S corporation tax return assignment. short question.
S Corporation Tax Return Assignment
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While Ben Smith and his former classmate John Jones both studied accounting at school formed a company together. Their company is XYZ Corporation specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. Ben and John formed the business at the beginning of 2014, and each contributed $50,000 in exchange for a 50 percent ownership interest. XYZ also borrowed $200,000 from a local bank. Both Ben and John had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to XYZ’s 2014 activities:
· ; XYZ uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
· ; XYZ received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).
· ; XYZ paid $30,000 compensation to Ben, $30,000 compensation to John, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
· ; XYZ 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.
· ; XYZ contributed $5,000 to charity.
· ; XYZ 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, 2014, XYZ distributed $20,000 to Ben and $20,000 to John.
Required:
Assume Ben and John formed XYZ as an S corporation.
(1) ; Complete XYZ’s Form 1120S, page 1, Schedule K (page 3) and Page 5 (Analysis of Income, Schedule M-1 and Schedule M-2, omit the Balance Sheet) and John’s Form 1120S, Schedule K-1 (note that you should use 2013 tax forms).
(2) ; Compute the tax basis of John’s stock in XYZ at the end of 2014.
(3) ; What amount of John’s income from XYZ is subject to FICA or self-employment taxes?
(4) ; What amount of income, including its character, will John recognize on the $20,000 distribution he receives on December 1?
(5) ; What amount of tax does XYZ pay on the $1,000 dividend it received?
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