While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2021 and each contributed $50,000 in exchange for a 50 percent ownership interest. GTE also borrowed $200,000 from a local bank. Both James and Paul had to personally guarantee the loan.Both owners provide significant services for the business. The following information pertains to GTE's 2021 activities.

• GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
• GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).
• GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
• GTE paid $15,000 of rent for a building and equipment, $20,000 for advertising, $14,000 in interest expense, $4,000 for utilities, and $2,000 for supplies.
• GTE contributed $5,000 to charity.
• GTE received a $1,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $1,500 in short-term capital gain when it sold some of the stock.
• On December 1, 2021, GTE distributed $20,000 to James and $20,000 to Paul.
• GTE has qualified property of $300,000 (unadjusted basis)

1. Assume James and Paul formed GTE as an S corporation.
   • Complete GTE's Form 1120S page 1, Form 1120 S, Schedule K, and Paul's Form 1120S Schedule K-1 (note that you should use 2020 tax forms).
   • Compute the tax basis of Paul's stock in GTE at the end of 2021.
   • What amount of Paul's income from GTE is subject to FICA or self-employment taxes?

• What amount of income, including its character, will Paul recognize on the $20,000 distribution he receives on December 1?
• What amount of tax does GTE pay on the $1,000 qualified dividend it received?

For 1120-S U.S. Income Tax Return for an S Corporation OMB No. 1545-0123 >Do not file this form unless the corporation has filed or Department of the Treasury Is attaching Form 2553 to elect to be an $ corporation 2020 Internal Revenue Service Go to www.irs.gov/Form11205 for instructions and the latest information. For calendar year 2020 or tax year beginning 2020, ending , 20 A Selection effective date Name D Employer identification number Business activity code TYPE number (hoo instructions)] OR Number, street, and room or suite no. If a PO. box, see instructions. E Date incorporated PRINT City or town, state or province, country, and ZIP or foreign postal code F Total assets (ooo instructions) C Chack if Sch. M-3 attached[ G Is the corporation electing to be an S corporation beginning with this tax year? Yes ( No If "Yes," attach Form 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) 5 election termination or revocation Enter the number of shareholders who were shareholders during any part of the tax year J Check if corporation: (1) Aggregated activities for section 465 al-risk purposes (2) Grouped activities for section 409 passive activity purposes Caution: Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. la Gross receipts or sales 1a Returns and allowances 1b Balance. Subtract line 1b from line 1a Cost of goods sold (attach Form 1125-A) . Income Gross profit. Subtract line 2 from line 1c Net gain (loss) from Form 4797, line 17 (attach Form 4797) Other income (loss) (see instructions- attach statement) . Total income (loss). Add lines 3 through 5 Compensation of officers (see instructions-attach Form 1125-E) Salaries and wages (less employment credits) limitations Repairs and maintenance . 10 Bad debts Rents Taxes and licenses . Interest (see instructions) . Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562) 15 Depletion (Do not deduct oil and gas depletion.). Advertising . . Pension, profit-sharing, etc., plans Employee benefit programs Deductions Other deductions (attach statement) Total deductions. Add lines 7 through 19 Ordinary business income (loss). Subtract line 20 from line 6 21 22a Excess net passive income or LIFO recapture tax (see instructions) . 22a Tax from Schedule D (Form 1120-5) 22b Add lines 22a and 22b (see instructions for additional taxes) . 22c 23a 2020 estimated tax payments and 2019 overpayment credited to 2020 23a Tax deposited with Form 7004 . 23b Credit for federal tax paid on fuels (attach Form 4136). 23c Tax and Payments d Reserved for future use 23d Add lines 23a through 23d 230 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached 24 Amount owed. If line 23e is smaller than the total of lines 22c and 24, enter amount owed 25 Overpayment. If line 23e is larger than the total of lines 22c and 24, enter amount overpaid 26 Enter amount from line 26: Credited to 2021 estimated tax Refunded 27 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and Sign belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return Here with the preparer shown below? Signature of officer Date Title See Instructions. Yes No Paid Print/Type preparer's name Preparer's signature Date Check if PTIN bef-employed Preparer Use Only Firm's name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 1 1510H Form 1120-S (2020)Form 1 120-5 (2020) Page 2 Schedule B Other Information (see instructions Check accounting method: Cash b Yes No a Other (specify) 2 See the instructions and enter the: a Business activity b Product or service 3 At any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation . At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, soo instructions. If "Yes," complete () through (v) below () Name of Corporation Employer fill) Country of (iv) Percentage of (v) # Percentage in (iv) is 100%, Enter Identification Incorporation Stock Owned the Date (dany) a Qualified Subchapter Number if any S Subsidiary Election Was Made Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If "Yes," complete () through (v) below () Name of Entity [)Employer (ii) Type of Entity (iv) Country of (v) Maximum Percentage Owned Identification Organization in Profit, Loss, or Capital Number if any 5a At the end of the tax year, did the corporation have any outstanding shares of restricted stock? If "Yes," complete lines () and (it) below. Total shares of restricted stock (i) Total shares of non-restricted stock . At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments? If "Yes," complete lines () and (it below. (1) Total shares of stock outstanding at the end of the tax year (1) Total shares of stock outstanding if all instruments were executed Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction? 7 Check this box if the corporation issued publicly offered debt instruments with original issue discount . If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. B If the corporation (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset (or the basis of any other property) in the hands of a C corporation, and (b) has not unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years. See instructions . 9 Did the corporation have an election under section 1630) for any real property trade or business or any farming business in effect during the tax year? See instructions . 10 Does the corporation satisfy one or more of the following? See instructions a The corporation owns a pass-through entity with current, or prior year carryover, excess business interest expense. b The corporation's aggregate average annual gross receipts (determined under section 448(c]) for the 3 tax years preceding the current tax year are more than $26 million and the corporation has business interest expense. c The corporation is a tax shelter and the corporation has business interest expense. If "Yes," complete and attach Form 8990. 11 Does the corporation satisfy both of the following conditions? a The corporation's total receipts (see instructions) for the tax year were less than $250,000. b The corporation's total assets at the end of the tax year were less than $250,000. if "Yes," the corporation is not required to complete Schedules L and M-1. Form 1120-S (2020)Form 1 120-5 (2020] Schedule K Shareholders' Pro Rata Share Items (continued) Total amount 15a Post- 1986 depreciation adjustment 15a b Adjusted gain or loss 15b Depletion (other than oil and gas) 15c Minimum Tax Alternative [AMT] Items Oil gas, and geothermal properties-gross income 15d Oil gas, and geothermal properties-deductions . 15e Other AMT items (attach statement) . 151 16a Tax-exempt interest income 16a Other tax-exempt income Butis Shareholder Items Affecting Nondeductible expenses 16c Distributions (attach statement if required) (see instructions) 16d Repayment of loans from shareholders 160 Investment income . 17a Investment expenses 1 7b Other Dividend distributions paid from accumulated earnings and profits 170 cilliation Information Other items and amounts (attach statement) Recon- Income (loss) reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14p 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (b) 1 Cash Trade notes and accounts receivable b Less allowance for bad debts . Inventories U.S. government obligations Tax-exempt securities (see instructions) Other current assets (attach statement) . Loans to shareholders . Mortgage and real estate bans 9 Other investments (attach statement) 10a Buildings and other depreciable assets. b Less accumulated depreciation 1 1a Depletable assets b Less accumulated depletion 12 Land (net of any amortization) . 13a Intangible assets (amortizable only) Less accumulated amortization 14 Other assets (attach statement) 15 Total assets . Liabilities and Shareholders' Equity Accounts payable . 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement) . 19 Loans from shareholders 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement) 22 Capital stock . Additional paid-in capital Retained earnings Adjustments to shareholders' equity (attach statement) Less cost of treasury stock Total Iabilities and shareholders' equity Form 1120-S (2020]Form 1 120-5 (2020) Page 5 Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note: The corporation may be required to file Schedule M-3. See instructions. Net income (loss) per books 5 Income recorded on books this year 2 Income included on Schedule K, lines 1, 2. not included on Schedule K, lines 1 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded through 10 (itemize): on books this year (itemize) a Tax exempt interest $ 3 Expenses recorded on books this year Deductions included on Schedule K. not included on Schedule K, lines 1 lines 1 through 12 and 14p, not charged through 12 and 14p (itemize): against book income this year (itemize) a Depreciation $ Depreciation $ b Travel and entertainment S 7 Add lines 5 and 6 . Income (loss) (Schedule K, line 18). Add lines 1 through 3 