On December 31, 2019, Jeff, John and James formed J3 Manufacturing Corp, a corporation created under the laws of the State of New York, for the principal purpose of manufacturing and distributing custom designed bikes. The company is authorized to issue 1000 shares of $1.00 par value common stock. Jeff, John, and James contributed the following property and each received 250 shares of $1.00 par value common stock. Jeff, John, and James elected themselves as officers of the J3 Mfg Corp and each received a salary of $250,000 for the tax year ending December 31, 2020.
1. Jeff FMV Adj. Basis
* Building $2,700,000 $1,250,000
* Land 300,000 230,000
*Mortgage (Debt) 800,000 800,000
2. John
* Inventory
975,000
450,000
* Account Receivables 825,000 825,000
* Accounts Payable 200,000 200,000
* NYS Muni Bonds (4.5%, FV= $650,000) 600,000 565,000
3. James
* Cash
1,200,000
1,200,000
* 36,500 shares JPM Chase (acq. 01/01/19) 1,000,000 450,000
The company adopted a calendar year and is an accrual basis taxpayer. For the tax year ending December 31, 2020, the company had the following activity:
Sales $ 9,772,360
Inventory purchases 3,140,000
Ending Inventory 962,000
Dividend income from a 1% owned Company 285,000
Interest received on Muni Bonds 29,250
Interest Income – Money Market 6,500
Officer’s compensation 750,000
Supplies 192,000
Telephone expense 34,440
Meals and Entertainment 24,120
Employee salaries 860,000
Marketing 290,000
Travel 122,000
Utilities 29,000
Insurance 28,770
Repairs & Maintenance 22,415
Interest Expense 89,520
Employment benefits 85,000
Payroll taxes 57,375
Employee bonus accrual paid 3/14/2021 220,000
Officer’s Life Insurance 55,000
Purchased New Truck 132,000
Purchased New Equipment 216,000
Made improvements to building 305,000
Contribution to Cancer Research Foundation 400,000
Recorded a reserve for Bad Debts 80,000
Bad debt right-off 98,000
Book Depreciation:
* Building 16,190
* Equipment 70,000
* Truck 21,000
* Improvements 14,000
Federal Income Tax (accrued) 280,000
State Income Tax (accrued) 150,000
Book Income ?????
Paid distribution to each shareholders on 12/15/2020 100,000
Miscellaneous: The company elected to take the maximum §179 on the new equipment. The three officers devote 100% of their time to the business. [EIN: 22-3658908]. The bonus accrual is not included in employee salaries. The stock in JP Morgan represents less than 1% of JP’s outstanding stock.
a. Prepare the 2020 corporate tax income return for J3 Manufacturing Corporation;
b. Calculate earnings & profits and determine tax effect of distribution to shareholders. Assume E&P depreciation is the same as book depreciation;
c. Prepare an excel worksheet showing J3’s basis in assets contributed at December 31, 2019;
d. Prepare an excel worksheet showing shareholder’s basis in stock at December 31, 2019, and December 31, 2020.
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