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Alpha Corporation (the Company), which is a C Corporation, maintains its books and records and prepares its financial statements on the accrual method of accounting and files its income tax returns on the cash method

Accounting

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Alpha Corporation (the Company), which is a C Corporation, maintains its books and records and prepares its financial statements on the accrual method of accounting and files its income tax returns on the cash method. The Company has a calendar year-end. The Company was incorporated on January 1, 2018, when Mr. Smith contributed equipment with a fair market value of $100,000, in which Mr. Smith had a basis of $75,000, for all of the Company’s 2,500 shares of common stock with a par value of $1. The Company’s operations are exclusive to Virginia, were the corporate income tax rate is 6%. The Company’s December 31, 2021 trial balance follows.

 

 

As of December 31, 2020, the Company had $890,000 in accounts receivable and $25,000 in accounts payable. During 2021, the Company acquired a single piece of equipment for $250,000. This equipment is expected to have a useful life of 10 years and no salvage value. For book purposes the equipment is being depreciated over the straight-line method and for tax purposes the Company uses the DDB method. The Company’s federal estimated tax payments of $10,000 are included in the other expenses of $1,300,000 and the Company did not make any Virginia estimated tax payments during 2021. Further, there was no balance due with the Company’s 2020 Virginia income tax return, which was filed on March 15, 2021.

 

 

 

 

Required

 

1. Calculate the Company’s Virginia and Federal taxable income on the cash method of accounting.
2. Prepare the journal entry to record the Company’s 2021 current income tax expense on the accrual method.
3. Calculate Mr. Smith’s basis in his stock in Alpha Corporation as of December 31, 2021.

 

 

Problem 2 (25 Points)

 

On January 1, 2021, George sold a piece of equipment to Fred, an unrelated party, for $100,000. Fred gave George a $10,000 down payment and gave him a note for the balance. The note bears interest at an annual rate of 8% and is due in full (principle and interest) on January 1, 2031. George had fully depreciated the equipment, which had an original cost of $100,000, on the DDB method of depreciation. George used the equipment in his business, which he operates as a single-member LLC and reports his taxable income on the accrual method. Fred operates a similar business and intends to use the equipment in his business.

 

Required

 

1. Calculate George’s gain or loss on sale of the equipment.
2. Calculate the gain and related interest (with respect to this sale only) that George will report on his 2021 tax return.
3. Calculate the gain and related interest (with respect to this sale only) that George will report on his 2022 tax return.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem 3 (25 Points)

 

Delta Corporation (the Company) maintains its books and records on an accrual method of accounting and through December 31, 2020 filed its income tax return on the cash method of accounting. During 2021, the Company intends to change its method of accounting from the cash method to the accrual method. The Company has always operated as a C-Corporation and its sole owner, Dallas, purchased 100% of the Company’s outstanding stock for $225,000 from the Company’s former owner on June 30, 2017.The Company’s 2021 trial balance follows.

 

 

Required

 

1. Based on the preceding information, calculate the Company’s net Sec. 481 adjustment in connection with its change in accounting method from the cash method to the accrual method.
2. Calculate the amount of the adjustment that will be included in the Company income tax returns for the year(s) 2021-2026.
3. Calculate Dallas’ basis in his stock in Delta Corporation as of December 31, 2021.

 

 

 

 

 

 

 

 

 

 

 

Problem 4 (25 Points)

 

On January 1, 2019, BWJ organized Papa Corporation (the Company) by contributing equipment, in which he had a basis of $100,000, in exchange for all of the Company’s company stock, 2,500 shares of $1 par value common stock.  As of the date of the contribution of the equipment, the equipment had a fair market value of $250,000. Effective January 1, 2021, the Company elected to be taxed as an S Corporation. During 2021, the Company did not have any income, expenses, or other items required to be separately stated and the Company’s book and tax depreciation were the same. Further, the Company during 2021 did not have any tax exempt income or non-deductible expenses. At the date of the Company’s S Corporation election there were NO built in gains and the Company’s accumulated earnings and profits was equal to its retained earnings.  The Company’s 2021 trial balance follows.

 

 

 

Required:

 

1. Calculate the gain or loss, if any, that BWJ would have recognized when he contributed the equipment to Papa Corporation on January 1, 2019.
2. What section of the Internal Revenue Code provides guidance with respect to the calculation performed in requirement 1?
3. As of December 31, 2021, what is BWJ’s basis in his stock in Papa Corporation? Note that BWJ continues to own all of the outstanding stock of Papa Corporation as of December 31, 2021.

