C:11-64 Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

Drs. Bailey and Firth formed the corporation on January 1, 2013, and the corporation immediately elected S corporation status effective at the beginning of 2013.

Upon formation of the corporation, Dr. Bailey received common stock worth $1.2 million, and Dr. Firth received common stock worth $2.8 million.

The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:

	January 1, 2014	December 31, 2014
Common stock	$4,000,000	$4,000,000
Retained earnings	171,360	91,020

The $180,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Baileys salary.

Qualified production activities income (QPAI) still equals $2.24 million, but employers W-2 wages allocable to U.S. production activities equal $1.16 million (because of Dr. Baileys salary). The company, being an eligible small pass-through S corporation, uses the small business simplification overall method for reporting these activities (see discussion for Line 12d of Schedule K and Line 12 of Schedule K-1 in the Form 1120S instructions).

Use book numbers for Schedule L and Schedule M-1 in Form 1120S.

TABLE C:11-2 Bottle-Up, Inc. Income Statement for the Year Ended December 31 of the Current Year (Problem C:11-63)

Sales		$2,500,000
Returns and allowances		(15,000)
Net sales		$2,485,000
Beginning inventory	$ 102,000
Purchases	900,000
Labor	200,000
Supplies	80,000
Utilities	100,000
Other manufacturing costs	188,000 a
Goods available for sale	$1,570,000
Ending inventory	(96,000)	1,474,000 b
Gross profit		$1,011,000
Salariesc	$ 451,020
Utilities expense	54,000
Depreciation (MACRS depreciation is $36,311)	11,782
Automobile and truck expense	26,000
Office supplies expense	9,602
Advertising expense	105,000
Bad debts expense	620
Rent expense	30,000
Interest expensed	1,500
Meals and entertainment expense	21,000
Selling expenses	100,000
Repairs and maintenance expense	38,000
Accounting and legal expense	4,500
Charitable contributionse	9,000
Insurance expensef	24,500
Hourly employees fringe benefits	11,000
Payroll taxes	36,980
Other taxes	2,500
Penalties (fines for overweight trucks)	1,000	(938,004)
Operating profit		$ 72,996
Other income and losses:
Long-term gain on sale of capital assets	$ 48,666g
Sec. 1231 loss	(1,100)h
Interest on U.S. Treasury bills	1,200
Interest on State of Florida bonds	600
Dividends from domestic corporations	11,600
Investment expenses	(600)	60,366
Net income		$ 133,362
a Total MACRS depreciation is $74,311. Assume that $38,000 of depreciation has been allocated to cost of sales for both book and tax purposes so that the book and tax inventory and cost of sales amounts are the same. The AMT depreciation adjustment on personal property is $9,000.
b The cost of goods sold amount reflects the Uniform Capitalization Rules of Sec. 263A. The appropriate restatements have been made in prior years.
c Officer salaries of $120,000 are included in the total. All are employers W-2 wages.
d Investment interest expense is $500. All other interest expense is trade- or business-related. None of the interest expense relates to the production of tax-exempt income.
e The corporation made all contributions in cash to qualifying charities.
f Includes $3,000 of premiums paid for policies on lives of corporate officers. Bottle-Up is the beneficiary for both policies.
g The corporation acquired the capital assets on March 3, 2012 for $100,000 and sold them on September 15, 2014, for $148,666.
h The corporation acquired the Sec. 1231 property on June 5, 2013 for $10,000 and sold it on December 21, 2014, for $8,900.

TABLE C:11-3 Bottle-Up, Inc. Balance Sheet for January 1 and December 31 of the Current Year (Problem C:11-63)

	January 1	December 31
Assets:
Cash	$ 15,000	$116,948
Accounts receivable	41,500	45,180
Inventories	102,000	96,000
Stocks	103,000	74,000
Treasury bills	15,000	16,000
State of Florida bonds	10,000	10,000
Building and equipment	374,600	375,000
Minus: Accumulated depreciation	(160,484)	(173,100)
Land	160,000	190,000
Tax form to fill out: https://www.irs.gov/pub/irs-prior/f1120s--2014.pdf