Preparing S Corporation Returns

CPE/CE 4 Credit Hours Preparing S Corporation Returns Form 1120S for S Corporations Interactive Self-Study CPE/CE Course

Preparing S Corporation Returns Self-Study CPE/CE Course Overview Program Content: Publication Date: September 2015. Expiration Date: Field of Study: Program Level: Recommended Participants: Prerequisites: Advance Preparation: Type of Delivery Method: CPE/CE Credit Hours: Passing Grade: Record Retention: The course provides continuing professional education (CPE/CE) to enhance competence in preparing income tax returns for S corporations. Subject matter includes electing S corporation status, basics of S corporation taxation, preparation of Form 1120S, U.S. Income Tax Return for an S Corporation, accompanying forms and schedules, flow-through income and deductions for shareholders of S corporations, and sale of an S corporation. The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion. Taxes. Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels. Tax professionals who prepare individual or small business tax returns are encouraged to take this course. Individuals who are familiar with tax rules regarding treatment of business income and expenses for sole proprietors filing Schedule C (Form 1040), Profit or Loss from Business. No advanced preparation is needed to complete this course. Interactive self-study. 4 Credit Hours. One 50-minute period equals one CPE/CE Credit Hour. Participants who answer a minimum of 70% correct on the final exam will receive a Certificate of Completion. See the Final Examination Instructions on the next page for further information regarding passing requirements and acquiring the Certificate of Completion. As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account. Complaint Resolution Policy: Please contact our customer service department toll-free at 1-866-919-5277. Refund Policy: 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at www.thetaxbook.com. Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. National Registry of CPE Sponsors ID Number 109322 In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T-00093-15-S Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Preparing S Corporation Returns Self-Study CPE/CE Course 6193-CE-0039, which provides 4 hours of federal credit and 0 hours of state credit towards the annual continuing education requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, 95812-2890, toll-free by phone at 1-877-850-2832, or on the internet at www.ctec.org. CTEC Course ID Number 6193-CE-0039 Copyright 2015 Tax Materials, Inc. All Rights Reserved TheTaxReview Preparing S Corporation Returns Overview i

Preparing S Corporation Returns Self-Study CPE/CE Course Completion Instructions Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the Notes sections to jot down reminders and information that will be helpful to you in your tax practice. Follow the instructions below: 1) Start each chapter by reading the Learning Objectives. 2) Read the course materials in the chapter. Pay close attention to: a) Key Facts: Information that is particularly pertinent to the Learning Objective. b) Examples: Review the examples to associate the information to real-world application. c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience. 3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow. 4) After all chapters have been studied, and each Self-Quiz has been taken, complete the Final Exam located at the back of this instruction booklet. Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at www.thetaxbook.com. It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to www.thetaxbook.com. 2) Click on Login to Education Center, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The email address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an email address, or have not provided one, please call our toll-free number at 1-866-919-5277 to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at 1-866-919-5277. 5) Select the Preparing S Corporation Returns Exam and click the Take Exam button. 6) You will be taken to the Final Exam. First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit Answers when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print. Complete Evaluation Form Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to: Tax Materials, Inc. 15105 Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN 55345 Thank you for helping us improve our CPE/CE course offerings! ii Overview TheTaxReview Preparing S Corporation Returns

Learning Objectives / Table of Contents Chapter 1 Basics of S Corporation Tax Return Preparation.................................................. 1 1-A Recognize the similarities and differences between reporting income and expenses on Form 1120S, U.S. Income Tax Return for an S Corporation, and other business entity tax returns. 1-B Identify the characteristics that enable an entity to be eligible to be an S corporation. 1-C Calculate a shareholder s basis based on capital contributions, distributions and pass-through items. 1-D Differentiate between taxable and nontaxable S corporation distributions. 1-E Recognize the necessary steps to elect S corporation status and how the S corporation status may be terminated. 2 S Corporation Scenario Day One Through End of Year......................................... 27 2-A Analyze a scenario involving S corporation formation and operation to identify how the scenario relates to S corporation taxation. 2-B Recognize the requirement that reasonable compensation be paid to S corporation shareholderemployees. 2-C Distinguish amortizable organizational costs and start-up costs. 2-D Recognize the proper shareholder-employee treatment of unreimbursed corporate expenses. 2-E Compute short-year depreciation for the first year of the S corporation s existence. 3 Comprehensive S Corporation Example Preparing Form 1120S................................. 47 3-A Identify the different tax year options available for S corporations and the procedures when an erroneous Schedule K-1 is received. 3-B Reconcile an S corporation s payroll report to extract figures necessary to report on Form 1120S, U.S. Income Tax Return for an S Corporation. 3-C Report all income and expense items on the S corporation tax return. 3-D Recognize items which are separately stated and flow directly through to shareholders on Schedules K and K-1. 3-E Transfer S corporation items from a shareholder s Schedule K-1 to the shareholder s Form 1040 and supporting schedules. 4 Sale of a S Corporation........................................................................ 79 4-A Determine classes of assets upon sale of a business and for reporting on Form 8594, Asset Acquisition Statement. 4-B Differentiate asset allocations favoring the buyer or the seller in the sale of a business situation. 4-C Identify the tax consequences to shareholders upon the liquidation of an S corporation. 4-D Recognize how the sale of a business is reported by an S corporation. 4-E Report the sale of the S corporation business on the shareholder s Form 1040 and supporting schedules. Appendix............................................................................................. 107 Final Exam............................................................................................ 137 Index................................................................................................. 143 Course Evaluation..................................................................................... 145 TheTaxReview Preparing S Corporation Returns Table of Contents iii

iv Table of Contents TheTaxReview Preparing S Corporation Returns

1 Basics of S Corporation Tax Return Preparation Learning Objectives Successful completion of this course will enable the participant to: 1-A Recognize the similarities and differences between reporting income and expenses on Form 1120S, U.S. Income Tax Return for an S Corporation, and other business entity tax returns. 1-B Identify the characteristics that enable an entity to be eligible to be an S corporation. 1-C Calculate a shareholder s basis based on capital contributions, distributions and pass-through items. 1-D Differentiate between taxable and nontaxable S corporation distributions. 1-E Recognize the necessary steps to elect S corporation status and how the S corporation status may be terminated. CPE/CE Glossary Terms Accumulated adjustments account. The accumulated adjustments account represents the accumulation of undistributed S corporation income. Open account debt. Open account debt consists of multiple shareholder advances to an S corporation that are not evidenced by separate written instruments. The undocumented loans are treated as a single indebtedness and referred to as open account debt. Qualified subchapter S subsidiary (QSub). A qualified subchapter S subsidiary (QSub) is an S corporation (or a corporation eligible to be an S corporation) that is owned 100% by another S corporation. S corporation. An S corporation is a corporation (or other eligible entity) that elects to be treated as a pass-through entity for tax purposes. Learning Objective 1-A Recognize the similarities and differences between reporting income and expenses on Form 1120S, U.S. Income Tax Return for an S Corporation, and other business tax entity tax returns. Fundamentals of S Corporation Taxation S corporation formation. An S corporation is formed in the same manner as any other business corporation. A corporation may be formed under state law, or an eligible non-corporate entity may elect to be taxed as a corporation. Whether the entity formed under state law, or made the election to be taxed as a corporation, the entity must file Form 2553, Election by a Small Business Corporation, to elect S corporation status. See Form 2553, Election by a Small Business Corporation, Learning Objective 1-E, page 19. An S corporation provides the same limited liability as a C corporation. However, an S corporation generally does not pay tax at the corporate level, instead An S corporation is formed in the same manner as any other business corporation. An S corporation provides the same limited liability as a C corporation. TheTaxReview Preparing S Corporation Returns Chapter 1 1

NOTES The income or loss is passed through to shareholders on Schedule K-1 (Form 1120S), and the amounts are reported on the shareholders income tax returns Learning how to complete returns for an S corporation should be combined with knowledge of the special rules for business entities which may apply in some situations. passing income through to shareholders in a manner similar to a partnership. Ordinary business income and loss are computed on Form 1120S, U.S. Income Tax Return for an S Corporation, and passed through to shareholders, along with other tax items on Schedule K-1 (Form 1120S), Shareholder s Share of Income, Deductions, Credits, etc. KEY FACT Principles of S corporation taxation. For federal tax purposes, an S corporation is a pass-through entity. S corporation income and deductions are reported on Form 1120S, then passed through to shareholders on Schedule K-1 (1120S). S corporation shareholders pay tax on income as it is earned, whether or not the income is distributed to the shareholder. Distributions to shareholders are generally not taxable up to the amount of the shareholder s basis in stock and/or loans. See Shareholder Basis, Learning Objective 1-C, page 9. Ordinary business income. Ordinary business income or loss for an S corporation is netted and reported on line 21, page 1, Form 1120S. The ordinary income or loss is then allocated to shareholders based on their percentage of stock ownership. The income or loss is passed through to shareholders on Schedule K-1 (Form 1120S), and the amounts are reported on the shareholders income tax returns. Net ordinary business income from an S corporation is reported to shareholders on a pro-rata basis. Other items pass through to shareholders as separately stated items. See Separately Stated Items, Learning Objective 3-D, page 60. Starting with Schedule C (Form 1040) This section applies knowledge of Schedule C preparation as a base for learning how to prepare income tax returns for S corporations. The same general rules that apply to recognition of income and deductions for sole proprietorships also apply to other business entities. If an individual understands how to prepare Schedule C, Form 1040, it should not be a difficult transition to learn how to report items on Form 1120S. Note that there are special rules for business entities such as related-party rules and treatment of transactions between a business entity and its owners that do not apply to sole proprietorships. Learning how to complete returns for an S corporation should be combined with knowledge of the special rules for business entities which may apply in some situations. Structure and Taxation of Business Entities Sole proprietorship. A sole proprietorship is a business owned and operated by an individual and is not considered separate from the individual. Income and expenses from a sole proprietorship are reported on Schedule C, Form 1040. Net profit is subject to income tax, plus self-employment tax. A net loss is allowed as a deduction against other income. Partnership. A partnership is a separate business entity created when two or more individuals or business entities combine to own and operate a business. A partnership income tax return computes net profit or loss, then allocates and reports to partners on Schedule K-1 (Form 1065), Partner s Share of Income 2 Chapter 1 TheTaxReview Preparing S Corporation Returns

Deductions Credits, etc. A partnership is referred to as a pass-through entity because the partnership itself does not pay income tax. Each partner is subject to tax based on the items passed through from the partnership. C corporation. A corporation is often referred to as an artificial person. Forming a corporation can be described as creating a next door neighbor who owns property, realizes income, enters contracts, and engages in transactions with the creators while retaining a separate identity. A corporation can provide shareholders with protection from personal liability by virtue of its separate legal status. In a corporation, stock issued to shareholders represents ownership interests. Decisions about how the corporation will operate are generally controlled by the shareholder or shareholders who own the majority of the voting stock. Even if a shareholder owns 100% of a corporation, the shareholder is legally required to treat the corporation as a separate entity. Similar to an individual, a C corporation pays tax on income. After-tax profits may be retained by the corporation or distributed to shareholders. Distributions of profits from a C corporation are generally treated as dividends taxable to the recipient. S corporation. An S corporation combines aspects of C corporations and partnerships. An S corporation is formed in the same manner as a C corporation and has separate legal status, but unlike a C corporation, an S corporation passes income through to shareholders in the same manner as a partnership. Comprehensive Example Greener Pastures, Inc. Note: The Greener Pastures, Inc. example will be used throughout this course to illustrate the concepts being shown. The Balance Sheet, Income Statement, and Cash Flow Reconciliation for Greener Pastures, Inc. can be found in the Appendix, page 107. The example illustrates how business transactions are reported for an S corporation and includes books, financial statements, and line-by-line illustrations of how to complete Form 1120S, U.S. Income Tax Return for an S Corporation. Differences in reporting for an S corporation. The following items are reported differently for S corporations as compared with C corporations and partnerships. Employee-shareholders of corporations. Unlike a partnership, corporation shareholders are paid wages by the corporation, the same as any other employee. Wages paid to shareholders are deducted from income of an S corporation. Fringe benefits. Although fringe benefits are generally tax free to employeeshareholders in C corporations, in S corporations employee-shareholders who own 2% or more of the corporation are treated the same as partners. This means that most fringe benefits are included in income for a 2% shareholder of an S corporation. S corporation taxation. An S corporation does not pay income tax at the entity level. Income, losses, deductions, and credits flow through to shareholders for reporting on their individual returns. S corporation shareholders pay tax on income at the time it is earned without regard for whether the income is NOTES An S corporation combines aspects of C corporations and partnerships. This means that most fringe benefits are included in income for a 2% shareholder of an S corporation. TheTaxReview Preparing S Corporation Returns Chapter 1 3

