Question

• Complete Alvin's Music Inc.'s (AMI) 2018 Form 1120 using the information provided below.

• Neither Form 4562 for depreciation nor Form 4797 for the sale of the equipment is required. Include the amount of tax depreciation and the tax gain on the equipment sale given in the problem (or determined from information given in the problem) on the appropriate lines on the first page of Form 1120.

• Assume that AMI does not owe any alternative minimum tax.

• If any information is missing, use reasonable assumptions to fill in the gaps.

• The forms, schedules, and instructions can be found at the IRS website (www.irs.gov). The instructions can be helpful in completing the forms.

Facts:

Alvin's Music Inc. (AMI) was formed in 2008 by Alvin Jones and Theona Smith. Alvin and Theona officially incorporated their store on June 12, 2009. AMI sells (retail) all kinds of music-related products including musical instruments, sheet music, CDs, and DVDs. Alvin owns 60 percent of the outstanding common stock of AMI and Theona owns the remaining 40 percent.

• AMI is located at 355 Music Way, East Palo Alto, CA 94303.

• AMI's Employer Identification Number is 29-5748859.

• AMI's business activity is retail sales of music-related products. Its business activity code is 451140.

• Officers of the corporation are as follows: o Alvin is the chief executive officer and president (Social Security number 123-45-6789).

o Theona is the executive vice president (Social Security number 978-65-4321).

o Gwen Givens is the vice president over operations (Social Security number 789-12-3456).

o Carlson Bannister is the secretary (Social Security number 321-54-6789).

• All officers devote 100 percent of their time to the business and all officers are U.S. citizens.

• Neither Gwen nor Carlson owns any stock in AMI.

• AMI uses the accrual method of accounting and has a calendar year-end.

• AMI made four equal estimated tax payments of $70,000 each. Its tax liability last year was $175,000. If it has overpaid its federal tax liability, AMI would like to receive a refund.

• AMI paid a dividend of $80,000 to its shareholders on December 1. AMI had ample earnings and profits (E&P) to absorb the distribution.

The following is AMI's audited income statement for 2018:

Revenue from sales	$        3,420,000
Sales returns and allowances	$            (40,000)
Cost of goods sold	$          (834,000)
Gross profit from operations	$        2,546,000
Other income:
Capital gains	$                 8,000
Gain from disposition of fixed assets	$                 2,000
Dividend income	$              12,000
Interest income	$              15,000
Gross income	$        2,583,000
Expenses:
Compensation	$      (1,300,000)
Depreciation	$            (20,000)
Bad debt expense	$            (15,000)
Meals and entertainment	$              (5,000)
Maintenance	$              (5,000)
Charitable donations	$            (27,000)
Property taxes	$            (45,000)
State income taxes	$            (60,000)
Other taxes	$            (56,000)
Interest	$            (62,000)
Advertising	$            (44,000)
Professional services	$            (32,000)
Pension expense	$            (40,000)
Supplies	$              (6,000)
Other expenses	$            (38,000)
Total expenses	$      (1,755,000)
Income before taxes	$            828,000
Federal income tax expense	$          (260,000)
Net income after taxes	$            568,000

Notes:

1. AMI has a capital loss carryover to this year from last year in the amount of $5,000.

2. AMI's inventory-related purchases during the year were $1,134,000. AMI values its inventory based on cost using the FIFO inventory cost flow method. Assume the rules of §263A do not apply to AMI.

3. Of the $15,000 interest income, $2,500 was from a City of Fremont bond issued in 2016, $3,500 was from a Pleasanton city bond issued in 2017, $3,000 was from a U.S. Treasury bond, and the remaining $6,000 was from a money market account.

4. AMI sold equipment for $10,000. It originally purchased the equipment for $12,000 and, through the date of the sale, had recorded a cumulative total of $4,000 of book depreciation on the asset and a cumulative total of $6,000 of tax depreciation. For tax purposes, the entire gain was recaptured as ordinary income under §1245.

