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Prepare the 2020 corporate tax income return for J3 Manufacturing Corporation

INSTRUCTIONS TO CANDIDATES
ANSWER ALL QUESTIONS

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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