NOTES withdrawn. Distributions of cash or property from an S corporation are generally not taxable up to the shareholder s adjusted basis in stock. See Distributions, Learning Objective 1-D, page 15. Section 179 deduction. In an S corporation, the Section 179 expense is not deducted from S corporation income. The amount is instead passed through to shareholders as a separately stated item. See Separately Stated Items, Learning Objective 3-D, page 61. Filling out blank forms will be helpful in learning how the information transfers to the S corporation tax return. The following forms are recommended. Form 1120S, U.S. Income Tax Return for an S Corporation. Form 1125-A, Cost of Goods Sold. Schedule K-1 (1120S), Shareholder s Share of Income, Deductions, Credits, etc. Form 4562, Depreciation and Amortization. Form 1040, U.S. Individual Income Tax Return. Schedule E (Form 1040), Supplemental Income and Loss, page 2. Schedule A (Form 1040), Itemized Deductions. Form 2106, Employee Business Expenses. Blank forms are available in the Appendix, page 107, for optional use when completing this course. Scenario Nate opened a retail store selling lawn and garden tools and implements. As a sole proprietor, he went into business under the name Urban Pastures. Tyler went into business providing hydroseeding services for residential and commercial businesses. He called his business Greener Acres, and operated as a sole proprietor. Assume that Nate and Tyler had formed an S corporation instead of doing business as sole proprietors. Based on capital contributions, Nate will have a 55% allocation of income and deductions from the S corporation, and Tyler will have a 45% allocation. Learning Objective 1-A Self-Quiz For answer, see Chapter 1 Self-Quiz Answers, page 23. Test your knowledge and comprehension of information presented in Learning Objective 1-A. 1) Marley and Eric each do business as sole proprietors in the same profession. They decide to go into business together as an S corporation to achieve the following tax benefit. a) A portion of flow-through ordinary income from an S corporation can be converted to capital gains. b) As shareholders, they can take advantage of a lower S corporation tax rate on the first $50,000 of income. c) As shareholders, they are taxed on the net profit of the S corporation however the net profit is not subject to self-employment tax. d) Fringe benefits to the Marley and Eric will be tax free. 4 Chapter 1 TheTaxReview Preparing S Corporation Returns

Learning Objective 1-B NOTES Identify the characteristics that enable an entity to be eligible to be an S corporation. S Corporation Qualifications An S corporation is limited to 100 shareholders. For this purpose, members of a family are treated as one shareholder. This includes family members up to six generations. A family is defined as the common ancestor, the lineal descendants of the common ancestor, and the spouse (or former spouses) of the lineal descendants or the common ancestor. All shareholders are required to consent to the election to be taxed as an S corporation. The S corporation can have only one class of stock. See One-Class-of-Stock Rule, page 7. The corporation must be a domestic corporation. Individual shareholders must be citizens or residents of the United States. For this purpose, members of a family are treated as one shareholder. Eligible Shareholders Individuals U.S. citizens or residents Decedent s estates Bankruptcy estates IRC 501(c)(3) charitable organizations Qualified Subchapter S Trusts (QSSTs) Electing Small Business Trusts (ESBTs) Employee stock option plan Qualified pension plans Qualified profit sharing plans Ineligible Shareholders Corporations Partnerships Charitable remainder trusts IRAs Simplified employee pensions SIMPLE plans State and local governments Single-member LLCs (if the LLC has elected to be taxed as a corporation) Qualified Subchapter S Trust (QSST). A QSST is permitted to hold stock in an S corporation [IRC 1361(d)(3)]. Qualifications include: The trust may have only one income beneficiary. If the beneficiary dies, the trust may continue with a successor beneficiary. Any corpus distributed during the life of the current income beneficiary may be distributed only to that beneficiary. The income interest must terminate on the earlier of the beneficiary s death or termination of the trust. Upon the termination of the trust during the life of the current income beneficiary, the trust must distribute all its assets to the beneficiary. All accounting income must be distributed (or be required to be distributed) to the single beneficiary during the year. Electing Small Business Trust (ESBT). An ESBT is permitted to hold stock in an S corporation [IRC 1361(e)]. Qualifications include: Beneficiaries are limited to individuals, estates, or eligible charities. An interest in the trust must have been acquired by gift, bequest, or inheritance. The interest may not be purchased. TheTaxReview Preparing S Corporation Returns Chapter 1 5

NOTES A QSub is an S corporation (or a corporation that is eligible to be an S corporation) that is owned 100% by another S corporation. The trustee must file an election under IRC section 1361(e)(3). See Treasury Decision 8994 for information about how to make the election. Potential current beneficiaries must also be qualified shareholders. Potential current beneficiaries include any person who is entitled to, or may receive a distribution from, the principal or income of the trust. [IRC 1361(e)(2)] Qualified Subchapter S Subsidiary (QSub). A QSub is an S corporation (or a corporation that is eligible to be an S corporation) that is owned 100% by another S corporation. Although a QSub is disregarded for income tax purposes and does not file a separate return, it is treated as a separate corporation for certain purposes such as federal employment taxes and information return filing requirements. [Reg. 1.1361-4(a)(7) and (9)] If the QSub is created through an acquisition, the transaction is treated as a liquidation of the subsidiary. Sale of QSub stock. If the parent S corporation sells any stock of the QSub, the QSub status terminates, and the parent is treated as acquiring the remaining stock of the former QSub in exchange for its assets. Gain on the sale of QSub stock is proportionate to the percentage of stock sold. EXAMPLE Real Joy S corporation (RJ) owns 100% of the stock of Purple Raisins S corporation (PR). On January 10, 2014, RJ sells 35% of PR s stock to Better Iridescent corporation (BI). PR terminates as a QSub. RJ pays tax on the gain from the sale of 35% of PR s stock. Grantor trust. A grantor trust owned by a U.S. citizen or resident is an eligible shareholder. If the grantor dies, the trust is allowed to continue for 60 days, or two years, if the assets of the trust are includable in the estate of the grantor. Testamentary trust. A testamentary trust may hold S corporation stock if the stock is transferred by a will. The trust is allowed to continue for two years after transfer of the stock. COURT CASE A corporation elected S status and had as its sole shareholder a custodial Roth IRA for the benefit of the taxpayer. The corporation contended that a custodial IRA qualified to be an S corporation shareholder because IRS regulations provide that the beneficiary (the taxpayer) of a custodial account should be considered the shareholder. The court held that the Roth IRA was an ineligible shareholder and that the corporation should be taxed as a C corporation; however, four judges issued a dissenting opinion. (Taproot Administrative Services, Inc., 133 T.C. No. 9) 6 Chapter 1 TheTaxReview Preparing S Corporation Returns

Ineligible corporations. The following corporations are not allowed to elect S status. [IRC 1361(b)(2)] A financial institution that uses the reserve method of accounting for bad debts. Insurance companies. A corporation that elects to be treated as a possessions corporation under IRC section 936. A DISC or former DISC. One-class-of-stock rule. A corporation that has more than one class of stock does not qualify as an S corporation. A corporation is treated as having only one class of stock if all outstanding shares of stock confer identical rights to distributions and liquidation proceeds. Differences in voting rights are disregarded in determining whether a corporation has more than one class of stock. The determination of whether stock confers identical rights is based on the corporation s governing provisions, which are defined in regulations as the corporate charter, articles of incorporation, bylaws, applicable state law, and binding agreements. [Reg. 1.1361-1(l)] COURT CASE S corporation shareholders had an agreement to pay unequal distributions to a retired shareholder. The shareholders had been advised that the agreement created a second class of stock negating the S corporation status and had filed all subsequent tax returns on that basis. The Tax Court held that since there was no evidence the shareholders had taken any formal corporate action to implement the understanding, it was nothing more than an informal, oral agreement and did not constitute a second class of stock. The court quoted Regulation section 1.1361-1(l) stating the corporation is treated as having only one class of stock if all the outstanding shares confer identical rights to distribution and liquidation proceeds. Conflicting evidence from the shareholders regarding the purpose of the distributions raised the possibility that the distributions may have constituted proportionate distributions fully consistent with the continued existence of one class of stock. (Minton, T.C. Memo 2007-372) NOTES A corporation that has more than one class of stock does not qualify as an S corporation. KEY FACT Any time distributions are made to shareholders, each shareholder should receive a distribution in proportion to the percentage of stock owned. Distributions that differ in timing or amount, depending on the facts and circumstances, may be deemed to create a second class of stock and terminate the S corporation status. Loans as a second class of stock. Instruments, obligations, or arrangements, regardless of whether designated as debt, will be treated as a second class of stock if the following are true. [Reg. 1.1361-1(l)(4)(ii)(A)] The instrument, obligation, or arrangement constitutes equity or otherwise results in the holder being treated as the owner of stock, and A principal purpose of issuing or entering into the instrument, obligation, or arrangement is to avoid the rights to distribution or liquidation proceeds TheTaxReview Preparing S Corporation Returns Chapter 1 7

NOTES conferred by the outstanding shares of stock or to avoid the limitation on eligible shareholders. Straight debt safe harbor. Straight debt will not be treated as a second class of stock if the following are true. [Reg. 1.1361-1(l)(5)] There is a written unconditional promise to pay a certain sum on demand or on a specified date, The interest rate is not contingent on profits, the borrower s discretion, or similar factors, The debt may not be converted into stock, The creditor is an eligible stockholder or a person regularly engaged in the business of lending money, Unwritten advances are treated as debt and do not total more than $10,000 at any time during the year, and Obligations owned solely by the shareholders in the same proportion as their outstanding stock are not treated as a second class of stock. [Reg. 1.1361-1(l) (4)(ii)(B)] KEY FACT The one-class-of-stock rule can be a trap for an S corporation. A number of events can occur that may create a second class of stock, which will invalidate S corporation status. For example, if a shareholder makes a loan to the corporation, and in turn the shareholder receives an increased share of income or profits, the transaction could be considered a second class of stock and S status may be in jeopardy. Loans between the shareholders and the corporation should be closely monitored to avoid violating this rule. Also, a single ineligible shareholder will terminate S corporation status. The corporation should control all stock transfers so that one shareholder cannot transfer any shares to an ineligible shareholder, whether or not intentional. The corporation should control stock transfers with shareholder agreements, such as right of first refusal. Learning Objective 1-B Self-Quiz For answer, see Chapter 1 Self-Quiz Answers, page 23. Test your knowledge and comprehension of information presented in Learning Objective 1-B. 2) Which of the following is one of the qualifications for S corporation status. a) The corporation is a foreign corporation. b) The corporation has 200 shareholders. c) The corporation is a financial institution using the reserve method of accounting for bad debts. d) The corporation has two classes of stock that only differ in voting rights. 8 Chapter 1 TheTaxReview Preparing S Corporation Returns

