University of Maryland Corporate Taxation Project

1. Project 3: Corporate Taxation
2. Introduction:

For next weeks, you will be assigned to one client, Mike’s Sporting Goods. All of the information you need to provide Mike with exceptional tax preparation services will be provided to you separate emails (Appendices below).

My expectations regarding this task in the Corporate Taxation Department are also provided below. Please don’t hesitate to get in touch if you run into any problems. I am here to help you succeed here at Tax Pros CPA Firm.

 

1. Steps to Completion:

Research Tax Topics

Step 1: Review:

Read through all of the appendices (A-G) below. As you read through the information about the client, keep in mind all you have learned so far.

Step 2: Research:

On the IRS Website, find and print the most recent Form 1120 and instruction.

Step 3: Complete Form 1120 (and all accompanying forms) for

Mike’s Sporting Goods, for the most recent completed year (e.g., if you are taking the course in 2019, assume you are doing it for 2018, and use 2018 forms, etc.). NOTE: To complete Form 1120, you will be required to complete other forms. See IV. Deliverables below for a list

 

See Appendix A – G

 

Step 4: ProConnect Tax Software

Enter all of the client information included in Appendix A – G in ProConnect.

IV. Deliverables:

• Form 1120
• Schedule G
• Form 1125-E
• Form 5884
• Schedule D: Net Long-Term Capital Gains or Losses
• Form 8949: Totals for Proceeds, Basis, & Gain/Loss
• Form 1125-A: Total for Cost of Goods Sold
• Form 3800: General Business Credit: Credit Allowed for the Current Year
• ProConnect Tax Software tax forms

Make sure you include all schedules that the forms ask for, including

any working papers for any calculations.

V. Hints and Tips:

• Ask your supervisor (professor) questions as needed.
• Submit the project before it is due.

VI. Rubric:

 

Criteria	Exceeds Performance Expectations 30 points	Meets Performance Expectations 26.67 points	Does Not Meet Performance Expectations 0 points
Correct Forms	The correct forms are used, easy to read and understand. Anything requiring labeling are properly labeled. The work has a professional appearance.	The correct forms are used, mostly easy to read and understand. Anything requiring labeling are properly labeled. The work has a somewhat professional appearance.	The correct forms are not used and/or are not easy to read and understand. Proper labels missing. The work appeared unprofessional. Or did not submit.
Accuracy of numbers	All numbers on the are accurate and in the correct place.	Most of the numbers on the work are accurate and in the correct place.	Most of the numbers on the work are inaccurate and/or are in the wrong place. Or did not submit.
Understanding of Topic	Indicates an exceptional understanding of the topic, connecting it with our readings or other sources.	Indicates a satisfactory understanding of the topic.	Indicates a limited understanding of the topic, reflecting what other students have already posted or repeating information that was in the assigned reading. Or did not submit.
Overall Score	Exceeds Performance Expectations 90 or more	Meets Performance Expectations 80 or more	Does Not Meet Performance Expectations 0 or more

Appendix A: Client General Information

As the newest member on the corporate tax department team, the senior partner assigns you to prepare corporate tax returns for Mike’s Sporting Goods, Inc. for the most recently completed calendar year (the company uses a calendar year for tax filing).

Mike’s Sporting Goods, Inc., is a Maryland C-Corporation that sells athletic shoes and clothing to sports teams at the college level. The company was originally started by Mike Jones and three guys he met while attending UMUC, all of whom were state champions in various sports. Juan Delaross was a swimmer who won the state championship with his killer butterfly stroke in the 100-meter fly. Elroy Mulcane was the college champion in golf and Scott Barnett was the state cycling champion three years in a row. Mike won the state championship as a sprinter all four years of college.

Starting the company was Mike’s idea, he owns the largest percentage of stock, and is the only owner who works in the business. The other three investors brought money to the table, but never planned on working in the sporting goods store. Therefore, no one questioned Mike when he suggested naming the corporation Mike’s Sporting Goods, Inc. In addition, Mike has always had a strong desire to be known as the big guy on campus even after graduation.

Location
As the old saying goes, Location, location, location. Luckily, Juan is a commercial real estate broker with a reputation for finding the perfect location for small businesses. After showing the location to the other investors, everyone agreed it would attract their target market of young athletic enthusiasts. As corporate officers, Mike and Juan signed a ten-year lease that required $9,200 per year in rent.

The building was built just a few years ago, so minimal expense was projected for maintenance and repairs. For last year, Mike kept repairs expense down to $800, which really pleased Juan, Elroy, and Scott.

