Overview:
The AS Corporation (a hypothetical company) was formed and began operations on January 1, 2020, and is owned by Ann Smith, who owns 50% of the stock. There is one other shareholder who owns the rest of the stock. Assume that the corporation has a valid S corporation election in effect for 2020. Ann lives at 1 Ocean Blvd, Brighton Beach NY 12570, she owns 100 shares of stock. The business is a hair salon.
The corporation follows the accrual method of accounting and is not subject to any special taxes. The address of the corporation is 2000 Main St, Brooklyn, NY 12870; and employer Identification number (EIN) is 98- 515234
You are provided with the following year-end financial statements for the AS Corporation.
AS Corporation
Income Statement
For the Year Ended December 31, 2020
Gross Sales $300,000
Qualified Dividends (10% owned investee) 12,000
Cost of Goods Sold 85,000
Total Income 227,000
Officer Compensation 50,000
Salaries and Wages 40,000
Payroll Taxes 15,000
Rent 20,000
Depreciation Expense (book and tax) 5,000
Repairs 2,000
Net Income $95,000
AS Corporation
Balance Sheet
December 31, 2020
Cash $ 10,000
Inventory 50,000
Land 20,000
Building 130,000
Less: Accumulated Depreciation 5,000
Total Assets $205,000
Accounts Payable $20,000
Common Stock 100,000
Retained Earnings 85,000
Total Liabilities & Equity 205,000
Note: No estimated tax payments have been made for 2020. Both shareholders contributed $50,000 to start up the corporation, and each received a $5,000 cash distribution.
Instructions:
Complete the 2021 Form 1120S for the AS Corporation and the Schedule K-1 for Ann Smith.
In this article, we will walk through the process of completing the 2021 Form 1120S for the AS Corporation, a hypothetical hair salon company. We’ll also delve into the specifics of preparing the Schedule K-1 for Ann Smith, one of the shareholders owning 50% of the stock.
Form 1120S is the U.S. Income Tax Return for an S Corporation, used to report the corporation’s income, deductions, and credits. S Corporations, like the AS Corporation, are unique in that they pass income and losses through to their shareholders, who report them on their individual tax returns.
Corporation Name: AS Corporation
Address: 2000 Main St, Brooklyn, NY 12870
Employer Identification Number (EIN): 98-515234
Fiscal Year: January 1, 2021, to December 31, 2021
Let’s first review the financial data for 2021 to calculate the corporation’s taxable income.
Gross Sales: $300,000
Qualified Dividends: $12,000 (10% owned investee)
Cost of Goods Sold: $85,000
Total Income: $227,000
Officer Compensation: $50,000
Salaries and Wages: $40,000
Payroll Taxes: $15,000
Rent: $20,000
Depreciation Expense: $5,000
Repairs: $2,000
Net Income for 2021: Calculate the net income by subtracting the deductions from the total income: $227,000 – ($50,000 + $40,000 + $15,000 + $20,000 + $5,000 + $2,000) = $95,000.
Balance Sheet for 2021: Review the balance sheet data to ensure accurate reporting.
Cash: $10,000
Inventory: $50,000
Land: $20,000
Building: $130,000
Less: Accumulated Depreciation: $5,000
Total Assets: $205,000
Accounts Payable: $20,000
Common Stock: $100,000
Retained Earnings: $85,000
Total Liabilities & Equity: $205,000
Schedule K-1 is used to report the shareholder’s share of the corporation’s income, deductions, and credits. In this case, we’ll prepare Schedule K-1 for Ann Smith.
Ann Smith’s Share of Income: Ann owns 50% of the stock. Her share of the net income is calculated by multiplying her ownership percentage by the net income: 50% * $95,000 = $47,500.
Part I – Information About the Shareholder: Fill in Ann Smith’s personal information, including her name, address (1 Ocean Blvd, Brighton Beach NY 12570), and EIN (98-515234).
Part II – Income: Report Ann’s share of income on the appropriate lines. For example, on Line 1, “Ordinary business income (loss),” enter $47,500.
Part III – Deductions: If there were any deductions or credits that passed through to Ann, they would be reported here.
Part IV – Shareholder’s Share of the Beginning Capital Account: Since both shareholders contributed $50,000 to start the corporation, Ann’s share of the beginning capital account is $25,000 (50% of $50,000).
Part V – Other Information: If there are any other relevant details, they can be included in this section.
In this article, we’ve walked through the process of completing the 2021 Form 1120S for the AS Corporation, a hypothetical hair salon company, and preparing the Schedule K-1 for Ann Smith, one of the shareholders. Accurate completion of these forms is crucial for proper tax reporting and compliance with IRS regulations. Remember to consult with a tax professional or accountant to ensure accurate and up-to-date information based on the specific tax year and any changes in tax regulations.
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