422 Acct Summer 2005 Tax Problem Due August 8, 2005
You are a new accountant at a local accounting firm and as your first assignment you are given the following tax return. Your supervisor explains to you that this client is currently an S-corporation that elected "S" status effective April 1, 1999. Prior to that date, it was a C-Corporation that was incorporated July 6, 1989 and very profitable in prior years and had a fiscal year ending September 30, 2004. The client's old accountant told them to elect "S" status so they could take distributions tax free. The company is a pluming contractor that does work on both commercial and residential project (primarily commercial work). There are 4 equal shareholders at the end of the year, named George Hincappe, Paolo Salvodelli, Jose Azevedo, and Viatcheslav Ekimov. During the year there was an owner shift. On February 28, 2004 there was a split with the last owner Floyd Landis and he sold 100% of his 25% interest to Jose Azevedo for $250,000. As of October 1, 2003, the basis the shareholders have in their stock and in the notes given to the corporation are as follows. There have been outstanding notes to the corporation over the years, but currently the note balance is $0. Shareholder George Hincapie Paolo Salvodelli Viatcheslav Ekimov Roberto Heras Stock Basis at 10/1/2003 $40,000 $40,000 $40,000 $40,000 Basis in Note at 10/1/2003 $0 $0 $0 $0
During year end work, the client informed you that they would not be able to get all of their information to you and this means that their tax return would not be completed by December 15, 2004, so an extension was filed, extending the due date to June 15, 2005. The principal business code of the company is 238220; the method of accounting used is the accrual method with the required disclosure required by IRS Reg 1.451-3(a)(2) stating that the company reports income from long-term contracts using the completed contract method of accounting, the client. The client keeps no inventory, the rules of IRC 263A do not apply to this corporation and there have been no change in determining the quantities, cost, or valuations between opening and closing inventory. the When company was converted from a C-corporation to an S-corporation, there were undistributed C-Corp Earnings and Profits of $349,304. See the attached sheet for the balance sheet and income statement of the company for the prior year and the current year (only prior year balance sheet is included). The AAA account at 10/1/2003 is $234,395. Salary for the shareholders is as follows and is all ready included in COGS payroll. George Hincapie Paolo Salvodelli $ 100,000.00 $ 100,000.00
Acct 422 Summer 2005 Tax Problem Due August 8, 2005
Viatcheslav Ekimov $ 100,000.00 Roberto Heras $ 50,000.00 Jose Azevedo $ 50,000.00 When Floyd Landis sells his stock, what is his gain? The company is located in Vancouver, WA and has business activities in both Oregon and Washington. There also are activities that take place in the City of Portland and Multnomah County so file the appropriate state and local tax returns as well. The information needed to file the correct apportionment numbers is included in the spreadsheet that details the balance sheet and income statement. The client has a good bookkeeper who has been working for them for years and keeps the books very clean. The only adjustments that need to be made to the income statement are those necessary to adjust the GAAP trial balance to a ta...