CORPORATE TAX RETURN PROJECT CASE INFORMATION – AC312
General Information
Anna West and Zoe Waters each own one-half of the common stock of Lucky Penny Corporation (LPC). LPC was incorporated on January 1, 2021. It has only one class of stock outstanding and operates as a C corporation for tax purposes. LPC provides accounting services to clients in and around Parkville, Missouri.
Following is additional information related to LPC:
• Office Location: 123 Park Ave, Parkville, MO 64152
• Employer Identification Number:11-2233444.
• Business activity code: 541213
• The shareholders are both US citizens and also work as officers for the corporation as follows:
o Anna is the chief executive officer and president (Social Security number 111-22-3333)
o Zoe is the chief financial officer and treasurer. (Social Security number 222-33-4444).
• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.
Financial Information
Following is pertinent financial information related to LPC’s financial activities in 2021:
• LPC uses the accrual method of accounting and has a calendar year-end.
• LPC made four equal estimated tax payments of $20,000 each.
• LPC paid a dividend of $60,000 to its shareholders on December 15. LPC’s dividend amount was not in excess of its current and accumulated earnings and profits.
• Of the $18,000 in interest income, $4,000 was from a Platte County bond, $2,000 was from a US treasury bond, and $12,000 was from a bank account.
• LPC owned 15,000 shares of Accounting Unlimited, Inc.’s (AU) stock at the beginning of the year, which represented 15% ownership. AU is a US (domestic) corporation. AU distributed a $12,000 dividend to LPC on June 1.
• On September 16, LPC sold 2,000 shares of its AU stock for $6,000. It had originally purchased the shares on February 14 for $16,000. After the sale, LPC owned 13% of AU.
• The officers’ compensation was as follows: Anna, $200,000; and Zoe, $180,000.
• The stock option compensation is related to NQO stock options expensed during the year (recipients are officers). The options have not been exercised.
• LPC wrote off $3,000 in accounts receivable as uncollectible during the year.
• The investment in bonds includes a $10,000 investment in US treasury bonds and $41,000 investment in local Platte County bonds.
• The fixed asset is office furniture that was placed in service on January 1 with a useful life for book purposes of 10 years. LPC wants to take bonus depreciation on the assets for tax purposes.
• The intangible asset is a customer list purchased from another accounting firm on January 1. The useful life for book purposes is 5 years.
• The $5,000 interest expense was from a business loan.
• All meals were related to business and were purchased from restaurants.
Audited Financial Statements
CHAPTER 16: CORPORATE OPERATIONS
Computing Corporate Taxable Income
To compute corporate taxable income:
Start with BOOK (financial reporting) Income
Add/Subtract book-tax differences
Results in Taxable Income
Book-tax differences result when income and expenses are accounted for differently for book and tax purposes.
Two impacts
• Addback (unfavorable book-tax difference)
• Deduction (favorable book-tax difference)
Two categories
Permanent book-tax differences are current year addbacks/deductions that will NOT be reversed in a future period.
Temporary book-tax differences are current year addbacks/deductions that WILL be reversed in a future period.
Book-Tax Differences Introduced in Chapter 16:
Book-Tax Differences Discussed in Other Chapters (Ch. 9 and 10):
16-1. Corporate Taxable Income: During the current year, BCT, Inc., a calendar-year corporation, reported the following information in its audited income statement:
In addition, the following information was provided:
• Regarding the investment in corporate stock, BCT owns 25% of the company. The company distributed a dividend in the amount of $60,000 to BCT in the current year.
• $5,000 of the interest income was earned on municipal bonds.
• At the beginning of the year, the balance in the Bad Debt Allowance account was $6,500. At the end of the year, the balance was $6,000.
• Tax depreciation was $150,000.
• The organization expenses were incurred on March 1.
• $2,000 of the interest expense was incurred to generate tax-exempt income.
• All meals were from restaurants.
Based on the above information:
a. Reconcile book income to taxable income and calculate the tax liability.
b. Complete the Schedule M-1.
Compliance
Corporations report taxable income on Form 1120.
Book-tax reconciliations are completed on Schedule M-1 for small corporations (total assets are less than $10M).
Book-tax reconciliations are completed on Schedule M-3 for large corporations
Return is due on April 15
Estimated Tax Payments
Required when federal income tax liability is $500 or more.
Installments due on 15th day of 4th, 6th, 9th, and 12th month.
Estimates are based on:
• 100% of prior year tax liability (only allowed for 1Q for large corporations with $1M of taxable income)
• 100% of current year tax liability; OR
• 100% of estimated current year tax liability using annualized method
16-2. Estimated Payments: ABC, Inc.’s prior year tax liability was $2,500,000. For the current year, ABC reported the following taxable income at the end of it’s first, second, and third quarters. What is ABC’s minimum required estimated payment for each quarter? (Ignore the actual current-year tax safe harbor.)