S Corporation Tax Return Assignment
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?