Subtract line 7 from line 4 Schedule M-2 Analysis of Accumulated Adjustments Account, Shareholders' Undistributed Taxable Income Previously Taxed, Accumulated Earnings and Profits, and Other Adjustments Account (see instructions) (a) Accumulated [b) Shareholders' [o) Accumulated [d) Other adjustments adjustments account undistributed taxable earnings and profits account income previously taxed Balance at beginning of tax year . Ordinary income from page 1, line 21 Other additions . Loss from page 1, line 21 Other reductions . Combine lines 1 through 5 . Distributions . Balance at end of tax year. Subtract line 7 from line 6 Form 1120-S (2020)Form 1 120-5 (2020) Page 3 Schedule B Other Information (see instructions) (continued) Yes No 12 During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or had the terms modified so as to reduce the principal amount of the debt? If "Yes," enter the amount of principal reduction . 13 During the tax year, was a qualified subchapter S subsidiary election terminated or revoked? If "Yes," see instructions . 14a Did the corporation make any payments in 2020 that would require it to file Form(s) 10997 . b If "Yes," did the corporation file or will it file required Form(s) 10997 . 15 Is the corporation attaching Form 8996 to certify as a Qualified Opportunity Fund? if "Yes," enter the amount from Form 8996, line 15 . . Schedule K Shareholders' Pro Rata Share Items Total amoun Ordinary business income (loss) (page 1, line 21) . 2 N Net rental real estate income (loss) (attach Form 8825) 3a Other gross rental income (loss) . 3a b Expenses from other rental activities (attach statement) 3b C Other net rental income (loss). Subtract line 3b from line 3a 3c Interest income . Dividends: a Ordinary dividends 5a Income (Loss] b Qualified dividends . Royalties . Net short-term capital gain (loss) (attach Schedule D (Form 1120-S) 8a Net long-term capital gain (loss) (attach Schedule D (Form 1120-S] Ba Collectibles (28%) gain (loss) . 8b c Unrecaptured section 1250 gain (attach statement) 8c Net section 1231 gain (loss) (attach Form 4797) 10 Other income (loss) (see instructions) Type 11 Section 179 deduction (attach Form 4562) . 12a Charitable contributions 12a Deductions b Investment interest expense 12b C Section 59(e)2) expenditures . Type 12c d Other deductions (see instructions) Type 12d 13a Low-income housing credit (section 420)(5)) 13a b Low-income housing credit (other) . 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable) 13c Credits d Other rental real estate credits (see instructions) Type 13d Other rental credits (see instructions) . Type Biofuel producer credit (attach Form 6478) 13f g Other credits (see instructions) Type 13g 14a Name of country or U.S. possession b Gross income from all sources 14b C Gross income sourced at shareholder level 14c Foreign gross income sourced at corporate level d Reserved for future use . 14d Foreign branch category Passive category 14f 9 General category 14g h Other (attach statement) 14h Deductions allocated and apportioned at shareholder Interest expense . 141 Foreign Transactions Other . 14j Deductions allocated and apportioned at corporate level to foreign source income Reserved for future use . 14k Foreign branch category 141 m Passive category |14m n General category 14 o Other (attach statement) 140 Other information p Total foreign taxes (check one): ] Paid Accrued 14p q Reduction in taxes available for credit (attach statement) 14q Other foreign tax information (attach statement) Form 1120-S (2020)671120 Final K-1 Amended K-1 OMB No. 1545-0123 Schedule K-1 (Form 1120-S) 2020 Part III Shareholder's Share of Current Year Income, Deductions, Credits, and Other Items Department of the Treasury 13 Credits Internal Revenue Service For calendar year 2020, or tax year Ordinary business income loss)] beginning / 2020 ending 2 Net rental real estate income foss)] Shareholder's Share of Income, Deductions, [Other not rental income (loss) Credits, etc. See separate Instructions Interest income Part | Information About the Corporation Corporation's employer Identification number 5a Ordinary dividends B Corporation's name, address, city, state, and ZIP code 5b Qualfied dividends 14 Foreign transactions Not short-term capital gain foss) IRS Center where corporation filed return 8n Not long term capital gain loss) Collectibles (289%) gain (loss) Part II Information About the Shareholder D Shareholder's identifying number Bc Unrecaptured section 1230 gain E Shareholder's name, address, city, state, and ZIP code Not section 1231 gain (loss) 10 Other income loss) 15 Allamative minimum to AMT) Bars F Current year allocation percentage G Shareholder's number of shares Beginning of tax your End of tax your 11 Section 179 deduction 16 Hems affecting shareholder basis H Loans from shareholder Beginning of tax your 12 Other deductions End of tax your 17 Other information For IRS Use Only 18 More than one activity for at-risk purposes" 19 More than one activity for passive activity purposes" * See attached statement for additional information. For Paperwork Reduction Act Notice, see the Instructions for Form 1 120-S. www.irs.gowForm11209 Cat No. 11520D Schedule K-1 (Form 1120-5) 2020