Question

Project Facts: Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year...

Project Facts:

Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss items for the current year:

Sales

$650,000

Corporate dividend (from 5% owned corporation)

60,000

Municipal bond interest

25,000

Long-term capital gain

0

Short-term capital loss

(8,000)

Cost of goods sold

320,000

Depreciation

65,000

Nondeductible fines

4,000

Advertising

7,000

Utilities

6,000

Rent

5,000

Furthermore, Sunshine’s liabilities (all recourse) increased from $0 on 1/1 to $300,000 on 12/31 of the current year.

  1. Assume that Sunshine Company is a c corporation. Alvin contributed $60,000 to purchase 60% of the stock while his wife’s best friend, Ann, contributed $40,000 to purchase the remaining 40% of the stock when the corporation was formed this year. Alvin received a $2,400 per month salary ($28,800 in total). Ann doesn’t work for the company so she received no salary. The company distributed some profits at the end of the year by paying out a $55,000 dividend.
    1. Calculate Sunshine Corporation’s taxable income and income tax liability to be reported on Form 1120.
    2. What amount and type of income must Alvin report on his individual Form 1040 tax return?
    3. What amount of Alvin’s income will be subject to self-employment tax?
    4. What is Alvin’s basis in his Sunshine stock at the end of this year?

Note that you do not need to complete Form 1120, but this form and related schedules will be a useful guide in completing this portion of the assignment.

IMPORTANT - All information is provided, form 1120 is a tool that might help you solve the problem. The related schedules that are linked to form 1120 are useful as well, but not entirely necessary to solve the exercise. Form 1120 can be found on IRS official site.

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