Go to the IRS Forms and Publications Web site to download the Form 1120 (Schedule M-1).
Prepare the Schedule M-1 using the information below.
It has been 3 years since you have seen your client, Tim Smith (SSN: XXX-YY-ZZZZ), and he has made an appointment today to have his tax return prepared. During the appointment, he informed you that he started his self-service car wash a few years ago, and his business is a success. During the conversation, you gather the following information about the business:
Business Name: The Car Wash
Business address: 1046 Broadway Street, Huntington Beach, CA 92605
Business description: Self-Service Car Wash
Employer identification number: 99-8877665
Date the business started: January 1, 2008
When you ask for the financial records of the business, he provides you with an income statement that he generated. You also ask for the general ledger so you can see the detail that was recorded in each of his accounts. Mr. Smith informs you that he uses the cash basis of accounting for his business.
Income Statement
December 31, 20XX
Revenue
Service Revenue $254,603
Expenses:
Advertising $2,520
Depreciation $31,250
Insurance $7,260
Interest expense $36,204
Licenses and fees $7,260
Miscellaneous $4,074
Office expense $8,911
Salaries and wages $67,460
Payroll taxes $9,444
Employee benefits $1,349
Professional fees $1,210
Repairs and maintenance $20,674
Telephone $900
Travel $1,500
Utilities $27,752
Net Income Before Taxes $26,835
The general ledger detail provides you with the following information about what is recorded under Miscellaneous expenses.
Miscellaneous Expenses
Meals and entertainment $2,074
Lease payments $2,000
Total miscellaneous expenses $4,074
When you ask the client about the lease payment, he tells you that he takes care of his mother and pays for her car lease payment with cash from the business. You confirm with Mr. Smith that his mother is not involved with his business in any way.
The depreciable property is the car wash building that cost $555,000. In your research, you learn that car wash buildings are depreciated over 15 years under the half-year convention using the Modified Accelerated Cost Recovery System (MACRS). This building is in its third year of service.
Obtain the appropriate tax forms at the following Web site, and save them to your computer:
http://www.irs.gov/formspubs/index.html?portlet=3
Part 2:
Having completed part one, identify in a 600-800 word document, what the differences are if using the Schedule M-3? As part of this discussion, explain:
What is the Schedule M-1 and what is its purpose?
How did you report information on your Schedule M-1? (Describe the components.)
Describe 2 book or tax differences that may be reported on the Schedule M-1.
When is the Schedule M-1 to be prepared?
Who must file a Schedule M-3? How is it filed?
What is the purpose of the Schedule M-3?
How is the information reported on the Schedule M-3? (Describe the sections or components.)
Describe how the Schedule M-3 differs from the Schedule M-1.
What are temporary differ