5. AMI's dividend income came from Simon's Sheet Music. AMI owned 15,000 shares of the stock in Simon's Sheet Music (SSM) at the beginning of the year. This represented 15 percent of the SSM outstanding stock.

6. On July 22, 2018, AMI sold 2,500 shares of its Simon's Sheet Music Stock for $33,000. It had originally purchased these shares on April 24, 2013, for $25,000. After the sale, AMI owned 12.5 percent of Simon's Sheet Music.

7. AMI's compensation is as follows: o Alvin $210,000

o Theona $190,000

o Gwen $110,000

o Carlson $90,000

o Other $700,000

8. AMI wrote off $10,000 in accounts receivable as uncollectible during the year.

9. Regular tax depreciation was $31,000. None of the depreciation should be claimed on Form 1125A.

10. Of the $62,000 of interest expense, $56,000 was from the mortgage on AMI's building and the remaining $6,000 of interest is from business-related loans.

11. The pension expense is the same for both book and tax purposes.

12. Other expenses include $3,000 for premiums paid on term life insurance policies for which AMI is the beneficiary. The policies cover the lives of Alvin and Theona.

The following are AMI's audited balance sheets as of January 1, 2018, and December 31, 2018.

1-Jan	31-Dec
Assets
Cash	$            240,000	$        171,000
Accounts receivable	$            600,000	$        700,000
Allowance for doubtful accounts	$            (35,000)	$        (40,000)
Inventory	$        1,400,000	$     1,700,000
U.S. government bonds	$              50,000	$           50,000
State and local bonds	$            140,000	$        140,000
Investments in stock	$            300,000	$        275,000
Building and other depreciable assets	$        1,500,000	$     1,600,000
Accu mulated depreciation	$          (200,000)	$      (216,000)
Land	$            900,000	$        900,000
Other assets	$            250,000	$        270,000
Total assets	$        5,145,000	$     5,550,000
Liabilities and Shareholders’ Equity
Accounts payable	$            250,000	$        220,000
Other current liabilities	$            125,000	$        120,000
Mortgage	$            800,000	$        790,000
Other liabilities	$            200,000	$        162,000
Capital stock	$            600,000	$        600,000
Retained earnings	$        3,170,000	$     3,658,000
Total liabilities and shareholders’ equity	$        5,145,000	$     5,550,000