Learning Objective 1-C Calculate a shareholder s basis based on capital contributions, distributions and pass-through items. Shareholder Basis S corporation shareholder s basis. An S corporation shareholder s basis determines the following: 1) The allowance of nontaxable distributions of cash or property, and 2) The deductibility of flow-through losses and deductions. Key points: A nondividend distribution in excess of stock basis is taxed as a capital gain on the shareholder s personal return, usually a long-term capital gain. Nondeductible expenses reduce a shareholder s stock and debt basis before loss and deduction items (unless shareholder elects to switch the order, see Election to switch order of basis adjustments, page 11). If nondeductible expenses exceed basis, they do not get carried forward unless the shareholder elects to switch the order, see Election to switch order of basis adjustments, page 11. If this election is made, the excess expenses retain their character and are carried forward to the succeeding tax year. A shareholder is not allowed to claim losses and deductions in excess of stock and debt basis. Losses and deductions not allowable in the current year are suspended due to basis limitations. Suspended losses and deductions due to basis limitations retain their character in subsequent years. A shareholder is allowed debt basis only to the extent he or she has personally lent money to the S corporation. A loan guarantee is not sufficient to allow the shareholder debt basis. If an S corporation repays reduced basis debt to a shareholder, part or all of the repayment is taxable to the shareholder. See Repayment of reduced basis debt, page 13. If stock is sold, suspended losses due to basis limitations are lost. The sales price does not have an impact on the stock basis. Stock basis and loan basis. Stock basis and loan basis are adjusted and applied separately. Note: Neither basis can go below zero. KEY FACT All distributions of cash or property and flow-through deductions are applied first against stock basis. If there is sufficient stock basis to absorb the amounts, there is no taxable income to the shareholder, and the losses and deductions are fully allowed on the shareholder s tax return. Taxability of distributions stock basis only. If a distribution of cash or property exceeds stock basis, the excess is a taxable capital gain. These distributions are taken into consideration before flow-through losses and deductions. See Order of adjustments in stock basis, page 10. NOTES A shareholder is not allowed to claim losses and deductions in excess of stock and debt basis. If a distribution of cash or property exceeds stock basis, the excess is a taxable capital gain. TheTaxReview Preparing S Corporation Returns Chapter 1 9

NOTES Deductibility of flow-through losses and deductions stock and/or loan basis. Loan basis is a second tier of basis that can be applied to deduct flowthrough losses and deduction if stock basis has been reduced to zero. EXAMPLE Bert is 100% shareholder of Writers, Inc, an S corporation. Bert s stock basis is $3,500. In addition, Bert has a loan basis of $5,000, which occurred when he made a direct loan to the corporation. In 2014, Writers Inc. made a cash distribution to Bert in the amount of $4,000. Since distributions are taken into account before losses and deductions, and loan basis may not be applied to distributions, Bert must recognize a $500 capital gain on the distribution. The corporation also passed through losses on Schedule K-1 in the amount of $3,000. Bert can apply the losses against loan basis. Stock Basis Loan Basis $4,000 cash distribution (distributions...$ 3,500...$ 5,000 can go against stock basis only-basis... ($ 3,500) cannot go below zero)... $ 0 $ 500 gain $3,000 flow-through loss...$ 0... ($ 3,000) Ending basis...$ 0...$ 2,000 On Bert s return, he recognizes a $500 capital gain and deducts a $3,000 loss. His stock basis is $0, meaning any further distributions of cash or property will result in a capital gain until stock basis is restored. He has $2,000 in loan basis remaining, meaning he will be able to deduct up to $2,000 of future flow-through losses against his loan basis. See Basis restorations apply first to loan basis, page 12. KEY FACT One significant difference between stock basis and loan basis is that tax-free distributions can be taken against stock basis, but not loan basis. If stock basis is zero, and loan basis exists, a distribution could be categorized as a nontaxable repayment of a shareholder loan instead of a distribution. S Corporation Shareholder s Basis Adjustments Order of Adjustments in Stock Basis Basis is increased by: Schedule K-1 1 1) Stock purchases and additional N/A capital contributions. 2) Ordinary income. Box 1 3) Separately stated income items. Boxes 2-10 4) Tax-exempt income. Boxes 16A and 16B 5) Excess depletion. Box 15C continued 10 Chapter 1 TheTaxReview Preparing S Corporation Returns

Order of Adjustments in Stock Basis continued Basis is decreased by: Schedule K-1 1 6) Distributions. 2 Box 16D 7) Nondeductible expenses. 3, 4 Box 16C and 17R 8) Ordinary loss. Box 1 9) Separately stated loss items. Boxes 2 12O, 14L, and 14M 1 See S Corporation K-1 Codes, page 125. 2 Distributions in excess of stock basis result in taxable capital gain. 3 See Election to switch order of basis adjustments, below. 4 Includes the depletion deduction for any oil and gas property held by the corporation, but only to the extent the shareholder s pro-rata share of the property s adjusted basis exceeds that deduction. Note: Stock basis cannot go below zero. See S Corporation Shareholder s Adjusted Basis Worksheet, page 109. NOTES See Basis restorations apply first to loan basis, page 12, for information about whether to apply basis increases to stock basis or loan basis. Election to switch order of basis adjustments. An election is available to reduce an S corporation shareholder s basis by pass-through losses before nondeductible expenses (switching item #7 with #8 and #9 in Order of Adjustments in Stock Basis, page 10). This election can result in a higher allowable deduction for the tax year. This election can result in a higher allowable deduction for the tax year. This election can also allow excess nondeductible expenses, which would ordinarily be lost, to retain their character and be carried forward. [Reg. 1.1367-1(g)] Making the election. A shareholder makes the election by attaching a statement to a timely-filed original or amended tax return indicating that the taxpayer agrees to the carryover rule of Regulation section 1.1367-1(g) and the name of the S corporation to which the rule applies. Once made, the election cannot be changed without IRS consent. EXAMPLE Lucy is 100% owner of Redcorp, an S corporation. Lucy s basis on December 31, 2013 is $10,000. There were no distributions in 2014. Redcorp passes through the following items on Schedule K-1. Ordinary loss of $10,000. Nondeductible penalties of $2,500. The treatment with and without the election to switch order of basis adjustment follows. Standard Order Basis 12/31/13...$10,000 Nondeductible items...$2,500 Basis subtotal...$7,500 Deductible loss...$10,000 Result...Deductible loss of $7,500, carryover loss of $2,500, zero basis Election to Switch Order Basis 12/31/13...$10,000 Deductible loss...$10,000 Basis subtotal... $0 Nondeductible items...$2,500 Result...Deductible loss of $10,000, carryover of nondeductible items, zero basis TheTaxReview Preparing S Corporation Returns Chapter 1 11

NOTES An S corporation shareholder s loan basis for purposes of deducting losses will be increased only by a direct loan to the S corporation. A loan guarantee will not increase an S corporation shareholder s basis for deducting losses. Loans Direct loans. An S corporation shareholder s loan basis for purposes of deducting losses will be increased only by a direct loan to the S corporation. Under IRC section 1366(d)(1)(B), a loan increases basis by the shareholder s adjusted basis of any indebtedness of the S corporation to the shareholder. Recently finalized regulations provide that, in order to increase a shareholder s basis of indebtedness, a loan must represent bona fide indebtedness of the S corporation that runs directly to the shareholder. The regulations also reaffirm that a shareholder acting as guarantor of S corporation indebtedness does not create or increase his or her basis simply by becoming a guarantor. (TD 9682) The following tax court ruling illustrates that even when there is a direct loan from the shareholder to the S corporation, basis is not increased when the transaction lacks economic substance. COURT CASE The taxpayer took out annual loans from his wholly-owned partnership. In turn, he loaned identical amounts of money to his S corporation. The S corporation then paid equivalent amounts of rent back to the partnership. The court held that the taxpayer did not acquire a basis in indebtedness of the S corporation from the annual loans since the transaction involved a circular flow of funds and, therefore, the taxpayer had no economic outlay. (Kerzner, T.C. Memo 2009-76) Loan guarantees. A loan guarantee will not increase an S corporation shareholder s basis for deducting losses. KEY FACT This is in contrast to a partnership where a general partner s share of partnership liabilities will increase basis regardless of whether or not a direct loan has been made. The eventual payment of a loan guarantee does not increase an S corporation shareholder s basis for years prior to the loan payment. At-risk basis. A loan guarantee will increase the shareholder s at-risk basis, but will not increase the basis for purposes of deducting S corporation losses. Basis restorations apply first to loan basis. If loan basis has been reduced in prior years, any basis increase from income items must be applied first to restore basis in the loan before being applied to increase stock basis. This applies only to loans that were in place at the beginning of the year. The loan basis is restored up to the loan balance (original loan less repayments). EXAMPLE Alan owns 100% of Colmes Corp, an S corporation. In 2013, Colmes Corp passed through losses of $4,500. There were no distributions of cash or property. Alan s stock basis was $0, and his loan basis was $10,000. Alan deducted the losses by applying them against his loan basis, bringing his loan basis to $5,500 ($10,000 $4,500). continued on next page 12 Chapter 1 TheTaxReview Preparing S Corporation Returns

Example continued In 2014, Colmes Corp passed through net income of $6,000. Under the basis restoration rules, the income had to be applied first to restoration of loan basis. Therefore, the loan was restored to $10,000, and Alan s stock basis was restored by the remainder, $1,500. NOTES Repayment of reduced basis debt. If an S corporation repays reduced basis debt to a shareholder, part or all of the repayment is taxable to the shareholder. Open account debt. When a shareholder makes multiple advances to an S corporation that are not evidenced by separate written instruments, the undocumented loans are treated as a single indebtedness, referred to as open account debt. If the running balance of open account debt exceeds $25,000 at the close of the taxable year, the entire principal amount of that indebtedness would be treated as debt evidenced by a written instrument. Any subsequent advances to the S corporation would constitute new open account debt. If the $25,000 threshold is exceeded, causing open account debt to be treated as evidenced by a separate written instrument, ordering rules and allocations are required in accordance with Regulation section 1.1367-2. Ordinary income vs. capital gain. A shareholder-creditor of an S corporation derives ordinary income from the repayment of a loan made on an open account debt to the extent the repayments exceed the shareholder s basis in the loan. (Rev. Rul. 68-537) Where a corporation has issued the shareholder a note as evidence of the indebtedness, such note is a capital asset in the hands of the shareholder. Payments received by the shareholder on retirement of the note constitute gains received from the sale or exchange of a capital asset to the extent they exceed the shareholder s basis in the note. (Rev. Rul. 64-162) Basis of S Corporation Stock Upon Conversion From C Corporation The basis of a C corporation shareholder s stock becomes the beginning basis in stock when the corporation converts to S status. Earnings and profits carried over from a C corporation do not add to basis. In some cases, it may be advantageous to distribute E&P before converting to S status. See Passive investment violation, Learning Objective 1-E, page 19. The basis of a C corporation shareholder s stock becomes the beginning basis in stock when the corporation converts to S status. EXAMPLE Kurt owns 100% of Trumpet, Inc., a C corporation. Trumpet has $25,000 of undistributed earnings and profits when Kurt converts to S status in 2014. Kurt s basis in the stock of the C corporation was $7,200 before the conversion. After the conversion, the corporation passes through a loss of $15,000. Kurt s deductible loss is limited to his basis, which is $7,200. The remaining $7,800 in losses carries over and will not be deductible until Kurt increases his stock basis. The loss does not reduce earnings and profits. If Kurt had taken a deemed dividend of $7,800, earnings and profits would be reduced without a net taxable effect. The deemed dividend would have been taxable to Kurt, but he would have been able to claim the offsetting loss. See Deemed Dividends, Learning Objective 1-D, page 17. TheTaxReview Preparing S Corporation Returns Chapter 1 13

