Corporate Tax Return Project – Ver. 1.0
You (The Paid Tax Preparer)
Your name is Gina Gonzales. You are a CPA and Senior Tax Manager in the CPA firm of G&G, LLP. Your preparer tax identification number (PTIN) is P00532784.
Your Firm (Who You Work For)
G&G’s address is 230 Waller Avenue – San Francisco, CA 94117 and its phone number is (415) 333-333. The firm’s EIN is: 30-3941936.
Your client is Dynamic Life Inc. Its address is: 1234 Evelyn Avenue – Sunnyvale, CA 94085. Its phone number is: (408) 555-5555. Dynamic Life is a seller of vitamins and various personal care items at the retail level.
Its Employer Identification Number is 59-2375331. It was incorporated in California on 02/15/1999. It is a non-publicly traded (private) corporation.
The only corporate officer authorized to sign its tax returns is Nancy Sarakinis. Her social security number is 342-10-3940 and she is a citizen of the United States. She is the President of the corporation. Nancy owns 75% of the shares of the corporation. She has owned 75% of the shares since the corporation was formed in 1999. She spent 2,465 hours working for the corporation in 2020. She was paid base wages of $1,479,000 as well as a $96,000 cash bonus in 2020 (the cash bonus was paid to her in 2020, but it related to the financial success of the corporation for 2019). She received no other bonuses or other incentive-based compensation in 2020. For years, the corporation had an employment contract in place with Nancy since she was hired back in 1999. It was the same employment contract for many years. However, the contract was completely changed, with material changes, on December 31, 2019.
Nancy’s home address is 19847 Pebble Court – Palo Alto, CA 94303. Her phone number is (510) 666-6666.
The Chief Financial Officer of the corporation is Amy Lee. She spent 2,233 hours working for the corporation in 2020. She was paid base wages of $669,900 in 2020. Amy’s social security number is 257-25-9741 and her home address is 123 Peachtree Way, Santa Clara, CA 95045. Amy owns 5% of the corporation. She obtained all of her shares back on January 1, 2016. She is also a citizen of the United States. She is also the interim Treasurer and Secretary of the corporation until they can find individuals to fill those officer positions.
Neither Nancy nor Amy worked anywhere else other than at Dynamic Life in 2020.
There are no other officers for the corporation. In addition, the only shares in the corporation are in the form of common stock. There are no preferred shares.
There is one other shareholder in the corporation: George Jassy. George owned 20% of the shares of the corporation throughout the year. He has owned the same percentage of the corporation’s stock since 2016. He is a citizen of the United States.
George’s social security number is 938-39-3927 and his home address is 1967 Chopper Way, Sunnyvale, CA 94085. His phone number is (408) 111-1111.
Dynamic Life uses the cash basis of accounting for both financial accounting and tax return purposes.
It has a December 31 year-end for both financial accounting and tax purposes.
Its 2020 financial accounting-based income statement and balance sheet starts on the following page.
2020 Income Statement
Gross sales: $12,723,250
Less: Customer returns $(119,600)
Interest (from Bank Accounts): $325
Interest on U.S. Treasury Bonds: $1,125
Interest on Waymo Corp. Bonds $852
State of California Bond Interest: $1,555
City of San Francisco, CA Bond Interest $345
Cost of Goods Sold
Inventory as of 1/1/20 of $3,265,710
Inventory purchased during 2020: $7,333,579
Inventory as of 12/31/20 of $3,530,490
[Note: All inventory figures are valued based on original cost and using the specific identification method because their computer systems can track the cost of each individual item sold. IRC Sect. 263A (UNICAP) does not apply to the corporation; there were no changes in the method of valuing inventories; and there were no write-downs of subnormal goods in 2020.]
Expenses (Other than Cost of Goods Sold)
Store Rent: $170,248
Accounting Services: $30,125
Office Supplies: $43,222
Repairs and maintenance: $11,458
Mortgage Interest Expense: $2,250
(meals: by employees, while out of town on business trips)
(travel: by employees, while out of town on business trips – includes airfare and hotels)
Charitable Contributions (cash) $33,427
Wages – Officers: $2,244,900
Wages (other employees): $739,292 2 & 3
1 Amounts paid to an outside lobbyist who went to various members of the California legislature to ask for support of legislation to relax the California rules for disclosures on bottles of vitamins. Unfortunately, no legislation was even written in 2020 by any member of the California legislature in Sacramento.