Answer 1

20 --- 2018 ale rouri GO P UGLISI . . Income 12 13 16 112 U.S. Corporation Income Tax Return OMB No 1545-0123 Form For calendar year 2018 or tax year beginning , 2018, ending Denertment of the Treasury Inlenen Serve Go to www.is.gov/Form1120 for instructions and the latest information. A Check if. Name B Employer identification number 1a Consolidated rotum alloch Fannast; 29-5748859 TYPE Alvin's Music Inc b Libonlit congol- Number, Strect, and room or suito no If a P.O box, soc instructions OR Dale incorporated 2 Personal holding co -PRINT 355 Music Way, East Palo Alto June 12, 2009 Caltha PH City or town, state or province, country, and ZIP or foreign postal code D Total assets isec instructions: 3 Panel Car See instructionsi CA 94303 Wanadala M atache E Check it: (0) Initial rotum (2) Final retum (3) Name chang (4) Address change 1a Gross receipts or sales . . . . . . . . . . . . . . . . la 3420000 b Returns and allowances. . . . . . . . . . . . . . . . 1b 40000 C Balance. Subtract line 1b from line 1a . . . . . . . 1c 3380000 Cost of goods sold (attach Form 1125-A) : . . . . . . . . . . . . . . . . . 2 834000 3 Gross profit. Subtract line 2 from line 1c , 3 2,546,000 4 Dividends and indusions (Schedule C, line 23. column (a)) . . . . . 12000 5 Interest , , . . . . . . . . . . . . . . . . . . 15000 6 Gross rents . . . . . . . . . . . . . . . . . . . . . . . . . 7 Gross royalties . . . . 8 Capital gain net income (attach Schedule D (Form 1120)) . . . . . . 8000 9 Net gain or loss, from Form 4797, Part II, line 17 (attach Form 4797) 10 Other income (see instructions-attach statement). . . . . . . . 2000 . . 10 11 Total income. Add lines 3 through 10 . . . . . . . . . . . . . . 11 2,583 000 Compensation of officers (see instructions-attach Form 1125-E) .... 13 Salaries and wages (less employment credits) . . . . . . . . . . . . . . 1300,000 14 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . 5000 15 Bad debts. , , . . . . . . . . . . . . . . . . . . . . 15000 Rents . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses , , , . . . . . . 161000 Interest (see instructions) . . . . 62000 Charitable contributions . . 27000 Depreciation from Form 4662 not claimed on Form 1125-A or elsewhere on retum (attach Form 4562) 20000 Depletion . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . 44000 Pension, profit-sharing, etc., plans . . . . . . . . 40000 Employee benefit programs . . . . . . . . . . . . 5000 . . . . Reserved for future lise. . . . . . . . . . . . . 25 Other deductions (attach statement). . . . . . . . . . . . . . . . . . . 76000 Total deductions. Add lines 12 through 26 .. . .. . ► 27 1755000 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11. 28 8 28000 29a Net operating loss deduction (see instructions). . . . . . .. 29a b Special deductions (Schedule C, line 24, column (c)) , , 29b Add lines 29a and 29 : . . . . . . . . . . . . . . . . . 30 Taxable income. Subtract line 29c from line 28. See instructions . . 828000 31 Total tax (Schedule J, Part I line 11). . . . . . . . . 260000 32 2018 net 965 tax liability paid (Schedule J, Part II, line 12) . . 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23). . . . . . 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached . Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34. enter amount owed ... Overpayment. If line 33 is larger than the total of lines 31, 32, and 34, enter amount overpaid. . . 36 37 Enter amount from line 36 you want: Credited to 2019 estimated tax Refunded 37 Uno c ol cur, laht i o Iti reum, including Techn olo ricis to be of my v ideo is tu, care Sign srdcompat Dsclerator of propererer than axeyatisheadcn al internat on ahich preparar 13 en 18dje May the IHS cuss this return with the prepare shown below? Here See instructions. Yes No Signature of office Date Print Type preparer's name Pispalei's signature PIN Paid self employed Preparer Firm's EIN Use Only Fim'e name ► "> F 's actress Phone na For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 114500 Farm 1120:2018 Daductions (See instructions for limitations on deductions.) 290 Tax, Hatundable Credits, and Payments 36 Title Check

(a) Didous and indusions Page 2 e l Special deductions fa) b) b Form 1120 (2018) Schedule C Dividends, inclusions, and Special Deductions (see instructions) Dividends from less-than-20%-owned domestic corporations (other than debt-financed stock) Dividends from 20%-or-more-owned domestic corporations (other than debt-tinanced stocki 50 65 Dividends on certain debt-financed stock of domestic and foreign corporations , inscucconis Dividends on certain preferred stock of less-than-20%-owned public utilities . . . Dividends on certain preferred stock of 20%-or-more-owned public utilities. . . . Dividends from less-than-20%-owned foreign corporations and certain FSCS 50 7 Dividends from 20%-or-more-owned foreign corporations and certain FSCs . . . 8 Dividends from wholly owned foreign subsidiaries . . . . . . . . 190 9 inois Subtotal. Add lines 1 through 8. See instructions for limitations . Dividends from domestic corporations received by a small business investment company operating under the Small Business Investment Act of 1958 . . . . 100 11 Dividends from affiliated group members . . . . . . . . 100 100 12 13 Dividends from certain FSCs . . . Foreign-source portion of dividends received from a specified 10%-owned foreign corporation (excluding hybrid dividends) (see instructions) . . . Dividends from foreign corporations not included on line 3, 6, 7, 8, 11, 12, or 13 including any hybrid dividends) . . . . . . . . . . . . . . . . 14 Insts 15 16a 100 Section 965 (a) inclusion . . . . . . . . . . . . . . . . . Subpart F inclusions derived from the sale by a controlled foreign corporation (CFC) of the stock of a lower-tier foreign corporation treated as a dividend (attach Form(s) 5471) (see instructions).. . . . . . . Subpart Finclusions derived from hybrid dividends of tiered corporations (attach Form(s) 5471) (see instructions) . . . . . . Other inclusions from CFCs under subpart F not included on line 15, 16a, 16b, or 17 (attach Formis) 5471) (see instructions). . . . . . b c Global Intangible Low-Taxed Income (GILTI attach Fomis: 5471 and Form 8992) . Gross-up for foreign taxes deemed paid . . . . . . . . . . . . . IC-DISC and former DISC dividends not included on line 1, 2 or 3 . . . . . Other dividends . . . . . 21 Deduction for dividends paid on certain preferred stock of public utilities . . . . 22 23 Section 250 deduction (attach Form 8993) . . . . . . . . Total dividends and inclusions. Add lines 9 through 20. Enter here and on page 1, line 4 . . . . . Total special deductions. Add lines 9 through 22. column (c). Enter here and on page 1, line 295...... 24 Form 1120:2016