Corporate investments
For last year, Mike’s Sporting Goods, Inc. received the following investment income:

• Interest from its own Accounts Receivables = $1,500
• Interest from corporate bonds = $4,000
• Interest from tax-exempt state bonds = $5,000
• Dividends from various U.S. corporations = $10,000
  • Mike’s Sporting Goods, Inc. owns 20% of the stock of one corporation

Since Mike’s Sporting Goods, Inc. did not have a net operating loss, its only entry on line 29 is the dividends-received deduction of $8,000 from Schedule C, page 2.

Year-end 20X5, includes a $3,600 capital loss from the sale of securities.

Revenue from Sales
The corporation, which uses an accrual basis of accounting on a calendar year, brought in $2,010,000 in gross sales in 20X5. Just less than 1% of gross sales were returned, thus bringing net sales to $1,990,000. Thanks to Mike’s purchasing savvy, cost of goods sold was $1,520,000, which is less than the industry standard of 80% of sales.

Other Expenses:

Advertising
While the stockholders had intended on spending more on advertising, Mike only spent $8,700 and most of it was in Website development.

Bad debt expense
The corporation uses the specific account write off method for uncollectible accounts receivable. A total of $1,600 in accounts receivable were written off in 20X5.

Charitable contributions
During the year, Mike’s Sporting Goods, Inc. contributed $11,400 to the UMUC Traveling Athletes Fund and $12,600 to the UMUC Athletic Scholarship Fund.

Depreciation

On Line 8(a) of the Schedule M of the 1120, Mike’s Sporting Goods, Inc. reports the difference between the depreciation claimed on the tax return and the depreciation shown on the corporation’s books.

Total depreciation from Form 4562 (not illustrated) is $17,600. $12,400 is included as cost of goods sold in Line 5 of the Form 1125-A. Enter the balance of $5,200 on line 20. Book Depreciation is $15,980.

Interest expense:
Mike’s Sporting Goods incurs interest expense on debt to finance operations and to buy investments when a deal is just too good to pass up. Elroy is a securities broker with a national brokerage firm therefore he handles all corporate investments. For last year, the corporation accrued $27,200 in interest expense plus $850 in interest on notes used to carry tax-exempt state bonds.

Salaries
When the corporation was first formed, the four corporate officers agreed to keep their salaries low for the first five years to allow the business to grow. Thus, they agreed to pay Mike $55,000 per year, since he will manage the store, and $5,000 per year to the other stockholders. Thereby, total officers’ salaries will be $70,000 per year for the first five years. Hint: use Schedule E.

Since Mike will be handling the ordering, inventory management, and other administrative tasks, all employees will be in sales. Given the nature of sporting goods stores, everyone agreed the staff should be college students currently attending UMUC. Their goal was to keep wages below $50,000 per year. For last year, Mike managed to keep total wages at $44,000.

All other expenses
All other expenses of operating Mike’s Sporting Goods, Inc. total $78,300. These expenses include legal fees, office expenses, and sales commissions. Attach a schedule that itemizes these expenses to the return.

Taxes and credits
Taxes:

At December 31, of last year, the corporation had $55,387 in accrued federal income taxes.

Mike’s Sporting Goods made four estimated tax payments totaling $69,711 as follows:

• $17,280 on April 15 of last year

• $17,280 on June 15 of last year

• $17,280 on September 15 of last year
• $17,871 on January 15 of the current calendar year as an estimate for last year’s tax liability.

 

See the cancelled checks in Appendix F.

 

Tax Credits:

The work opportunity credit is an incentive to hire persons from groups with a particularly high unemployment rate or other special employment needs. Given the high unemployment rate of college students, Mike’s Sporting Goods, Inc. is eligible for a $6,000 work opportunity credit based on 24,000 hours of work. Hint: use Form 5884. The credit will then carry over to the Schedule J of the 1120.

Reconciling Book to Return:

Mike’s Sporting Goods, Inc. has the following non-deductible expenses on its Income Statement Per Books:

Premiums paid on term life insurance on corporate officers	$9,500
Interest paid to purchase tax-exempt state bonds	850
Nondeductible contributions	500
Reduction of salaries by work opportunity credit	6,000
Total	$16,850

 

Deductible state and local taxes (not federal income tax) totaled $15,000

If Mike’s Sporting Goods, Inc. owes income tax, the corporation will mail a check; if, otherwise, credit any overpayment to next years estimated taxes.