2 Three of the employees were certified by a designated local agency as being a member of a targeted WOTC group. Employee #1, Anna Lee, worked 2,500 hours for the year and was paid $55,000 in wages. She is in within the “regular” WOTC group. Employee #2, Thao Nguyen, worked 312 hours for the year and was paid $7,176 in wages. She is also in within the “regular” WOTC group. Employee #3, Yi Kim, worked 2,000 hours for the year and was paid $38,000 in wages ($3,166.67 per month) in 2020. He is certified to be in the long-term family assistance recipients WOTC category. Anna and Thao were hired and started work on January 1, 2020. Yi was hired and started work the prior year on June 1, 2019. Looking in the payroll records, Yi was paid $15,000 back in 2019.
3 One of its employees, Sarah Zheng (Social Security number 599-46-3210), was paid $3,500 in specially designated paid family leave for four weeks so she could take care of her sick mother who had a very serious health condition. Sarah’s normal salary is $1,000 per week and she has worked for the company since 2005. She earned $40,500 of
Federal and California Payroll Taxes: $213,950
Fines and Penalties $8,200
Sales taxes: $04
Gain on sale of Government Debt Investments5 $4,260
Loss on sale of corp. debt investments6 ($400)
Gain on the Sale of Business Assets7 $22,000
Gain on the exchange of real property8 $300,000
Net Income $?????? (The client was too busy to calculate this figure and they have asked you to complete this for them as a separate engagement from the preparation of the tax returns. For purposes of this project, you can simply include the financial accounting / book net income where appropriate on the 1120 tax return).
wages in the prior tax year (2019). Dynamic Life ’s family and medical leave program meets all of the requirements of IRC Sect. 45S and the guidance set forth in IRS Notice 2018-71. None of the $3,500 was paid out of Sarah’s sick time or vacation time. It was specifically paid through the terms of the company’s written family and medical leave plan. The $3,500 paid under the plan is already included in the total amount of wages paid to non-officers of the corporation for the year. Dynamic Life ’s written Family and Medical leave program/policy complies with the “non-interference” language requirement under pertinent laws.
4 Because of the COVID-19 pandemic, Dynamic Life was able to negotiate a special payment plan to defer all of the required sales tax payments to the California Department of Tax and Fee Administration (CDTFA) for 2020 until 2021.
5 Sold some of its State of California bonds on 8/1/20 for $9,460 to an unrelated party. The bonds that were sold were purchased on 12/06/17 for $5,200. Dynamic Life received an IRS Form 1099-B showing the sale of these bonds, but the tax basis of these bonds was not provided to the IRS on the 1099-B.
6 Sold some of its Waymo Corp. bonds on 10/1/20 for $800 (its fair market value) to Nancy Sarakinis. The bonds that were sold were purchased on 12/26/15 for $1,200. Dynamic Life did not receive an IRS Form 1099-B showing the sale of these bonds.
7 The $22,000 gain on the sale of business assets in 2020 refers to the sale of the mainframe computer to an unrelated party on 4/3/20 for $24,000. Dynamic Life paid a $2,000 commission expense to a broker related to the sale of the mainframe computer. See additional details on the mainframe computer in footnote #9 below.
8 See additional details in footnote #8 below.
12/31/2019 Year-End Balance Sheet
Stock in Junk Masters Corp. $50,000
U.S. Treasury Bonds $19,000
State of California Bonds $50,000
City of San Francisco, CA Bonds $10,000
Waymo Corp. Bonds $11,500
Mainframe computer (Cost)10 $95,000
Less: Accumulated Depreciation on Personal Property ($95,000)
Fixed Assets (Personal Property) – Net Book Value $0
Mortgage Payable $55,000
Common Stock $1,000,000
Retained Earnings – Unappropriated11 $7,915,465
9 While Dynamic Life rents the store in which it operates, it owned a vacant piece of property three miles away for many years. The property was used to store some of its excess store shelving after some prior store remodels. The property was originally purchased for $600,000 on 9/13/2012. The address for this property was 16 Bracket Way, Mountain View, CA 94039. On March 25, 2020, this property was exchanged with another, unrelated taxpayer, for another vacant lot that will also be used as a place to store excess store shelving.
The fair market value of the 16 Bracket Way property at the time of the exchange was $900,000.
The replacement property is located at 5888 Frys Way, Sunnyvale, CA 94085. The fair market value of the Frys Way property at the time of the exchange was $845,000. There were no expenses related to the exchange and the other party assumed the mortgage on the Frys Way property (a $55,000 liability at the time of the exchange).
10 Originally purchased for $95,000 and placed in service on 03/15/2012. Was fully depreciated for financial accounting and tax purposes prior to 2020. Sold for $24,000 on 4/3/20. This was the only fixed asset for the corporation as of 12/31/19 other than the land.