NOTES Greener Pastures, Inc. In 2014, the shareholders of Greener Pastures, Inc. made capital contributions, received distributions and Schedule K-1 reporting the flow-through items reported to each shareholder. The following is Nate s shareholder basis calculation. Shareholder basis 12/31/13... $0 Capital contributions... $55,000 Ordinary income... $40,303 Interest income...$311 Section 179 expense...($12,980) Nondeductible expenses... ($5,253) Distributions... ($5,500) Shareholder basis 12/31/14... $71,881 Learning Objective 1-C Self-Quiz For answer, see Chapter 1 Self-Quiz Answers, page 23. Test your knowledge and comprehension of information presented in Learning Objective 1-C. 3) An S corporation with no earnings and profits made a distribution. In what order are basis adjustments made to calculate the S corporation shareholder s stock basis for purposes of determining if the distribution was taxable? a) First Increased for separately and non-separately stated income items. Second Decreased for distributions. Third Decreased for nondeductible expenses. Fourth Decreased for separately and non-separately stated deductible losses. b) First Increased for separately and non-separately stated income items. Second Decreased for separately and non-separately stated deductible losses. Third Decreased for nondeductible expenses. Fourth Decreased for distributions. c) First Increased for separately and non-separately stated income items. Second Decreased for nondeductible expenses. Third Decreased for separately and non-separately stated deductible losses. Fourth Decreased for distributions. d) First Decreased for distributions. Second Increased for separately and non-separately stated income items. Third Decreased for nondeductible expenses. Fourth Decreased for separately and non-separately stated deductible losses. 14 Chapter 1 TheTaxReview Preparing S Corporation Returns

Learning Objective 1-D Differentiate between taxable and nontaxable S corporation distributions. NOTES Distributions Acronyms. The following acronyms are commonly used to describe items relating to distributions to S corporation shareholders. AAA: Accumulated Adjustments Account OAA: Other Adjustments Account PTTP: Post Termination Transition Period E&P: Earnings and Profits S Corporations With No Earnings and Profits All distributions from an S corporation are treated as return of capital if the S corporation has no earnings and profits. An S corporation will generally not have earnings and profits unless the corporation was once a C corporation. Amount applied against basis. Distributions are tax free up to the amount of the shareholder s basis in stock. Amount in excess of basis. If the amount of the distribution exceeds the adjusted basis of the stock, the excess is treated as a capital gain. Also see Stock basis and loan basis, Learning Objection 1-C, page 9. S Corporations With Earnings and Profits A corporation with earnings and profits must maintain an accumulated adjustments account to determine taxability of distributions to shareholders. Although keeping an accumulated adjustments account is not required for S corporations with no earnings and profits, it is recommended. Accumulated Adjustments Account (AAA) The accumulated adjustments account represents the accumulation of undistributed S corporation income. Distributions to shareholders are not taxable to the extent of the balance in the accumulated adjustments account. The taxation of distributions in excess of the accumulated adjustments account depends on whether the corporation has accumulated earnings and profits. See Ordering Rules, page 16. EXAMPLE On January 1, 2013, Shannon formed Chalker, Inc., an S corporation. For tax year 2013, the S corporation passed through income of $16,000 that Shannon reported on her individual tax return. The income was a positive adjustment to the accumulated adjustments account. Shannon did not receive any distributions in 2013. In 2014, Shannon took a distribution of $15,000 from Chalker, Inc. Since the accumulated adjustments account had a balance of $16,000, the distribution was not taxable to Shannon. The distribution caused a negative adjustment to the accumulated adjustments account, which had a balance of $1,000 after the distribution. A corporation with earnings and profits must maintain an accumulated adjustments account to determine taxability of distributions to shareholders. TheTaxReview Preparing S Corporation Returns Chapter 1 15

NOTES KEY FACT Corporate account. The accumulated adjustments account belongs to the S corporation and does not belong to any specific shareholder. A new shareholder who purchases stock in an S corporation also purchases a share of the accumulated adjustments account and is eligible to receive tax-free distributions. The accumulated adjustments account can have a below-zero balance from losses (but not from distributions). Adjustments. The accumulated adjustments account is adjusted in the same manner as the shareholder s basis, with the following exceptions. No adjustment is made for stock purchases or additional capital contributions. No adjustment is made for tax-exempt income and expenses. The accumulated adjustments account can have a below-zero balance from losses (but not from distributions). The deficit is made up by positive adjustments in future years. Other Adjustments Account (OAA) The other adjustments account is adjusted for tax-exempt income (and related expenses) and federal taxes attributable to a C corporation tax year. Ordering Rules The following ordering rules apply to S corporation distributions. Ordering Rules for S Corporation Distributions Tax Effect on Shareholder Effect on Stock Basis 1) AAA Not taxable Negative adjustment 2) E&P Taxable dividend No adjustment 3) OAA Not taxable Negative adjustment 4) Return of capital Not taxable up to basis in stock Negative adjustment 5) Excess of basis in stock Capital gain No adjustment EXAMPLE Todd is 100% owner of Leftfield, Inc., an S corporation. Leftfield has no accumulated earnings and profits. In 2012, the accumulated adjustments account had a balance of $12,500. Todd s stock basis was also $12,500. In 2012, Leftfield, Inc. passed through a loss to Todd in the amount of $15,000. In 2013, Leftfield, Inc., made a distribution to Todd of $3,000 and passed through a loss of $1,200. In 2014, Leftfield, Inc. passed through income of $6,000 to Todd. continued on next page 16 Chapter 1 TheTaxReview Preparing S Corporation Returns

NOTES Example continued AAA Stock Basis Starting basis Pass through loss $15,000 Balance 12/31/12 $ 12,500 ($ 15,000) ($ 2,500) $ 12,500 ($ 12,500) $ 0 (stock basis cannot go below zero $2,500 suspended loss) Distribution $3,000 $0 $ 0 ($3,000 capital gain distribution in excess of stock basis) Loss $1,200 Balance 12/31/13 Pass through income $6,000 Balance 12/31/14 ($ 1,200) ($ 3,700) $ 6,000 $ 2,300 $ 0 $ 0 (increases suspended loss to $3,700) $ 6,000 ($ 3,700) (suspended loss allowed) $ 2,300 (Todd reports the $6,000 gain and also picks up the $3,700 suspended loss on his tax return) Election to Distribute Earnings and Profits First An S corporation can elect to alter the ordering rules and distribute earnings and profits first and amounts from the accumulated adjustments account second. [IRC 1368(e)(3)] The election is irrevocable and applies only for the tax year for which it is made. Deemed Dividends An S corporation may elect to distribute all or part of its C corporation earnings and profits through a deemed dividend. The election is considered to be an election to distribute earnings and profits first (see above). The amount of the deemed dividend is considered as distributed to the shareholders in proportion to their stock ownership, then immediately contributed by the shareholders back to the corporation, all on the last day of the corporation s taxable year. Shareholders pay tax on a deemed distribution, and the amount increases the basis in stock. An S corporation can elect to alter the ordering rules and distribute earnings and profits first and amounts from the accumulated adjustments account second. Shareholders pay tax on a deemed distribution, and the amount increases the basis in stock. In certain cases, it can be advantageous to declare a deemed dividend if the corporation is low on cash. See the example in Learning Objective 1-C under Basis of S Corporation Stock Upon Conversion from C Corporation, page 13. Post Termination Transition Period (PTTP) When a corporation terminates S corporation status, rules for distributions generally revert to C corporation rules. However, a post termination transition period applies special rules for distributions to be treated as if the distributions were made by an S corporation. For the duration of the post termination transition period, distributions from the accumulated adjustments account and the other adjustments account retain their tax-free character, up to the shareholder s adjusted basis in S corporation stock. Also see Election to Distribute Earnings and Profits First, above. (Reg. 1.1377-2) TheTaxReview Preparing S Corporation Returns Chapter 1 17

NOTES Duration. The post termination transition period begins the day after termination of S corporation status and ends on the later of: 1) The day that is one year after the date of termination, or 2) The due date for filing the last S corporation return (including extensions). Greener Pastures, Inc. Distributions. In December 2013, Greener Pastures Inc. made cash distributions of $5,500 to Nate and $4,500 to Tyler. The distributions were made pro rata based on stock ownership, and, therefore, did not violate the one-class-of-stock rule. See One-Class-of-Stock Rule, Learning Objective 1-B, page 7. Form 1120S (2014) Page 5 Schedule M-1 M-2. Reconciliation Schedule of Income M-2 (Loss) is per an Books analysis With Income of (Loss) accumulated per Return adjustments account, 1 Net other income adjustments (loss) per books... account,... 40,695 and shareholders 5 Income recorded on undistributed books this year not included taxable in- Note. The corporation may be required to file Schedule M-3 (see instructions) 2 Income included on Schedule K, lines 1, 2, 3c, 4, come previously taxed. 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ In this 3 example, Expenses recorded line on 5, books Other this year reductions, not consist 6 of Deductions nondeductible included Schedule meals K, and entertainment 14l (itemize): expenses of $550, Section 179 expense against of book $23,600, income this year and (itemize): a Small Business included on Schedule K, lines 1 through 12 and lines 1 through 12 and 14l, not charged a Depreciation $ a Depreciation $ Health b Travel Care and Tax entertainment Credit $ of $9,000, for a total of $33,150. 550 Salaries and Wages 9,000 7 Add lines 5 and 6..... 4 Add lines 1 through 3........ 50,245 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 50,245 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) 1 Balance at beginning of tax year..... 2 Ordinary income from page 1, line 21... Interest 3 Other additions.......... 4 Loss from page 1, line 21....... 5 Other reductions.......... 6 Combine lines 1 through 5....... 7 Distributions other than dividend distributions 8 Balance at end of tax year. Subtract line 7 from line 6 9,550 (a) Accumulated adjustments account 0 73,279 566 (b) Other adjustments account ( ) ( ) ( ) 33,150 40,695 10,000 30,695 (c) Shareholders undistributed taxable income previously taxed Form 1120S (2014) Learning Objective 1-D Self-Quiz For answer, see Chapter 1 Self-Quiz Answers, page 23. Test your knowledge and comprehension of information presented in Learning Objective 1-D. 4) Skylights, Inc. started business and elected to be an S corporation on January 1, 2014. Ron is the 100% shareholder and contributed $2,000 to the company on January 1, 2014. In 2014, the company had ordinary trade or business income of $4,000, charitable contributions of $500, and distributions of $5,000. What amount, if any, of the distribution results in taxable income to Ron? a) $5,000 b) $1,500 c) $1,000 d) $0 18 Chapter 1 TheTaxReview Preparing S Corporation Returns