Appendix B: Corporate Ownership Information

 

Corporate Name	Mike’s Sporting Goods, Inc.	Social Security #	Ownership %
Corporate Address	422 Bruce Lane Annapolis, MD 21401
Federal Tax ID	52-9746858
Corporate officers:
President/CEO	Michael S. Duke	585-11-4711	40%
Vice President	Juan Delaross	247-88-7896	20%
Treasurer	Elroy Mulcane	585-85-1212	20%
Secretary	Scott Barnett	555-11-4741	20%

 

Appendix C: List of select Accounts and Balances per Book

Partial Trial Balance of Revenues and Expenses per Book (financial-basis, not tax basis). Account balances may or may not be reported on Form 1120. Hint: You will need these items to prepare Schedule M of the 1120.

Account	Debit	Credit
Advertising	8,700
Bad debts	1,600
Charitable Contributions to Not-for-Profit organizations	24,000
Charitable Contributions to political campaigns	500
Compensation of officers	70,000
Cost of goods sold	1,520,000
Depreciation–indirect	3,580
Dividends received		10,000
Federal income tax accrued	55,387
Interest expense on note to buy tax-exempt state bonds	850
Interest expense on note to buy corporate bonds	27,200
Interest income on tax exempt state bonds		5,000
Interest income on taxable corporate bonds		5,500
Loss on securities	3,600
Maintenance and Repairs	800
Net income per books after tax	147,783
Other expenses of operations	78,300
Premiums on life insurance	9,500
Proceeds from life insurance		9,500
Rental expense	9,200
Salaries and wages–indirect	44,000
Sales – gross		$2,010,000
Sales returns and allowances	20,000
Taxes	15,000
Total	$2,040,000	$2,040,000

 

Appendix D: Income Statement per Books

Income Statement per Book (financial, not tax)

Mike’s Sporting Goods, Inc.
Income Statement (per Books)
Revenue:
Gross sales			$ 2,010,000
Less: Returns & allowances		20,000
Net sales		1,990,000
Cost of goods sold		1,520,000
Gross Margin			470,000
Operating expenses:
Advertising		8,700
Bad debt		1,600
Charitable contributions:
Deductible	24,000
Non-deductible	500	24,500
Depreciation		3,580
Equipment rental		9,200
Life insurance		9,500
Maintenance & repairs		800
Officers compensation		70,000
Salaries and wages		44,000
Total operating expenses			171,880
Operating Income			298,120
Other revenue and gains:
Dividend income		10,000
Interest income: Maryland bonds		5,000
Interest income: All other bonds		5,500
Proceeds from life insurance		9,500
Total other revenue and gains			30,000
Other expenses and losses:
Accrued federal income taxes		55,387
Other operating expenses		78,300
Loss on investments		3,600
Total other expenses and losses			137,287
Total income before interest and taxes			190,833
Interest expense on note to purchase tax-exempt bonds	850
Interest expense on all other notes	27,200	28,050
Income before tax			162,783
Less: Income tax			15,000
Net income per books after tax			147,783

Appendix E:

Mike’s Sporting Goods, Inc.
Balance Sheet per Books
As of December 31, of Previous Two Completed Years
	Two Years Previous			Last Year
Assets
Cash		14,700			28,331
Accounts receivable (net)		98,400			103,700
Inventory		126,000			298,400
Tax-exempt securities		100,000			120,000
Other current assets		26,300			17,266
Other investments		100,000			80,000
Buildings	272,400		296,700
Accumulated depreciation	88,300	184,100	104,280		192,420
Land		20,000			20,000
Other assets		14,800			19,300
Total assets		684,300			879,417
Liabilities & Stockholder’s Equity
Accounts payable		28,500			34,834
Notes payable (short term)		4,300			4,300
Other current liabilities		6,800			7,400
Notes payable (long term)		176,700			264,100
Stockholder’s Equity
Common stock		200,000			200,000
Retained earnings: Appropriated		30,000			40,000
Retained earnings: Unappropriated		238,000			328,783
Total liabilities & Stockholder’s equity		684,300			879,417

Appendix F: General Ledger: Retained Earnings (T-acct)

General Ledger Retained Earnings Account
Explanations:	Debits	Credits		Explanations:
Contingencies	10,000		238,000	Beg balance
Accrued income tax	55,387		203,170	Net Income before tax
Dividends paid	65,000		18,000	Income tax refund
Ending balance			328,783