Page 6 Farm 1120 2012 Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (a) (b) (c) (d) 1 Cash . . . 171,000 . 240,000 . . 2a Trade notes and accounts receivable.. 600000 700,000 b Less allowance for bad debts . . . . 35000) 5650000 40000) 660000 3 Inventories. . . . 1,400,000 1,700,000 4 U.S. government obligations 50,000 50,000 5 Tax-exempt securities (see instructions), 140,000 140,000 Other current assets (attach statement) . Loans to shareholders . . . . . . . 8 Mortgage and real estate loans . . . . 9 Other investments (attach statement) . 300,000 275,000 10a Buildings and other depreciable assets . . 1500000 1,600,000 b Less accumulated depreciation.. 200,000) 1300000 216000) 1384000 11a Depletable assets. . . . . . . . . b Less accumulated depletion . . 12 Land (net of any amortization). . . . . 900.000 900,000 13a Intangible assets (amortizable onlyi , , b Less accumulated amortization. . 14 Other assets (attach statement) . . 250.000 270 000 15 Total assets 5,145,000 5,550,000 Liabilities and Shareholders' Equity 16 Accounts payable. . . . - 250,000 220,000 17 Mortgages, notes, bonds payable in less than 1 year 800,000 790,000 18 Other current liabilities (attach statement) . 125,000 120,000 19 Loans from shareholders. . . . . . . 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities attach statement) 200,000 162,000 22 Capital stock: a Preferred stock . . b Common stock . . . . 600,000 600,000 23 Additional pald-in capital. . . 24 Retained eamings - Appropriated rattach statement 3,170,000 3,658,000 25 Retained earnings-Unappropriated . . . 26 Adjustments to shareholders' equity (attach statement 27 Less cost of treasury stock . . 28 Total liabilities and shareholders' equity 5,145,000 5,550,000 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books. .... 828000 7 Income recorded on books this year Federal income tax per books. 260000 not included on this return ſitemize): Excess of capital losses over capital gains 5000 Tax-exempt interest S 6000 Income subject to tax not recorded on books INTEREST INCOME this year (itemize): 8 Deductions on this retuin not charged Expenses recorded on books this year not against book income this year ſitemize): deducted on this return (itemize): a Depreciation . . $ a Depreciation . . . S 4000 b Charitable contributions $ b Charitable contributions. S c Travel and entertainment. S 9 Add lines 7 and 8. . . . . . 6 Add lines 1 tlrough 5.. 10 Income (page 1, line 28) - line 6less line 9 Schedule M-2 Analysis of Unappropriated Retained Earnings per Books (Line 25, Schedule L) 1 Balance at beginning of year . . . 5 Distributions: a Cash 2 Net income (loss) per books. . . b Stock . . . . 3 Other increases (temize): c Property . . . 6 Other decreases (itemize: 7 Add lines 5 and 6. . 4 Add lines 1, 2 and 3. . . . . . 8 Balance at end of year line 4 less line 7) Form 1120:2015