Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

Drs. Bailey and Firth formed the corporation on January 1, 2015, and the corporation immediately elected S corporation status effective at the beginning of 2015.

 Upon the formation of the corporation, Dr. Bailey received common stock worth $600,000, and Dr. Firth received common stock worth $1.4 million.

 The balance sheet  information is the same as in Table C:9-3 except the equity section is as follows:

 The $100,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Bailey's salary.

 Qualified production activities income (QPAI) still equals $1.6 million, but employer?s W-2 wages allocable to U.S. production activities equal $800,000 (because of Dr. Bailey's salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).

 Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

Required:?

Prepare the 2016 S corporation tax return (Form the 1120S), including the following additional schedules and forms: Schedule D, Form 4562, and Schedule K-1. Optional: 

(1) Complete Schedule M-2 in Form 1120S even though the company has never been a C corporation. For this purpose, the accumulated adjustments account at the beginning of 2016 is $57,100. 

(2) Prepare a schedule for each shareholder?s basis in his or her S corporation stock. For this purpose, Bailey?s stock basis at the beginning of 2016 is $617,130 and Firth?s is $1,247,970.

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January 1, 2016 December 31, 2016 Common stock $2,000,000 57,100 $2,000,000 310,400 Retained earnings