Learning Objective 1-E Recognize the necessary steps to elect S corporation status and how the S corporation status may be terminated. Electing to Be an S Corporation Form 2553, Election by a Small Business Corporation. Form 2553 is filed by a corporation to elect to be taxed as an S corporation. The due date for the election is the 15th day of the third month of the tax year the election is to take effect (March 15 for a calendar year corporation). The election may also be filed at any time during the tax year prior to the year the S corporation election is to apply. An eligible non-corporate entity that files Form 2553 is deemed to have made an election to be taxed as a corporation. This eliminates the need for the entity to file Form 8832, Entity Classification Election, in order to choose S corporation taxation. Shareholder consent. All shareholders must consent to an S corporation election. Shareholder information required on Form 2553 includes the name, address, taxpayer ID number, information about stock ownership, and taxable year of the shareholder. Once an election is in place, a new shareholder joining the corporation does not need to make a formal consent. Relief for Late S Corporation Elections Effective September 3, 2013, Revenue Procedure 2013-30 simplifies the granting of relief to late-filing entities by consolidating numerous other revenue procedures into one procedure and by extending relief in certain circumstances. This procedure provides guidance for relief for late: S corporation elections, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections, Qualified Subchapter S Subsidiary (QSub) elections, and Corporate classification elections which the entity intended to take effect on the same date that the S corporation election would take effect. Due date for relief. Relief under Revenue Procedure 2013-30 must be requested within three years and 75 days after the effective date of the intended election. See Exception to three years and 75 days rule, page 20. General relief rules for S corporation elections. Relief under Revenue Procedure 2013-30 is granted when the following requirements are met. The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify solely because the election was not timely filed, The entity has reasonable cause for its failure to make the election timely, The entity and all shareholders reported their income consistent with an S corporation status for the year the election should have been made and all subsequent years, Less than three years and 75 days have passed since the intended effective date of the election. See Exception to three years and 75 days rule, page 20. If an entity does not qualify for relief under Revenue Procedure 2013-30, it may still request relief by requesting a private letter ruling. The procedure for NOTES All shareholders must consent to an S corporation election. If an entity does not qualify for relief under Revenue Procedure 2013-30, it may still request relief by requesting a private letter ruling. TheTaxReview Preparing S Corporation Returns Chapter 1 19

NOTES The S corporation election may be revoked with the consent of shareholders holding more than 50% of the shares of stock of the corporation. requesting a letter ruling and the associated fees are described in Revenue Procedure 2014-1, or its successor. Exception to three years and 75 days rule. Entities meeting the following conditions are not limited by the three years and 75 days rule. The entity is a corporation (not an LLC seeking an entity classification election), The corporation failed to qualify solely because the election was not timely filed, The corporation and all its shareholders reported their income consistent with S corporation status for the year the election should have been made and all subsequent years, At least six months have elapsed since the date on which the corporation filed its tax return for the first year it intended to be an S corporation, Neither the corporation nor any of its shareholders was notified by the IRS of any problems regarding the S corporation status within six months of the date on which Form 1120S for the first year was timely filed, and The completed Form 2553 includes all the statements as described in Revenue Procedure 2013-30. Termination of S Corporation Status An S corporation election will terminate, and the corporation will revert to C corporation taxation, upon the occurrence of any one of the following events. 1) Shareholders revoke the election, 2) The corporation fails to qualify as an S corporation, or 3) The corporation violates the passive income restrictions (for corporations with E&P). Shareholder revocation. The S corporation election may be revoked with the consent of shareholders holding more than 50% of the shares of stock of the corporation. A revocation made on or before the 15th day of the third month of the taxable year is effective as of the first day of the taxable year (March 15 for a calendar year corporation). Revocation made after the 15th day of the third month of the tax year is effective for the following taxable year. Revocation can be made for a prospective date which is on or after the date the revocation is made. [IRC 1362(d)(1)] Corporation statement. The corporation files a statement of revocation, signed by an officer who is authorized to sign Form 1120S, with the IRS Service Center where the original election was filed. Include the following information. A statement that the corporation is revoking its S corporation election under IRC section 1362(a). The corporation s name, address, and EIN. The number of shares of outstanding stock. The effective date of the revocation. The shareholder s consent statements. Shareholder statement. A statement signed by the shareholder, under penalty of perjury, which includes: The name, address, and EIN of the consenting shareholder. The number of shares owned by the shareholder. 20 Chapter 1 TheTaxReview Preparing S Corporation Returns

The date the shareholder acquired the stock. The shareholder s tax year end. The name and EIN of the S corporation. The election to which the shareholder consents. The shareholder s consent statement should be attached to the corporation s election revocation statement. Passive investment violation. An S corporation election shall terminate if passive investment income exceeds 25% of gross receipts for three consecutive taxable years, and the corporation has accumulated earnings and profits from periods when the corporation was a C corporation. The termination will occur on the first day of the taxable year after the three-year period. [IRC 1362(d)(3)] For purposes of this provision, passive income includes income from royalties, rents, dividends, interest, and annuities. Rents do not include rents derived in the active trade or business of renting property. Rents received are derived in an active trade or business of renting property only if, based on all the facts and circumstances, the corporation provides significant services or incurs substantial costs in the rental business. [Reg. 1.1362-2(c)(5)] KEY FACT An S corporation that earns passive income and has accumulated E&P may want to consider making a dividend distribution sufficient to eliminate the accumulated E&P. This would avoid possible termination due to passive income restrictions and also avoid the possible tax on excess net passive income. See also Deemed Dividends, Learning Objective 1-D, page 17. NOTES The shareholder s consent statement should be attached to the corporation s election revocation statement. Inadvertent Termination If an inadvertent S corporation termination occurs, and the corporation takes steps to correct the terminating event within a reasonable time after discovery, the IRS may allow the corporation to continue to operate as an S corporation. The corporation has the burden of establishing that the termination was inadvertent. A termination may be found to be inadvertent if the event was not reasonably within the control of the corporation and was not part of a plan to terminate the election, or the event took place without the knowledge of the corporation. Permission from the IRS is required to disregard an inadvertent termination. (Reg. 1.1362-4) Five-Year Waiting Period for Reinstatement If an S corporation election is terminated, whether by shareholder revocation, ceasing to qualify, or violating the passive income restrictions, a five-year waiting period applies during which the corporation cannot re-elect S corporation status without IRS consent. [IRC 1362(g)] Treatment of S Corporation Termination Year Termination of an S corporation election that occurs on a date other than the last day of the S corporation s tax year will create two short tax years. Income, loss, deductions, and credits are allocated between the S and C corporation short years on a pro-rata basis using the number of days in each short year. Termination of an S corporation election that occurs on a date other than the last day of the S corporation s tax year will create two short tax years. TheTaxReview Preparing S Corporation Returns Chapter 1 21

NOTES An S corporation may elect to close the books on the date of termination upon consent of all the shareholders. Exception: If there is a sale or exchange of 50% or more of the stock in the corporation during the year the S corporation terminates, the pro-rata allocation method may not be used. See Election to close books, below. EXAMPLE #1 Card Corporation, a calendar year corporation, starts out the year with a valid S corporation election in place. On May 1, the corporation s S status terminates. The pro-rata allocation will be 33% to the S corporation, and 67% to the C corporation (120 days 365 days = 33%; 245 days 365 days = 67%). Card Corporation has income of $120,000 for the full year. The income is allocated as follows: S corporation at 33% = $ 39,600 ($ 120,000 33%) C corporation at 67% = $ 80,400 ($ 120,000 67%) Income...$ 120,000 Election to close books. An S corporation may elect to close the books on the date of termination upon consent of all the shareholders. An election to close the books will allocate income, loss, deductions, and credits during the S corporation short year to the S corporation and C corporation items to the C corporation short year. [Reg. 1.1362-3(b)] Note: If there was a sale or exchange of 50% or more of the stock of the corporation during the year the S corporation was terminated, this method is mandatory and the pro-rata allocation cannot be used. EXAMPLE #2 Assume the same information as Example #1, except with the additional information that $100,000 was earned before the S corporation termination occurred, and the remaining $20,000 was earned after the termination. Card Corporation s shareholders made an election to close the books. Therefore, $100,000 will be allocated to the S corporation, and $20,000 will be allocated to the C corporation. Learning Objective 1-E Self-Quiz For answer, see Chapter 1 Self-Quiz Answers, page 23. Test your knowledge and comprehension of information presented in Learning Objective 1-E. 5) An S corporation election will terminate upon the occurrence of which of the following events? a) The corporation revokes the election. b) The corporation allows IRA s to be shareholders. c) 20 out of the 50 shareholders want to revoke the election. d) A shareholder passed away and her estate became the shareholder. 22 Chapter 1 TheTaxReview Preparing S Corporation Returns

Chapter 1 Self-Quiz Answers NOTES 1) Marley and Eric each do business as sole proprietors in the same profession. They decide to go into business together as an S corporation to achieve the following tax benefit. a) A portion of flow-through ordinary income from an S corporation can be converted to capital gains. Incorrect. Ordinary income flowing through from an S corporation is taxed as ordinary income to the shareholder. b) As shareholders, they can take advantage of a lower S corporation tax rate on the first $50,000 of income. Incorrect. Income is not taxed at the S corporation level. Income from an S corporation is passed through to shareholders and taxed along with their other income on Form 1040. c) As shareholders, they are taxed on the net profit of the S corporation however the net profit is not subject to self-employment tax. Correct. The flow-through income from an S corporation is not subject to self-employment tax. However, employee-shareholders must take reasonable wages from an S corporation and those wages are subject to FICA and Medicare taxes. d) Fringe benefits to the Marley and Eric will be tax free. Incorrect. In S corporations, employee-shareholders who own more than 2% of the corporation are taxed on most fringe benefits. 2) Which of the following is one of the qualifications for S corporation status. a) The corporation is a foreign corporation. Incorrect. An S corporation must be a domestic corporation. b) The corporation has 200 shareholders. Incorrect. An S corporation is limited to 100 shareholders. c) The corporation is a financial institution using the reserve method of accounting for bad debts. Incorrect. Certain corporations are not eligible to elect S status and a financial institution using the reserve method of accounting for bad debts is one of those corporations. d) The corporation has two classes of stock that only differ in voting rights. Correct. A corporation that has more than one class of stock does not qualify as an S corporation, however differences in voting rights are disregarded in determining whether a corporation has more than one class of stock. TheTaxReview Preparing S Corporation Returns Chapter 1 23

NOTES 3) An S corporation with no earnings and profits made a distribution. In what order are basis adjustments made to calculate the S corporation shareholder s stock basis for purposes of determining if the distribution was taxable? a) First Increased for separately and non-separately stated income items. Second Decreased for distributions. Third Decreased for nondeductible expenses. Fourth Decreased for separately and non-separately stated deductible losses. Correct. This is the correct order for basis adjustments to stock. There is an election available to switch the order and decrease stock basis by separately and non-separately stated deductible losses before nondeductible expenses. This election can result in a higher allowable deduction for the tax year. b) First Increased for separately and non-separately stated income items. Second Decreased for separately and non-separately stated deductible losses. Third Decreased for nondeductible expenses. Fourth Decreased for distributions. Incorrect. Stock basis is decreased first by distributions, then nondeductible expenses, and last deductible losses. c) First Increased for separately and non-separately stated income items. Second Decreased for nondeductible expenses. Third Decreased for separately and non-separately stated deductible losses. Fourth Decreased for distributions. Incorrect. Stock basis is decreased by distributions before nondeductible expenses. d) First Decreased for distributions. Second Increased for separately and non-separately stated income items. Third Decreased for nondeductible expenses. Fourth Decreased for separately and non-separately stated deductible losses. Incorrect. Stock basis is increased first for income items and then decreased by distributions. 24 Chapter 1 TheTaxReview Preparing S Corporation Returns

