The owners of The Car Wash have asked you to prepare their tax return. Their financial statements are audited by a local certified public accountant (CPA) firm, and they have provided them to you as a reference. A copy of the Income Statement and Balance Sheet have been reproduced below. In your discussion, you obtained the following pieces of additional information to prepare the tax return:
- Name of business owner: Tim Smith, SSN:123-45-6789
- Tim Smith's address: 8765 Warner Street, Huntington Beach, CA 92605
- Name of business owner: Jack Dillard, SSN: 987-65-4321
- Jack Dillard's address: 4321 Courtyard Place, Huntington Beach, CA 92605
- 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
- Business will file its return using the cash basis of accounting
Income Statement
December 31, 20XX
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Revenue:
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Service Revenue
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$254,603
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Expenses:
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Advertising
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2,520
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Depreciation
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31,250
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Insurance
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7,260
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Interest expense
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36,204
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Licenses and fees
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7,260
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Miscellaneous
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4,074
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Office expense
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8,911
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Salaries and wages
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67,460
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Payroll taxes
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9,444
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Employee benefits
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1,349
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Professional fees
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1,210
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Repairs and Maintenance
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20,674
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Telephone
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900
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Travel
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1,500
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Utilities
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27,752
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Net income before taxes
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26,835
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Balance Sheet
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January 1, 20XX
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December 31, 20XX
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Assets
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Cash
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$28,638
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$64,979
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Buildings and other depreciable assets
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555,000
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555,000
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Accumulated depreciation
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(62,500)
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(93,750)
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Total assets
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521,138
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526,229
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Liabilities and equity
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Loans
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183,757
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167,962
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Mortgage
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233,229
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227,280
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Equity investment
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160,000
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160,000
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Retained earnings
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(55,848)
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(29,013)
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Total liabilities and equity
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$521,138
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$526,229
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- Scenario 1: The Car Wash is a corporation.
- Scenario 2: The Car Wash is a limited liability company (LLC).
Obtain the appropriate tax return forms at the following Web site and save them to your computer:
Instructions for how to prepare the applicable forms are available at the same Web site. You may directly input text and numbers on to these forms using Reader. The forms do not self-calculate. Once complete, upload your tax return to the submitted assignments.
Complete all of the requested attachments for the applicable tax return.
Assume the following:
- The initial investment for each owner was $80,000. Each owner has an equal interest in the business.
- A $30,000 salary was paid to each owner. A part-time employee was paid $7,460.
- The loans and mortgage are long-term obligations.
- The annual tax depreciation on the car wash building is $47,453.
- The $555,000, in its third year of service, property was depreciated for tax purposes using a 15-year recovery period, half-year convention (HY) and the Modified Accelerated Cost Recovery System (MACRS) depreciation method.
- The organization does not have any carry forward net operating losses or tax credits.
- The organization does not qualify for any current year tax credits.
Assume the following for a corporation:
- The corporation made a total of $3,000 in estimated tax payments for the tax year.
- Assume the business owners want to receive any applicable refunds.
- Only common stock has been issued.
Assume the following for a partnership:
- The salary paid to each owner is a guaranteed payment.
- Partnership profit, losses, and capital are shared 50/50.
- The loans and mortgage are both recourse debt.
- The K-1 should reflect the partner's capital account according to the United States' Generally Accepted Accounting Principles (U.S. GAAP).