Vesta Inc. is a new client of your firm. The following information is provided for Vesta Inc., an Oregon corporation that made the S election effective January 1, 20x1. Prior to January 1, 20x1, Vesta Inc. operated as a C corporation.  Vesta Inc. is on the cash method of accounting (except for inventory).  Vesta Inc. both sells inventory and provides services. In accounting for inventory, the FIFO method is used.

Mary, a US citizen, owns all of the stock of this corporation. At the formation of the corporation, Mary acquired her stock for a $400,000 cash contribution to the corporation. 

Balance Sheet at 1/1/x1

Assets	Fair market value	Adjusted Basis
Cash	$  900,000	$  900,000
Accounts Receivable- sale of inventory	$  400,000	$  400,000
Accounts Receivable - services	$  200,000	$     0
Inventory	$  300,000	$  200,000
Equipment	$  100,000	$    20,000
Building	$  225,000	$  200,000
Land	$  275,000	$  375,000
Goodwill	$  350,000	none
	$2,750,000	$2,095,000
Liabilities
Commercial Debt (line of credit)- Bank of Last Resort		$ 730,000
Owners Equity
Capital Stock - original cash contribution by Mary		$ 400,000
Retained Earnings  - represents previously reported taxable income		$ 965,000
		$ 2,095,000

                                                                                               

During 20x1 Vesta Inc generated ordinary income of $500,000 before considering the BIG consequences. Vesta Inc's 20x1 taxable income computed as a C corporation is $500,000. During this year the entire inventory held on January 1, 20x1 was sold for at least the value on 1/1/x1. All of the receivables outstanding on January 1, 20x1 were collected. A reasonable salary of $100,000 was paid to Mary (The deduction for salary was included in the ordinary income calculation).  The corporate tax rate is 21%.

Determine the 20x1 Vesta Inc. tax liability.

Answer rating: 100% (QA)

To determine Vesta Incs tax liability for 20x1 as an S corporation we need to conside... View the full answer