4) Skylights, Inc. started business and elected to be an S corporation on January 1, 2014. Ron is the 100% shareholder and contributed $2,000 to the company on January 1, 2014. In 2014, the company had ordinary trade or business income of $4,000, charitable contributions of $500, and distributions of $5,000. What amount, if any, of the distribution results in taxable income to Ron? a) $5,000 Incorrect. The distribution of $5,000 is not taxable to Ron because his stock basis is $6,000 prior to the distribution. NOTES b) $1,500 Incorrect. The contribution of $500 is a separately stated item and not considered in stock basis before the distribution. Ron s capital contribution of $2,000 also adds to his basis in the stock. Ron s stock basis is $6,000 not $3,500 prior to the distribution. c) $1,000 Incorrect. Ron s capital contribution of $2,000 adds to his basis in the stock. Ron s stock basis is $6,000 not $4,000 prior to the distribution. d) $0 Correct. Ron s beginning stock basis is $2,000 increased by the ordinary income of $4,000 which totals $6,000 of stock basis prior to the distribution. The distribution of $5,000 is not taxable since the stock basis is $6,000. After the distribution Ron s basis is $1,000 which is further reduced by the charitable contributions of $500. 5) An S corporation election will terminate upon the occurrence of which of the following events? a) The corporation revokes the election. Incorrect. The corporation cannot revoke the election, only the shareholders can decide to revoke the election. b) The corporation allows IRA s to be shareholders. Correct. The corporation fails to qualify as an S corporation since an IRA is not an eligible shareholder. c) 20 out of the 50 shareholders want to revoke the election. Incorrect. Shareholders can revoke the election, however shareholders holding more than 50% of the shares of stock of the corporation must consent to revoke the election. d) A shareholder passed away and her estate became the shareholder. Incorrect. Decedent s estates are eligible shareholders so the corporation still qualifies as an S corporation. TheTaxReview Preparing S Corporation Returns Chapter 1 25

26 Chapter 1 TheTaxReview Preparing S Corporation Returns

2 S Corporation Scenario Day One Through End of Year Learning Objectives Successful completion of this course will enable the participant to: 2-A Analyze a scenario involving S corporation formation and operation to identify how the scenario relates to S corporation taxation. 2-B Recognize the requirement that reasonable compensation be paid to S corporation shareholder-employees. 2-C Distinguish amortizable organizational costs and start-up costs. 2-D Recognize the proper shareholder-employee treatment of unreimbursed corporate expenses. 2-E Compute short-year depreciation for the first year of the S corporation s existence. Glossary Terms Organizational costs. Business organizational costs are the direct costs paid or incurred to create a business entity. Short tax year. A short tax year is any tax year with less than 12 full months. Start-up costs. Business start-up costs are amounts paid or incurred for investigating or creating an active trade or business that would be deductible if paid or incurred by an existing business. CPE/CE Learning Objective 2-A Analyze a scenario involving S corporation formation and operation to identify how the scenario relates to S corporation taxation. Greener Pastures, Inc. The Greener Pastures Inc. example is a comprehensive example that follows the business cycle of Greener Pastures from concept to inception, start-up to the end of the first tax year, then through completion of the tax return and reporting income to owners. The example illustrates how business transactions are reported for an S corporation, and includes books, financial statements, and line-by-line illustrations of how to complete Form 1120S, U.S. Income Tax Return for an S Corporation. The Balance Sheet, Income Statement, and Cash Flow Reconciliation for Greener Pastures, Inc. can be found in the Appendix, page 107. Scenario Nate owned a lawn and garden implement store. Tyler owned a hydroseeding business. Nate and Tyler decided to go into business together under the name Greener Pastures. TheTaxReview Preparing S Corporation Returns Chapter 2 27

NOTES Shareholders are personally responsible for paying for their own professional publications, association dues, and sanctioning fees. Creating an S corporation. Nate and Tyler consulted an attorney for advice about the choice of business entity. The attorney recommended that they operate their business as a corporation and began the process of filing the necessary documents with the Secretary of State. The attorney also assisted them in drafting an incorporation agreement. See Incorporation Agreement, below. Upon creation of the corporation, the official name of the company became Greener Pastures, Inc. The attorney s fee was $2,000. Tax advice. The tax consultant for Greener Pastures, Inc. recommended that the corporation make the election to be taxed as an S corporation and assisted in filing the election. See Form 2553, Election by a Small Business Corporation, Learning Objective 1-E, page 19. The tax consultant obtained an employee identification number (EIN) for the business. The consultant also instructed Nate and Tyler to open a business checking account and to make cash contributions to capital. The bookkeeping system was set up and procedures were put in place to provide for compensation and benefits for the shareholders. The tax consultant s fee was $2,500. Incorporation Agreement The partnership agreement for Greener Pastures, Inc. contains the following provisions. Stock authorized. The corporation authorized 500,000 shares of stock at par value of $1.00 per share. Capital contributions. Nate makes a capital contribution in the amount of $55,000 in exchange for 55,000 shares of stock. Tyler makes a capital contribution in the amount of $45,000 for 45,000 shares of stock. After the capital contributions, the corporation has 100,000 shares of outstanding stock. Note: No gain or loss is recognized when cash is contributed to a corporation in exchange for stock. Employee-shareholder expenses. Shareholders are personally responsible for paying for their own professional publications, association dues, and sanctioning fees. As corporation shareholders, these amounts will be deducted as employee business expenses on the individual tax returns, subject to the 2% of AGI limitation for employee business expenses. KEY FACT Although an employee-shareholder can deduct employee business expenses, a shareholder of an S corporation cannot deduct expenses paid on behalf of a corporation unless a corporate resolution or policy requires payment of the expense. See Employee Business Expense for S Corporation Shareholder, Learning Objective 2-D, page 37. Tax year. The S corporation adopts a calendar tax year. The first tax year is a short tax year beginning on April 1, 2014 and ending on December 31, 2014. The corporation will establish its calendar tax year with the IRS when it files its first income tax return. 28 Chapter 2 TheTaxReview Preparing S Corporation Returns

Accounting method. The S corporation will use the cash method of accounting. Inventory. The S corporation will hold inventory consisting of lawn and garden implements and hydroseeding materials. Under the general rule, if a company carries inventory, the accrual method of accounting must be used for purchases and sales. However, businesses with average gross receipts of $1 million or less are eligible to use the cash method of accounting. Even though Greener Pastures, Inc. will use the cash method of accounting, the cost of inventory cannot be deducted until the products are sold. Employees. Greener Pastures, Inc. hired Evan to assist Tyler with hydroseeding, Cyndi as an assistant store manager, and Tristan and Jordan as sales people. In addition to wages, the corporation will provide health benefits through HSAs and retirement benefits through a SIMPLE plan. Distributions. In December 2014, Greener Pastures Inc. made cash distributions of $5,500 to Nate and $4,500 to Tyler. The distributions were made pro rata based on stock ownership, and, therefore, did not violate the one-class-of-stock rule. See One-class-of-stock rule, Learning Objective 1-B, page 7. NOTES Businesses with average gross receipts of $1 million or less are eligible to use the cash method of accounting. Learning Objective 2-A Self-Quiz For answer, see Chapter 2 Self-Quiz Answers, page 44. Test your knowledge and comprehension of information presented in Learning Objective 2-A. 1) Susan and Char decide to go into business and operate as a corporation. After receiving professional advice they decide to be taxed as an S corporation. For federal tax purposes, how will the S corporation be established? a) The S corporation is established by filing Form SS-4, Application for Employer Identification Number. b) The S corporation is established when the first Form 1120S, U.S. Income Tax Return for an S Corporation, is filed with the IRS. c) The corporation is established by filing the necessary documents with the Secretary of State, adopting an Incorporation Agreement and filing Form 2553, Election by a Small Business Corporation. d) The S corporation is established by filing documents with the Secretary of State. TheTaxReview Preparing S Corporation Returns Chapter 2 29

NOTES Learning Objective 2-B Recognize the requirement that reasonable compensation be paid to S corporation shareholder-employees. Reasonable Compensation Payment for services. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to him or her. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly. Source of gross receipts. Three major sources of an S corporation s gross receipts are: Services of the shareholder, Services on non-shareholder employees, or Capital and equipment. If most of the gross receipts and profits are associated with the shareholder s personal services, then most of the profit distribution should be allocated as compensation. If most of the gross receipts and profits are associated with the shareholder s personal services, then most of the profit distribution should be allocated as compensation. Additionally, the shareholder-employee should be compensated for administrative work performed for the other income producing employees or assets. An officer that performs no service, or only minor service, to the corporation is not considered an employee. Reasonable compensation in the courts. Several court cases support the authority of the IRS to reclassify other forms of payments to shareholder-employees as wages subject to employment taxes. IRS Position Court Rulings Authority to reclassify Glass Block Unlimited, T.C. Memo 2013-180 Joly, 6th Cir., March 20 2000 Reinforce employment status of shareholders Reasonable reimbursement for services performed Joseph M. Grey Public Accountant, P.C., 119 T.C. No. 121 Veterinary Surgical Consultants, P.C., 117 T.C. No. 141 Sean McAlary Ltd. Inc., T.C. Summary 2013-62 David E. Watson, P.C., 8th Cir., February 21, 2012 KEY FACT Many S corporations are set up for the primary purpose of avoiding payroll taxes on wages to shareholders. This approach does not comply with tax law. A recent study identified the highest noncompliance issue in S corporations as being incorrect wages paid to shareholders. The growing number of S corporations and the fact that most of them are held by three or fewer shareholders makes this area a prime target for IRS audits. (TIGTA Ref. No. 2012-30-062) Factors considered in finding reasonable wages. The following factors are often cited in court cases in relation to determining reasonable wages for an S corporation shareholder. Training and experience. Duties and responsibilities. 30 Chapter 2 TheTaxReview Preparing S Corporation Returns

Time and effort devoted to the business. Dividend history. Payments to non-shareholder employees. Timing and manner of paying bonuses to key people. What comparable businesses pay to key people. Compensation agreements. Usage of a formula to determine compensation. Note: The IRS will also look at amounts paid to family members in determining whether reasonable wages were paid. If the compensation paid to a family member is not reasonable under the circumstances, the IRS will make an adjustment to the tax of the corporation and the family member. Salary comparisons. Comparable wage information specifically for S corporations can be obtained at: www.payscale.com/salary-survey/aid-9176. Income taxed to the earner. The existence of a validly organized and operated corporation does not preclude taxation of income to the service provider instead of the corporation. Income is taxable to the one who earns it. COURT CASE The taxpayer and his wife each owned separate S corporations under which they ran a tax preparation business and realtor business, respectively. Each taxpayer assigned payments received for their services to their respective corporations. Neither corporation paid either taxpayer wages for their services. Since there was not an employer-employee relationship, nor any contract between the corporation and the taxpayer giving the corporation the right to instruct or control the taxpayer s actions, the court upheld the IRS position that the S corporations themselves did not earn the income. Rather, the taxpayers personally earned the income outside the corporation and, thus, were subject to self-employment tax. (Arnold, T.C. Memo 2007-168) NOTES The IRS will also look at amounts paid to family members in determining whether reasonable wages were paid. Fringe Benefits for S Corporation Shareholders For purposes of applying the rules for fringe benefits, an S corporation is treated as a partnership, and any shareholder with 2% or more ownership of the S corporation is treated as a partner. Self-employed health insurance. Guidance from the IRS allows a more than 2% shareholder-employee of an S corporation to deduct an above-the-line health insurance deduction, even if the policy is purchased in the name of the shareholder. The deduction is allowable if: 1) The S corporation makes the premium payments for the policy covering the more than 2% shareholder-employee in the current tax year, or 2) The more than 2% shareholder-employee makes the premium payments, furnishes proof of payment to the S corporation, and is reimbursed within the current tax year. (Notice 2008-1) The premiums will not qualify if they are not paid or reimbursed by the S corporation and included in the shareholder s gross income on Form W-2. The deduction is limited to the smaller of eligible health insurance premiums or net profit from the business. For a more than 2% shareholder-employee of The deduction is limited to the smaller of eligible health insurance premiums or net profit from the business. TheTaxReview Preparing S Corporation Returns Chapter 2 31

