Part 1: Compute Wizard Inc.’s current year taxable income given the following information relating to its 2020 activities. Also, complete Wizard’s Schedule M-1. Use the Form 1120 Page 1 and Page 6 Schedule M-1 to show your work. Pages 1 and 6 are the only pages required.
- Sales of Inventory totaled $1,110,090.
- COGS was $680,080
- There were no book-tax differences in sales or COGS.
- Dividends Wizard received from 28 percent-owned corporation equaled $120,000. Equity method income from the same corporation equaled $130,000.
- Expenses other than DRD, charitable contribution (CC), net operating loss (NOL) totaled $300,000 (no book-tax differences). Put this $300,000 on line 26. Put all other deductions on their designated tax return lines.
- NOL carryover from prior year of $12,000 (originated in 2019).
- Cash charitable contribution of $50,000.
- Federal tax expense of $15,000. This is the amount recorded on the company’s income statement and the amount they paid to the IRS in 2020. State income tax expense equaled $10,000.
Part 2: In addition, given the following information regarding Wizard’s stock ownership and distribution activity during the year, determine the tax status to the shareholders of each distribution, each shareholder’s stock basis as of January 1, 2020 and Wizard’s accumulated E&P as of January 1, 2021. (You must first calculate current E&P)
On January 1, 2020, Wizard Corporation has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:
Arthur Weasley 350
Ronald Weasley (Arthur’s son) 175
Ginny Weasley (Arthur’s daughter) 175
James Potter (Arthur’s grandson) 75
Weasley’s Wizard Wheezes * 125
Callidora Longbottom (Arthur’s Aunt) 50
Gideon Prewitt (Arthur’s brother-in-law) 50
*Weasley’s Wizard Wheezes is a general partnership owned jointly by Arthur’s sons, George and Fred.
Wizard Corporation had accumulated E&P at January 1, 2020 of $300,000.
During 2020, the corporation made the following distributions to its shareholders:
03/31: Paid a “dividend” of $9/share to each shareholder ($9,000 in total).
06/30: Redeemed 200 shares of Arthur’s stock for $200,000. Arthur’s basis in the 200 shares redeemed was $100,000.
09/30: Redeemed 30 shares of Gideon’s stock for $60,000. His basis in the 30 shares was $36,000.
12/31: Paid a “dividend” of $8/share to each shareholder ($6,160 in total).
Please turn the assignment in on February 16 in class, in the following order:
1120 pg. 1, 1120 pg. 6, Current E&P, tax status of distributions in date order, Accumulated E&P as of January 1, 2021, shareholder basis as of January 1, 2021, calculations page if a separate sheet is required to show your work.
The last 4 items do not have to be on separate pages, as long as they are clearly labeled and in the correct order. I would highly recommend the use of Excel for your calculations. If you use Excel, please submit your Excel file through Canvas by class time on February 16. Your 1120 pages must be handwritten.
Stockholder basis in their shares of Wizard Inc. stock as of January 1, 2020:
(total basis for all shares held on that date)
Ronald $ 87,500
Ginny $ 87,500
James $ 37,500
Weasley’s Wizard Wheezes $ 62,500
Callidora $ 60,000
Gideon $ 60,000
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