11 All retained earnings are unappropriated.
12/31/2020 Year-End Balance Sheet
Stock in Junk Masters Corp. $50,000
U.S. Treasury Stock $19,000
State of California Bonds $44,800
City of San Francisco, CA Bonds $10,000
Waymo Corp. Bonds $10,300
Pre-Paid Federal Inc. Tax13 $400,000
New Xerox Copier (Cost) 14 $45,000
Less: Accumulated Depreciation ($5,000)
New Office Furniture Set for Amy (Cost)15 $7,000
Less: Accumulated Depreciation ($700)
New Mainframe Computer16 $10,000
Less: Accumulated Depreciation ($1,000)
12 The client was too busy to calculate this figure and they have asked you to complete this for them as a separate engagement from the preparation of the tax returns. For purposes of this project you can simply list the amount of year-end cash where applicable on the 1120 tax return.
13 2020 Federal estimated taxes were paid in 2020. They were paid in four installments as follows: $100,000 on 4/11/20; $100,000 on 6/14/20; $100,000 on 9/13/20 and $100,000 on 12/13/20.
14 Purchased and placed in service on 5/04/20. Dynamic Life elects to take the maximum cost recovery on this asset in 2020 under IRC Sect 179.
15 Purchased and placed in service on 7/4/20.
16 Purchased and placed in service on 4/1/20. Dynamic Life elects out of any first-year bonus depreciation, if any, on this asset.
Fixed Assets (Personal Property) – Net Book Value $55,300
Common Stock $ 1,000,000
Retained Earnings – Unappropriated ??????17
1) After completing the few items that Dynamic Life was not able to provide to you in its prepared draft financial statements, using only the blank forms available at: www.IRS.gov, prepare Dynamic Life ’s Federal income tax return (Form 1120) for the 2020 Tax Year – including the following schedules and forms (you must attach these forms in the required order as detailed by the IRS):
● Schedule D
● Form 1125-A
● Schedule G
● Form 1125-E
● Form 3800
● Form 4562
● Form 4797
● Form 5884
● Form 7004 (Extension to File)
● Form 8824
● Form 8949
● Form 8994
● Schedule M-3 (Part I only)
17 The client was too busy to calculate this figure and they have asked you to complete this for them as a separate engagement from the preparation of the tax returns. For purposes of this project you can simply list the amount of unappropriated retained earnings where applicable on the 1120 tax return.
Note: See item #3 below regarding information returns that will also be required as part of this project.
2) For any part of the tax return where a statement is required, you must attach a statement to the end of the tax return as the last attachment to the 1120 return (before the information returns) – with a reference to what form and line of the return it applies to, as well as the name of the taxpayer and the EIN of the taxpayer on the top of each statement page.
3) VERY IMPORTANT – YOUR SUBMITTED PROJECT WILL ALSO INCLUDE FORM 1099-SERIES FORMS.
For the 1099-series forms that you will turn in, you only need to complete the IRS copy (you do not need to complete all of the 1099 copies) of these 1099-series forms and attach them at the very end of the submitted return project. Also, prepare and complete the IRS Form(s) 1096 as well. At most, the different types of 1099-series forms that you will need to complete and turn in are: Forms 1099-NEC; Form 1099-MISC and Form 1099-DIV (all available at www.IRS.gov). Make sure to have the proper tax year for these forms.
-> YOU WILL ALSO NEED TO PREPARE AND INCLUDE FORM 8809 – the extension to file information returns. Use the date on Form 8809 that was the last day to file the extension on time (hint: it was sometime earlier in 2021).
4) All of the repairs and maintenance services were performed to Dynamic Life by another corporation (Repairs R Us, Inc. – 578 Culture Drive, Sunnyvale, CA 94085; EIN – 77-1581297; Phone (408) 555-5556.
5) The entertainment expenses were for tickets for the San Jose Jammers CBA basketball team. Dynamic Life took out its biggest clients and vendors to discuss business matters at all of the games.
6) In addition to signing the tax return as the paid preparer, for purposes of this project also actually sign the return as the taxpayer (keeping in mind you would not do this in real practice).
7) You do not need to prepare any payroll tax returns or forms (such as the W-2 or W-3) for the client (Amy handles the payroll tax returns herself for the corporation).
Other Important Items:
1) The landlord for the warehouse that Dynamic Life rents is Dane Iorg. Dane’s address is 9057 Jay Way, Menlo Park, CA 94025. His tax ID is 20-1484863 and his phone number is (650) 555-8888.
2) All the amounts paid in 2020 for accounting services were paid to G&G, LLP.