NOTES an S corporation, net profit means Medicare wages from box 5 of his or her Form W-2. KEY FACT Since the health insurance premiums are generally exempt from FICA tax, the employee needs to earn additional wages from the S corporation in an amount at least equal to the insurance premiums to insure a full deduction. Greener Pastures, Inc. In Greener Pastures, Inc., the S corporation will pay wages of $55,755 to Nate and $44,245 to Tyler. The corporation will pay health insurance premiums and make HSA contributions for each shareholder-employee. See Employee benefits, below. Total wages reported are $63,555 ($55,755 + $4,500 + $3,300) for Nate, and $52,045 ($44,245 + $4,500 + $3,300) for Tyler. KEY FACT Health insurance benefits paid for more than 2% shareholders of an S corporation are taxable as wages but are not subject to FICA. The amount of the self-employed health insurance deduction should be reported in box 14 of the employee-shareholder s Form W-2. The shareholder is then able to deduct this amount as adjustments to income on Form 1040. Since the employeeshareholder s wages are increased by health benefits, that also increases the compensation for purposes of computing the employer s match for the SIMPLE plan. In a reverse situation compared with health benefits, employee elective deferrals to a SIMPLE plan are not subject to income tax but are subject to FICA. See Learning Objective 3-B, page 49, for information about reporting these amounts. Employee benefits. The S corporation will pay premiums of $4,500 for each employee, which is 100% of the cost of their high-deductible medical insurance purchased through a Small Business Health Options Program (SHOP) Marketplace. It will also contribute to both HSA and SIMPLE plans for each employee. Health savings accounts. The corporation will contribute $3,300 to an HSA for each individual. See Learning Objective 3-B, page 49, for how to report on Form 1120S. SIMPLE plan. The S corporation will contribute to Savings Incentive Match Plans for Employees (SIMPLE plans) by establishing SIMPLE IRAs. The corporation will match employee elective deferrals dollar-for-dollar up to 3% of each employee s wages. Note that health benefits for S corporation shareholder-employees increase taxable wages, and, therefore, increase the employer matching amount for their SIMPLE contributions. 32 Chapter 2 TheTaxReview Preparing S Corporation Returns

Learning Objective 2-B Self-Quiz For answer, see Chapter 2 Self-Quiz Answers, page 44. Test your knowledge and comprehension of information presented in Learning Objective 2-B. 2) Which of the following is one of the requirements for a more than 2% shareholder-employee of an S corporation to deduct an above-the-line health insurance deduction? a) The health insurance premium is paid by the shareholder and not reimbursed by the S corporation. b) The health insurance premium is paid by the S corporation but is not included in the shareholder s Form W-2. c) The shareholder has no other wages from the S corporation. d) The shareholder makes the premium payments, furnishes proof to the S corporation and is reimbursed in the current year. NOTES Learning Objective 2-C Distinguish amortizable organizational costs and start-up costs. Organizational Costs and Start-Up Costs Capital expenses. Organizational costs and start-up costs are capital expenses. Capital expenses are generally not deductible and are added to the taxpayer s basis in the business. If the expenses are not otherwise recoverable through depreciation, amortization, depletion, or the cost of goods sold deduction, the expenses are recovered at the time the business is sold. An election is available to deduct up to $5,000 in organization costs and $5,000 in start-up costs for tax purposes. Amortization is available for amounts in excess of the limits. Greener Pastures, Inc. Greener Pastures, Inc. will elect to deduct its organizational costs and startup costs for tax year 2014. An election is available to deduct up to $5,000 in organization costs and $5,000 in start-up costs for tax purposes. Organizational and Start-Up Cost Deduction Limits Organizational costs*...$5,000 Start-up costs*...$5,000 * Reduced dollar-for-dollar when total costs exceed $50,000. Limits apply separately. Any remaining costs must be amortized. Organizational Costs The costs to organize a corporation are the direct costs of creating the corporation. A cost must meet the following tests. It is for the creation of the corporation. It is chargeable to a capital account. It could be amortized over the life of the corporation if the corporation had a fixed life. TheTaxReview Preparing S Corporation Returns Chapter 2 33

NOTES It is incurred before the end of the first tax year in which the corporation is in business. Exception: See Cash method corporation, below. Qualifying Costs Temporary directors. Organizational meetings. State incorporation fees. Accounting services for setting up the corporation. Legal fees for drafting the charter, bylaws, term of the original stock certificates, and minutes of organizational meetings. Nonqualifying Costs Issuing and selling stock or securities (commissions, professional fees, printing costs, etc.). Transferring assets to the corporation. Cash method corporation. A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Start-Up Costs Business start-up costs are amounts paid or incurred for investigating or creating an active trade or business that would be deductible if paid or incurred by an existing business. Start-up costs include: Analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Expenses incurred while investigating the purchase of a business. Training wages for employees who will work in the business. Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Cost of professional services, such as executives and consultants. The business start date determines whether operating expenses are deductible in the current tax year or whether the expenses must be capitalized. Business start date. The business start date determines whether operating expenses are deductible in the current tax year or whether the expenses must be capitalized. For example, before a retail store opens its doors to customers, wages paid for employee training are capitalized start-up costs subject to amortization limits. After the grand opening, the wages are deductible as current operating expenses. KEY FACT Determining the business start date is not always as clear as a retail store s grand opening. In Glotov vs. Commissioner, (T.C. Memo 2007-147), Tax Court made the determination based on whether the business is functioning as a going concern and performing the activities for which it was organized. Note that a business can be a going concern even if it has not yet produced any sales revenue. Purchase of a business. Costs directly associated with purchasing a business are capital expenses and cannot be amortized. 34 Chapter 2 TheTaxReview Preparing S Corporation Returns

EXAMPLE In June, Jenny hired an accounting firm to perform financial projections to investigate the potential purchase of Heidi s Convenience Store. In October, Jenny signed a purchase agreement with Heidi s Convenience Store. The accounting firm continued to provide services after the purchase agreement was signed. The costs to investigate the business before Jenny signed a purchase agreement are amortizable start-up costs. The costs for services after that time related to the attempt to purchase the business must be capitalized, added to the basis of the business, and cannot be amortized as startup costs. Assuming the deal closes, when Jenny opens the doors as the new owner, the business start date has occurred, and future accounting costs will be currently deductible as operating costs. NOTES Deduction/Amortization Amortization. Under the general rule, a taxpayer may elect to amortize startup costs and organizational costs over a term of 180 months, starting with the month the active trade or business begins. Deduction. Instead of amortizing start-up costs and organizational costs, a taxpayer may elect to deduct up to $5,000 in start-up costs and/or up to $5,000 in organizational costs in the year the business begins. The deduction is phased out dollar-for-dollar when start-up costs (or organizational costs) exceed $50,000. EXAMPLE Armando opened the doors to the public for his new restaurant in April 2014. Start-up costs paid between November 2013, when he first started planning for the restaurant, and April 2014, when final preparations were complete, total $14,000. The first $5,000 of start-up costs is currently deductible in 2014. The remaining $9,000 is amortized over 180 months starting April 2014. Making the Election Electing the deduction. The election to currently deduct up to $5,000 of startup or organizational costs (or both) is made by claiming the deduction for the tax year in which the trade or business begins. The tax return must be timely-filed, including extensions. No separate statement is required for making this election. Electing to amortize. The election to amortize start-up or organizational costs (or both) is made by filing Form 4562, Depreciation and Amortization, with the applicable tax return for the tax year in which the trade or business begins. The election is irrevocable. The tax return must be timely-filed, including extensions. Attach a statement listing a description and amount of each cost, date incurred (for organizational costs), month the business began or was acquired, and the amortization period (generally 180 months). Use separate statements for start-up costs and organizational costs. The election to currently deduct up to $5,000 of start-up or organizational costs (or both) is made by claiming the deduction for the tax year in which the trade or business begins. TheTaxReview Preparing S Corporation Returns Chapter 2 35

NOTES KEY FACT If the business is organized as a corporation, only the corporation can elect to amortize its startup or organizational costs. A shareholder cannot make this election. A shareholder cannot amortize any costs incurred in setting up the corporation. Only the corporation can amortize these costs. See Organizational and Start-up Costs: Statement of Election to Amortize, page 110, for a worksheet and statement that can be used to make the election. Correcting an omitted election. An election to deduct or amortize costs that was omitted on a timely-filed return (including extensions) can still be made by filing an amended return within six months of the original due date of the return (excluding extensions). Note: Because deducting and amortizing start-up and organizational costs are both elections that must be made by the extended due date of the return, a taxpayer filing a past-due return with start-up and/or organizational costs must capitalize the expenses and can recover them only upon the sale of the business. What if the Business Never Starts? Corporations. If a corporation attempts to go into a new trade or business and is not successful, all investigatory costs are deductible as a loss. The cost of any assets acquired during the unsuccessful attempt at going into business is part of the basis in the assets. Such costs are recovered when the assets are disposed of. Learning Objective 2-C Self-Quiz For answer, see Chapter 2 Self-Quiz Answers, page 44. Test your knowledge and comprehension of information presented in Learning Objective 2-C. 3) Franco, Inc. is an S corporation and has $4,500 in qualified start-up costs. What is the fastest way for the S corporation to write off the costs? a) The start-up costs can be deducted in full on Franco, Inc. s first tax return. b) The start-up costs must be amortized over 180 months beginning on the date the business starts. c) The start-up costs may be reported as Section 179 property and deducted on the S corporation s first tax return. d) Start-up costs are capital expenses and are therefore included in the shareholder s basis in the S corporation stock. Start-up costs are not allowed to be deducted, and will reduce gain or increase loss on eventual sale of the stock. 36 Chapter 2 TheTaxReview Preparing S Corporation Returns

Learning Objective 2-D Recognize the proper shareholder-employee treatment of unreimbursed corporate expenses. NOTES Employee Business Expense for S Corporation Shareholder KEY FACT A shareholder of an S corporation cannot deduct expenses paid on behalf of the corporation without a corporate resolution. Paying expenses of an employer. If the expense paid by an employee is that of the employer and not the employee, the expense might not be deductible. This could be the case where a taxpayer is both the shareholder and employee of his or her corporation. The shareholder-employee may pay a corporate expense, such as office rent, out of personal funds when the corporate checkbook is low on funds. Since the expense is a liability of the corporation and not the employee, the expense is not deductible by the employee because it is not an ordinary and necessary business expense under IRC section 162 (Brody, T.C. Summary 2004-149). However, if the corporation has a resolution or policy in place requiring a corporate officer as an employee of the corporation to assume certain expenses, those expenses would be deductible by the employee, subject to the 2% AGI limitation on Schedule A. (Craft, T.C. Memo 2005-197) If the expense paid by an employee is that of the employer and not the employee, the expense might not be deductible. COURT CASE The taxpayer was a 50% shareholder and incurred vehicle expenses and office-in-home expenses in performing his duties as an employee of the corporation. The corporation had adopted a resolution requiring the taxpayer to incur expenses as may be necessary or required, and that they would not be reimbursed by the corporation. The resolution also required the taxpayer to supply office space and his own vehicle for his business services which would not be reimbursed by the corporation. The court ruled these expenses were deductible as employee business expenses which are miscellaneous itemized deductions, subject to the 2% AGI limitation. The court noted that the voluntary payment of corporate expenses by officers, employees, or shareholders are not deductible and must be considered capital contributions or loans to the corporation. However, a corporate resolution or policy in place requiring a corporate officer to assume certain expenses indicates that those expenses are his or her expenses as opposed to those of the corporation. (Craft, T.C. Memo 2005-197) Reimbursable expenses. When an employee has a right to reimbursement for expenses related to his or her status as an employee but fails to claim reimbursement, the expenses are not deductible since they are not considered necessary expenses. TheTaxReview Preparing S Corporation Returns Chapter 2 37

