000
Retained earnings 946,6001,259,700
1,899,700 2,651,200
Other information
The balance in the Accumulated Adjustments Account (AAA) at January 1, 2014 was $728,600. The shareholder distributions were made prorate to the percentage of ownership. Addresses for the Schedule K-1's are:
Max: 304 Pinehurst Ave. Concord, NC 28025.
Sandra: 500 Sandhills Dr. Concord, NC 28025
Salaries for the officers in 2015 were: Max $200,000; Sandra $308,000
Shareholder basis in Cotton, Inc. stock on January 1, 2014: Max $633,360; Sandra $422,240
Required:
Prepare the 2014 S corporation tax return, Form 1120S and all necessary schedules, including the calculation of shareholders basis in corporation stock at December 31, 2014. If any information is missing, make reasonable assumptions.