John Weaver (123-45-6781) and George Kupp (123-45-6782) are 50% and 50% owners, respectively of Scully, Inc. (11-1111120), a Baseball manufacturing company located at 1525 Valley Glenn Ave. Tustin CA 92782. Scully’s S- election was made effective January 1, 2021.Prior to that Scully was a C Corporation incorporated on 6/15/1980. On 12/31/2022, the Company sold interest in the Land used in the trade or business for $1,202,000 Cash. The basis of the land was $2,000 purchased on 1/1/2019. No estimated tax payments have been made.
The following information was taken from the company’s 2022 income statement without regard to the sale to the sale of Land:
Interest income $ 200,000
Gross sales receipts 2,610,000
Beginning inventory 9,607
Direct labor (203,102)
Direct materials purchased (278,143)
Direct other costs (249,356)
Ending inventory 3,467
Salaries and wages (442,103)
Officers’ salaries ($100,000 each to Weaver and Kupp) (200,000)
Repairs (206,106)
Depreciation expense, tax and book (assume Bonus Depreciation-Section 168(k)) (15,254)
Interest expense (35,222)
Rent expense (operating) (40,000)
Taxes (65,101)
Charitable contributions (cash) (40,000)
Advertising expenses (30,000)
Payroll penalties (15,000)
Other deductions (59,899)
Net Unrealized Built-In Gain-Land @12/31/2021 1,000,000
A comparative balance sheet appears in a separate file.
Scully’s accounting firm provides the following additional information.
Distributions to shareholders $500,000
Beginning balance, Accumulated adjustments account 111,148
W–2 wages for QBI 795,205
Scully Inc.
Comparative Balance Sheets
2021 and 2022
12/31/2021 12/31/2022
Cash $47,840 TBD
Accounts Receivable 93,100 123,104
Inventories 9,607 3,467
Prepaid Expenses 8,333 17,582
Building and Equipment 138,203 185,348
Accumulated Depreciation (84,235) TBD
Land 2,000 –
Total Assets 214,848 TBD
Accounts Payable 42,500 72,300
Notes Payable-Short Term 4,500 2,100
Notes Payable-Long Term 26,700 24,300
Loan to Scully – 100,000
Federal Taxes Payable – TBD
Capital Stock 30,000 30,000
Retained Earnings 111,148 TBD
Total Liabilities and Equity 214,848$ TBD
Using the preceding information, prepare a 2022 Form 1120S and Schedule K–1s for
John Weaver 25 Newport Blvd, Irvine CA 92618, and George Kupp, 10 Main Street,
Irvine, CA 92618. Complete the Forms 1125–A, 1125–E, 4562, 4797 and Schedule D
and other forms you deem necessary. If any information is missing, make realistic
assumptions. Suggested software: Pro Connect Tax Online.
2. Prepare a letter to one of the S Corporation shareholders explaining what they should do with the information on the K-1 on their individual tax returns. DO NOT USECOMPUTER GENERATED LETTERS
3. Prepare write up describing the similarities and differences between an S Corporation, partnership 1065 and corporate tax return 1120 that you have prepared. Also discuss the tax aspects of the S Corporation return and any significant you want to communicate to Scully, Inc. (tax issues, planning ideas, etc.). Use appropriate authorities