Tax Return Problems - formerly Appendix C

Corporate Tax Return Problem 2

Required:

• Complete Blue Catering Service Inc.'s (BCS) 2021 Form 1120, Schedule D, and Schedule G (if applicable) using the information provided below.
• Form 4562 for depreciation is not required. Include the amount of tax depreciation given in the problem on the appropriate line on the first page of Form 1120.
• If any information is missing, use reasonable assumptions to fill in the gaps.
• The forms, schedules, and instructions can be found at the IRS website (IRS Website). The instructions can be helpful in completing the forms.

Facts:

Cara Siler, Janna Funk, and Valerie Cloward each own one-third of the common stock of Blue Catering Services Inc. (BCS). BCS was incorporated on February 4, 2012. It has only "one class" of stock outstanding and operates as a C corporation for tax purposes. BCS caters all types of social events throughout southern California.

• BCS is located at 540 Waverly Way, San Diego, California 92101.
• BCS's Employer Identification Number is 38-4743474.
• BCS's business activity is catering food and services. Its business activity code is 722300.
• The shareholders also work as officers for the corporation as follows:
  • Cara is the chief executive officer and president (Social Security number 231-54-8976).
  • Janna is the executive vice president and chief operating officer (Social Security number 798-56-3241).
  • Valerie is the vice president of finance (Social Security number 879-21-4536).
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
• BCS made payments that require it to file several Form 1099s for 2021. These forms will all be filed prior to the tax return.
• BCS uses the accrual method of accounting and has a calendar year-end.
• BCS made four equal estimated tax payments of $8,750 each. Its tax liability last year was $41,000. If it has overpaid its federal tax liability, BCS would like to receive a refund.
• BCS paid a dividend of $51,500 to its shareholders on November 1. BCS had ample earnings and profits (E&P) to absorb the distribution.

Other Notes:

1. BCS's inventory-related purchases during 2021 were $360,000. It values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of 263A do not apply to BCS.
2. Of the $10,000 interest income, $1,250 was from a City of Irvine bond issued in 2017, $1,750 was from an Oceanside city bond issued in 2020, $1,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.
3. BCS's dividend income came from Clever Cakes Inc. (CC). BCS owned 10,000 shares of the stock in Clever Cakes at the beginning of the year. This represented 10 percent of SSM outstanding stock.
4. On October 1, 2021, BCS sold 1,000 shares of its CC stock for $25,000. It had originally purchased these shares on April 18, 2015, for $40,000. After the sale, BCS owned 9 percent of CC.
5. BCS's compensation is as follows:

• Cara, $150,000
• Janna, $140,000
• Valerie, $130,000
• Other, $530,000

1. BCS wrote off $25,000 in accounts receivable as uncollectible during the year.
2. BCS's tax depreciation was $28,000. None of the depreciation should be claimed on Form 1125A.
3. The $5,000 interest expense was from a business loan.
4. Other expenses include $6,000 for premiums paid on term life insurance policies for which BCS is the beneficiary. The policies cover the lives of Cara, Janna, and Valerie.

FINANCIAL STATEMENTS

The following is BCS's audited income statement for 2021:

BCS Income Statement For year ending December 31, 2021
Revenue from sales	$1,800,000
Sales returns and allowances	(5,000)
Cost of goods sold	(350,000)
Gross profit from operations	$1,445,000
Other income:
Capital loss	$ (15,000)
Dividend income	25,000
Interest income	10,000
Gross income	$1,465,000
Expenses:
Compensation	$ (950,000)
Depreciation	(10,000)
Bad debt expense	(15,000)
Meals (fully deductible)	(1,500)
Maintenance	(6,000)
Property taxes	(11,000)
State income taxes	(45,000)
Other taxes	(44,000)
Rent	(60,000)
Interest	(5,000)
Advertising	(52,000)
Professional services	(16,000)
Employee benefits	(32,000)
Supplies	(5,000)
Other expenses	(27,000)
Total expenses	(1,281,000)
Income before taxes	184,000
Federal income tax expense	(42,000)
Net income after taxes	$ 143,500

The following are BCS's audited balance sheets as of December 31, 2020, and December 31, 2021.

	12/31/2020	12/31/2021
Assets
Cash	$ 180,000	$ 205,000
Accounts receivable	560,000	580,000
Allowance for doubtful accounts	(60,000)	(50,000)
Inventory	140,000	150,000
U.S. government bonds	20,000	20,000
State and local bonds	120,000	120,000
Investments in stock	400,000	360,000
Fixed assets	140,000	160,000
Accumulated depreciation	(50,000)	(60,000)
Other assets	20,000	21,000
Total assets	$1,470,000	$1,506,000
Liabilities and Shareholders' Equity
Accounts payable	$ 280,000	$ 240,000
Other current liabilities	20,000	18,000
Other liabilities	40,000	26,000
Capital stock	400,000	400,000
Retained earnings	730,000	822,000
Total liabilities and shareholders' equity	$1,470,000	$1,506,000