 

Problem 5 (25 Points)

 

On January 1, 2021, RBJ sold his membership interest in Oscar Company, LLC (the Company) to an unrelated party for $1,250,000 cash. The Company has been taxed as a partnership for its entire existence and has a calendar year end. RBJ held a 50% interest in the Company. As of December 31, 2020, the assets of the Company were appraised for $2,500,000 including $2,250,000 allocated to the Company’s one piece of highly specialized equipment which is an integral part of the Company’s business. As of December 31, 2020, this equipment for tax purposes was fully depreciated. The equipment had an original cost of $750,000. RBJ’s tax basis in his partnership interest at the time of the sale (January 1, 2021) totaled $125,000. A summary of the Company’s assets at book value and fair market value as of December 31, 2020, is as follows.

 

 

 

Required:

 

1. Without regard to Sec. 751, calculate RBJ’s gain or loss on sale of his partnership interest.
2. Calculate RBJ’s ordinary income and capital gain or loss giving consideration to the requirements of Sec. 751.

 

 

 

 

 

 

 

 

 

 

Problem 6 (25 Points)

 

Golf Corporation (the Company), which is a C Corporation, maintains its books and records on the accrual method of accounting and files its income tax returns under the same method. The Company has a calendar year end. During 2021, the Company collected the final payment on the instalment sale of a piece of land entered into on January 1, 2018. The principle collection in 2021 was $30,000 and at the time of the original sale, the computed gross profit percentage was 30 percent. During 2021, the Company did not receive any tax exempt income nor have any non-deductible expenses. The Company did not made any 2021 federal or state income estimated tax payments. For both book and tax purposes the Company’s equipment is fully depreciated. The Company operates exclusively in Virginia where the corporate income tax rate is 6%.The Company’s trial balance follows.

 

 

 

Required:

 

1. Calculate the 2021 gain associated with the Company’s collection of the final instalment payment related to the 2018 sale of the land.
2. Calculate the Company’s 2021 Virginia taxable income.
3. Calculate the Company’s 2021 federal tax.

 

 

 

 

Problem 7 (25 Points)

 

On January 1, 2021, Bob purchased a 50 percent interest in ABC Partnership (ABC) from Tim by paying Tim $150,000 in cash. During 2021, ABC had ordinary income totaling $180,000 and paid a penalty to the state of Virginia in the amount of $1,000. ABC, which does not have any liabilities, made a distribution to its partners on December 31, 2021 in the total amount of $50,000. The ABC partnership agreement requires all income, gains, and losses to be allocated between Bob and his partner based on ownership interest or 50/50.

 

Required:

 

1. Calculate Bob’s tax basis in ABC partnership interest on December 31, 202
2. If Bob sold his entire interest to Jack on January 1, 2022 for $200,000, calculate Bob’s gain or loss on the sale assuming that ABC at the time of the sale did not have any “Hot Assets”.

 

 

 

Problem 8 (25 Points)

 

On the effective date of the Bravo Corporation’s (the Company) S Corporation election (January 1, 2020) the Company had a built in gain with respect to certain real estate held by the Corporation on that date  of $100,000. The Company had zero basis in the real estate and it was appraised for $100,000. One year later (January 1, 2021) this built in gain was realized when the Company sold the real estate to an unrelated party $100,000 and there were no expenses associated with the sale. For the Company’s calendar year 2021, the Company has, exclusive of this gain, taxable income of $2,000,000.

 

Required:

 

1. Calculate the built-in gains tax (Federal) that will be paid by Bravo Corporation with its 2021 tax return as a result of the sale of this real estate.
2. Calculate the amount of gain that will be passed through to the Company’s shareholders related to this sale.

 

Problem 9 (25 Points)

 

Jack and Ann will file a joint return for the year ended December 31, 2021 on which they report taxable income of $130,900 which includes $2,000 of capital gain and $154,000 of ordinary income from Jack’s interest in an S Corporation. Jack’s allocable share of wages and unadjusted basis in qualified property totals $200,000 and $1,500,000, respectively. The ordinary income from Jack’s association with the S Corporation is NOT related to a specified service business and all of the qualified property is within the depreciable period. Jack and Ann do not have any carryover qualified business losses from prior years.

 

Required:

 

1. Calculate Jack and Ann’s Qualified Business Income Deduction for 2021 using the appropriate IRS form.