3) Dynamic Life Corporation is not a subsidiary in an affiliated group or a parent-subsidiary group.
4) Dynamic Life Corp. purchased 10,000 shares in Junk Masters Corporation, a U.S.-based corporation that specializes in the management of junkyards on July 1, 2017 for $50,000. Junk Masters Corp. had 99,500 shares outstanding throughout 2020. On October 31, 2020, Dynamic Life received a $160,000 dividend check from Junk Masters Corporation. Junk Masters Corporation’s Employer Identification Number is 77-2573648.
5) The three shareholders in Dynamic Life Inc. had the same ownership in the corporation throughout the year.
6) Dynamic Life has a $16,500 NOL carryover into the 2020 tax year.
7) For Schedule K of Form 1120, you are given that the answers to question nos. 14, 17, 18, 19, 20, 21, 23, 25 and 26 are “no” and the checkbox to no. 8 is to be unchecked.
8) Your client has asked you to file the return with the fewest number of required schedules filled-out on the 1120 form as legally possible.
9) $100,000 of cash distributions from Dynamic Life Corp. were made in 2020. Each of the three shareholders received cash distributions based on their
percentage ownership in the corporation. All cash distributions were paid on December 30, 2020.
10) On 2/15/1999, the corporation issued common stock to its original shareholders for $1,000,000.
11) If there is an amount due for the year on the 1120, the client (as a corporation) will need to pay the IRS electronically (i.e., not via check).
However, for purposes of this tax return project, if tax is due for the year you do not need to prepare any payment documentation – simply show the amount due on the appropriate line(s) of the 1120 tax return accordingly. Also, if tax is due for the year, you do not need to calculate any penalties or interest – just the base tax due.
On the other hand, if there is a refund due to the client on the 1120 tax return for the year, the client wants to receive the refund in the form of a check (i.e. they do not want any portion of the refund credited to next year’s Federal income taxes).
12) All amounts contributed to charitable organizations for the year were made in cash, all of the charities were IRS-qualified charities, and the charities all provided the client with the required documentation in a timely manner.
13) All wages paid to shareholders are ordinary, necessary and reasonable in amount, with none being disguised dividends.
14) All expenses – including wages paid to shareholders – are ordinary, necessary, and reasonable, with none being disguised dividends.
15) None of the entertainment expenses were lavish or extravagant.
16) None of the wages are includable in cost of goods sold.
17) All of the corporate bonds that were owned either at the beginning of the year or at the end of the year mature more than five years after the end of the 2020 tax year and the client did not expect to sell them or convert any of them into cash until they mature. The small sale of corporate bonds in 2020 was unexpected and it was not easy to sell these particular bonds as they were not readily traded on an exchange (they were not liquid assets that were readily convertible into cash).
18) For Schedule K of Form 1120, you are given that the answers to question nos. 14, 17, 18, 19, 20, 21, 22, 23, and 25 are “No” and the checkbox to no. 8 is to be unchecked. Mark “No” for question no. 24 of Schedule K.
19) For Schedule J, you can skip lines 3; 5a; 5b; 5d; 5e; 9a-9g; 10; 12; 13; 15; 17; 18; 20a-20d; 21and 22. Any other parts that are applicable in Schedule J must be completed. For a non-skip line in Schedule J, you will need to determine if a figure goes on that line. There is a possibility that at least one non-skip line in Schedule J is still not applicable. If not applicable, simply put “0” for that line.
20) For Form 3800, you skip: all of Part I (but put down “0” for line 6); Lines 10a-c, 18-26 and 31-35 of Part II
21) Since its formation, Dynamic Life has never had annual gross income of more than $20 million per year.
22) Your client allows you to discuss its tax return with the IRS.
Final Project Notes:
1) VERY IMPORTANT: Your group must e-mail an electronic copy of the project to me by the due date and time (at the beginning of class) either through Canvas or at: [email protected]
2) Please have the group member names included in the e-mailed submission.
3) VERY IMPORTANT – You are to only work on this project only with your fellow group members.
4) Late submissions (after the beginning of class on Tuesday, 5/4) of the project are subject to a significant reduction of points.
5) A peer-review report will be required for the project. You can complete the return directly to me after the due date for the project (do not send to your other group members)- but no later than by Tuesday, 5/11.
6) Finally, EACH MEMBER MUST INDIVIDUALLY E-MAIL ME THROUGH CANVAS AND DESCRIBE, IN A FEW SENTENCES, DETAILS OF YOUR SPECIFIC CONTRIBUTIONS TO THE PROJECT by Tuesday, 5/11.
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