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CCS Corporate Tax Return Problem

Purpose: The purpose of this is not merely to learn how to fill-­‐in forms but to enable you to meet the following goals:

  • Understand the corporate tax formula
  • Identify common book-­‐tax differences and distinguish between permanent & temporary differences.
  • Calculate the current & deferred income tax expense or benefit components of a tax provision.

Task: In order to successfully complete this assignment you must:

Complete Celebrity Catering Service Inc.’s (CCS) Form 1120 and all related schedules. Be sure to attach schedules for any line item, which indicates one is required on the 1120. This includes line items that may require you to create a schedule that identifies the various items that are included in a line on the return these usually indicate “attach schedule.” Other lines will indicate specifically which schedule must be included with the return.

The returns must be in.pdf format. The student can use either:

  • o Forms schedules and instructions found at www.irs.gov
  • o Tax preparation software may be used to prepare your assignment, but submission must still be in .pdf format.

Include a list of all the judgments, decisions and assumptions that you made in order to complete the return. This should be submitted along with your return.

Required:

  • Complete Celebrity Catering Service Inc.’s (CCS) 2019 Form 1120 and all related schedules. Be sure to attach schedules for any line item, which indicates one is required on the 1120.
  • If any information is missing, use reasonable assumptions to fill in the gaps and list those assumptions as an attachment.
  • Also list on an attachment any tax positions that you made in the completion of the return, such as depreciation method.
  • The forms schedules and instructions can be found at www.irs.gov and download the necessary forms.

Celebrity Catering Services, Inc.

Rachael Ray, Paula Deen and Gordon Ramsay each own one-­‐third of the common stock of Celebrity Catering Services, Inc. (CCS). CCS wasincorporated on February 2, 2009. It has only one class of stock outstanding and operates as a C corporation for tax purposes. CCS caters to all types of social events.

  • CCS is located at 540 Waverly Way Burbank, CA 91501
  • Its employer ID is 38-­‐4743474 CCS’s business activity is catering food services. Its business activity code is 722300.
  • The shareholders also work as officers for the corporation as follows:
    • Rachael is the chief executive officer and president, (SS# 231-­‐54-­‐8976).
    • Paula is the executive VP and Chief operating officer (SS#798-­‐56-­‐3241)
    • Gordon is the VP of Finance (SS# 879-­‐21-­‐4536).
  • All officers devote 100% of their time to the business and all of the officers are US citizens.
  • CCS uses the accrual method of accounting and has a calendar year-­‐end.
  • CCS made four equal quarterly estimated tax payments of $25,200each. Its tax liability last year was $100,800. If it has overpaid its federal tax liability, CCS would like toreceive a refund.
  • In the prior year, the company made a large charitable contribution.$22,000 of that contribution exceededthe amount deductibleand was carried forward to the currentyear.
  • CCS paid a dividend of $125,000 to each of its shareholderson December1. CCS had ample earnings and profits (E&P) to absorb the distribution.

Income statement

Income

Sales

$3,682,500

Sales returns and allowances

-­‐37,000

Net sales

3,645,500

Cost of goods sold

1,189,700

Gross profit

2,455,800

Net Loss on Sale of Assets & Investments

-­‐$5,000

Dividend income

26,000

Interest income

8,750

Total income

$2,485,550

Expenses

Salaries and wages

1,172,000

Bad Debt

32,000

Meals

18,000

Entertainment

12,000

Repairs and Maintenance

22,400

Property Taxes

8,100

State Income Tax

37,500

Payroll Taxes

115,000

Charitable Contribution

42,000

Equipment Rent

50,000

Warehouse Rent

125,000

Interest

6,800

Advertising

127,500

Professional Services

32,500

Depreciation

15,200

Employee benefits Programs

69,000

Other Miscellaneous Expenses

28,700

Total expenses

1,913,700

Net income before taxes

$571,850

Federal income taxes

-­‐122,147

Net income after taxes

$449,703

[1] CCS’S inventory-­‐related purchases during the year were $321,000 and direct labor of $875,000. It values its inventory based on cost using FIFO inventory cost flow method. CCS must use the 263A method for valuing its inventory for tax purposes the beginning balance of 263A adjustment is $12,000 and the ending value is $11,000. The current year additional §263A costs are $85,000 of the officer’s salary.

[2] CCS’s dividend income came from Sinful Desserts, Inc. (SD) CCS owned 10,000 shares of stock in SD at the beginning of the year this represented 16% of SD’s outstanding stock.

[3] $1,200 was from a City of Irvine bond that was used to fund public activities(issued in 2006), $1,700 was from an Oceanview City bond used to fund public activities (issued in 2005), $ 1,000 was from a US Treasury Bond and the rest was from a money market account at Bank of America.

[4] The officers’ salariesincluded are: Rachael Ray -­‐$320,000; Paula Deen -­‐$ 230,000 and Gordon Ramsey -­‐$265,000

[5] The interest expense was from an ordinary and necessary deductible business loan.

[6] None of the depreciation will be claimed on 1125A. The MACRS depreciation has been computed as $ 13,400 for assets not purchased during the current fiscal year.The straight-­‐line depreciation method is reflected on the financial statements.

[7] Includes $4,200 for premiums paid on term life insurance policies for which CCS is the beneficiary. The policies cover Rachael, Paula and Gordon. Also includedis$500 in parking tickets. The rest are regular miscellaneous, ordinary and necessary expenses.

Balance Sheet

Assets

12/31/2018

12/31/19

Cash

$673,100

$642,300

Trade and accounts receivables

457,000

528,000

Allowance for Doubtful Accounts

-­‐61,500

-­‐67,500

Inventories

165,000

171,300

U.S. government bonds

20,000

20,000

State & Local bonds

120,000

120,000

Investment In Stock

314,000

299,000

Prepaid Federal Income Taxes

0

0

Property, plant and equipment

180,000

250,000

Accumulated depreciation

-­‐69,200

-­‐75,400

Other assets

37,500

37,500

Total Assets

$1,835,900

$1,925,200

Liabilities and Owners' Equity

Accounts payable

$72,313

$70,320

Income Taxes Payable

4,756

3,151

Other Current Liabilities

21,000

21,000

Deferred Tax Liability

30,701

48,896

Other Liabilities

38,000

38,000

Capital stock

400,000

400,000

Retained earnings

1,269,130

1,343,833

Total Liabilities and Owners' Equity

$1,835,900

1,925,200

[1] CCS wrote off $26,000 as uncollectible during the year.

[2] On October 1, 2019CCS sold100 shares of SD stock for $12,000. It had originally purchased these shares on April 18, 2010 for $15,000. After the sale CCS owns 15.8percent of SD.

[3] On November 12, 2019CCS purchased threeindustrial Hobart mixers for $5,500 each and a Wolf Convection Double Stack Commercial Oven for $67,500.

[4] On December 5, 2019they sold two old mixers thathad been fully depreciatedfor tax purposes but had a book value of $2,500 each. The oldmixers had been purchased at $7,000 each and were sold for $1,500 each.

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