NOTES The employer is allowed a deduction for rent paid, but the employee is not allowed a deduction for business use of the home. COURT CASE The taxpayer s job involved extensive traveling in a two state area. His employer had a policy under which employees were eligible for reimbursement of all types of nonvehicle business expenses. The taxpayer did not submit any expenses for reimbursement from his employer. Instead, he deducted the expenses as unreimbursed business expenses on his tax return. The court noted that it was not necessary for the taxpayer to remain unreimbursed for the expenses. To the extent the expenses could have been reimbursed, the court disallowed the taxpayers claimed deductions. (Stidham, T.C. Summary 2012-61) Shareholder s use of home. If general requirements are met, a shareholder is allowed to deduct expenses for business use of the home, assuming the shareholder receives reasonable wages for services rendered. Such expenses are deducted as employee business expenses on Schedule A, Form 1040, subject to the 2% of AGI limitation. Exception for rental. A taxpayer is not allowed to deduct expenses for business use of the home attributable to rent paid by the employer if the employee is providing services. The employer is allowed a deduction for rent paid, but the employee/shareholder has taxable rental income with no corresponding deductions for the business use of the home. [IRC 280A(c)(6)] Greener Pastures, Inc. The shareholders are personally responsible for paying for their own professional publications, association dues, and sanctioning fees. As corporation shareholders, these amounts will be deducted as employee business expenses on the individual tax returns, subject to the 2% of AGI limitation for employee business expenses. Learning Objective 2-D Self-Quiz For answer, see Chapter 2 Self-Quiz Answers, page 44. Test your knowledge and comprehension of information presented in Learning Objective 2-D. 4) If an S corporation has a policy requiring a corporate officer as an employee of the corporation to pay certain expenses, how does the shareholder claim the deduction? a) A shareholder is not allowed to deduct S corporation expenses on his or her individual tax return. b) A shareholder is allowed to deduct unreimbursed S corporation expenses as an itemized deduction subject to the 2% AGI limitation. c) If stated in the S corporation policy, a shareholder is allowed to deduct unreimbursed S corporation expenses on Schedule E of Form 1040. d) A shareholder may amortize unreimbursed S corporation expenses over a period of 180 months from the date the business starts. 38 Chapter 2 TheTaxReview Preparing S Corporation Returns

Learning Objective 2-E Compute short-year depreciation for the first year of the S corporation s existence. Tax Depreciation Short tax year. A short tax year is any tax year with less than 12 full months. A short tax year can occur in the first or last year of a corporation s existence, or when a taxpayer changes from a fiscal year to a calendar year or vice versa. The MACRS percentage tables cannot be used with a short tax year. NOTES The MACRS percentage tables cannot be used with a short tax year. KEY FACT The Section 179 deduction is not limited by short year depreciation rules. Short year depreciation may be avoided by claiming a Section 179 deduction on property placed in service in a short tax year. Short Tax Year Conventions Mid-month convention. Under the mid-month convention, property is always treated as placed in service or disposed of on the midpoint of the month it is placed in service or disposed of. This rule is applied regardless of whether a short tax year exists. Half-year convention. Under the half-year convention, the midpoint of the short tax year is determined by dividing the number of months in the tax year by 2. A short tax year may begin or end with a partial month. Use these rules for counting months and determining midpoints. If the short tax year begins on the first day of a month or ends on the last day of a month, treat the partial month as a full month for determining the midpoint. The midpoint of the short year will be the first day or midpoint of a month. If the short tax year does not begin on the first day of a month and does not end on the last day of a month, determine the midpoint by dividing the number of days in the tax year by 2. If the result is not the first day or midpoint of a month, treat property as placed in service or disposed of on the nearest preceding midpoint or first day of the month. Using these rules, property subject to the half-year convention in a short tax year is always treated as being placed in service or disposed of on the first day or midpoint of a month. EXAMPLE Patches Company was incorporated on March 15, 2014, and is a calendar year taxpayer. Since the short tax year ends on the last day of a month (December 31, 2014), the partial month of March is treated as a full month. Therefore, for purposes of computing short-year depreciation, the short tax year is considered to begin on March 1 and is a 10-month tax year ending on December 31. Patches Company purchases a depreciable asset that falls under the half-year convention. The company treats the asset as being placed in service on the first day of the sixth month of the tax year, or on August 1, 2014. TheTaxReview Preparing S Corporation Returns Chapter 2 39

NOTES Mid-quarter convention. In general, property falls under the mid-quarter convention if more than 40% of the depreciable basis of all property placed in service was placed in service during the last three months of the tax year, regardless of the length of the tax year. For example, all depreciable property placed in service during a short tax year of three months or less is subject to the mid-quarter convention. Use these rules to divide the short tax year into quarters and determine midpoints. If the short year consists of four or eight full calendar months, then the quarters consist of one month or two full months, respectively. The midpoint of each quarter in the short year is either the midpoint of a month or the first day of a month. For any other short tax year, divide the number of days in the short year by 4 to establish the quarters. Divide the number of days in each quarter by 2. If the result is not the first day or midpoint of a month, treat property as placed in service or disposed of on the nearest preceding midpoint or first day of the month. Using these rules, property subject to the mid-quarter convention in a short tax year is always treated as being placed in service or disposed of on the first day or midpoint of a month. EXAMPLE Britches Company has a short tax year that extends from September 10 to December 31. There are 112 days in Britches Company s short tax year, which computes to four quarters of 28 days each. The midpoint of each quarter falls 14 days after the start of the quarter. Since the first quarter of the short tax year began on September 10, the midpoint of the first quarter is September 24. Since the midpoint does not fall on the first day or midpoint of a month, property placed in service in the first quarter will be considered to have been placed in service on September 15, the nearest preceding midpoint of the month. Even in a short tax year, the full amount of the Section 179 expense is allowed, subject to normal limits. Computing Depreciation in a Short Tax Year Section 179. Even in a short tax year, the full amount of the Section 179 expense is allowed, subject to normal limits. Property placed in service in a short tax year. MACRS percentage tables cannot be used to compute short-year depreciation. Use the following procedure instead. 1) Determine the short tax year convention for the property and the number of months the property is treated as being in service. This is the midpoint. 2) Calculate full year depreciation by multiplying the depreciable basis by the applicable depreciation rate. 3) Multiply the full year depreciation by a fraction. The numerator is the number of months (including parts of a month) from step 1. The denominator is 12. Short-Year Depreciation Formula (First Year) Depreciable Basis 1 Recovery period 200% (200DB) or 150% (150DB) or 100% (S/L) Midpoint 12 = Depreciation 40 Chapter 2 TheTaxReview Preparing S Corporation Returns

EXAMPLE Whisper Company has a short tax year beginning on March 15, 2014, and ending on December 31, 2014. On March 16, the company purchased a depreciable asset with a 5-year recovery period for $1,000. No other assets were placed in service during the short tax year; therefore, the asset falls under the half-year convention. The midpoint of the short tax year is August 1. The midpoint of the short tax year will allow five months of depreciation for the year. Whisper Company did not claim the Section 179 deduction for the asset and uses the 200DB depreciation method. Using the Short-Year Depreciation Formula (First Year), page 40, the first-year depreciation computation is as follows: $1,000 basis 1/5 200% 5/12 = $167 first-year depreciation Depreciation after a short tax year. MACRS percentage tables cannot be used to compute full-year depreciation for property previously placed in service during a short tax year. Use the following procedure instead. For 12-month tax years occurring after an initial short tax year, multiply the adjusted basis of the property at the beginning of each tax year by the applicable depreciation rate. If using 200DB or 150DB, switch to SL in the year the SL method yields a higher deduction. For a short tax year occurring after an initial short tax year, multiply the adjusted basis of the property at the beginning of the tax year by the applicable depreciation rate and then by a fraction. The numerator of the fraction is the number of months in the short tax year the property is considered to be in service based on the applicable convention, and the denominator is 12. Section 179 Expense Section 179 limits. Maximum Section 179 limits for tax years beginning in 2014 are as follows. Maximum Section 179 expense: The maximum Section 179 deduction for 2014 is the lesser of $500,000 or the taxpayer s business income limitation, see below. Maximum Section 179 expense for SUVs: $25,000. Investment limit: If the total cost of Section 179 property placed in service in 2014 exceeds $2,000,000, the available Section 179 deduction is reduced by the amount of the excess (but not below zero). Amounts disallowed because of the investment limit may not be carried over. S corporation business income limitation. The business income limitation for an S corporation is the total net taxable income from all trades or businesses actively conducted by the S corporation, without considering: The Section 179 deduction, credits, and tax-exempt income. Shareholder-employee compensation. Section 179 carryover: If the business income limit prevents an individual taxpayer from deducting all or part of the cost of Section 179 property, the disallowed amount is reported on line 13, Form 4562, Depreciation and Amortization of Property, and carried over to the next tax year. NOTES MACRS percentage tables cannot be used to compute full-year depreciation for property previously placed in service during a short tax year. Amounts disallowed because of the investment limit may not be carried over. TheTaxReview Preparing S Corporation Returns Chapter 2 41

NOTES The shareholder s basis in the entity is reduced by the entire amount of the Section 179 deduction even if the deduction is unused by the shareholder. If the investment limit prevents an individual taxpayer from deducting all or part of the cost of Section 179 property, no carryover of the disallowed amount is permitted. KEY FACT It is often advantageous to claim the entire eligible Section 179 amount even when the deduction is reduced by the business income limit. The amount carried over is available for future years when business income may be higher. However, if the deduction is reduced by the investment limit, claim only the allowed amount (or less), and recover the remaining cost of the property through depreciation. Excess Section 179 deduction from a pass-through entity. Section 179 deduction or investment limitations may prevent an individual taxpayer from claiming the full amount of a Section 179 deduction allocated by a S corporation. In this case: The disallowed amount is not deductible and may not be carried over by the shareholder. The shareholder s basis in the entity is reduced by the entire amount of the Section 179 deduction even if the deduction is unused by the shareholder. The S corporation reduces its basis in Section 179 property by the full amount of the deduction elected. When interest or ownership in the entity is disposed of, the shareholder s basis for gain or loss is increased by the amount of disallowed deduction. S corporations should structure Section 179 deductions so that shareholders do not suffer loss of the deduction. EXAMPLE Julie is 100% shareholder in an S corporation and also has an interest in a partnership. She receives a K-1 from the S corporation showing a pass-through Section 179 deduction of $375,000 and a K-1 from the partnership showing a pass-through Section 179 deduction of $185,000. Since the deduction limit of $500,000 applies to Julie individually, the excess $60,000 Section 179 deduction is lost and does not carry over. The lost deduction does not increase Julie s basis in either the S corporation or the partnership unless she disposes of her ownership or interest. Greener Pastures, Inc. Purchase of assets. Greener Pastures, Inc. took out a bank loan of $23,600 to purchase equipment for hydroseeding. It paid cash for display shelving, office furniture, and computers totaling $16,515. Equipment... $23,600 Display shelving...$8,950 Office furniture...$3,675 Computers...$3,890 Total... $40,115 Special bonus depreciation. Greener Pastures, Inc. is electing out of the special depreciation method. 42 Chapter 2 TheTaxReview Preparing S Corporation Returns

Section 179 deduction and depreciation. A Section 179 deduction of up to $500,000 is available for tax year 2014. Greener Pastures, Inc. elects to claim a Section 179 deduction for the hydroseeding equipment only. The remaining assets will be depreciated for tax purposes under regular MACRS using a short tax year. NOTES Short tax year depreciation. Since the S corporation s first year is less than 12 months, depreciation cannot be computed using the MACRS percentage tables. 2014 Depreciation Schedule Greener Pastures, Inc. Asset Placed in Service Basis Section 179 Depreciable Basis Recovery Period Method Equipment April 1, 2014 $ 23,600.00 $ 23,600.00 $ 0.00 7 yr. 200DB Display shelving April 1, 2014 $ 8,950.00 $ 0.00 $ 8,950.00 7 yr. 200DB Office furniture April 1, 2014 $ 3,675.00 $ 0.00 $ 3,675.00 7 yr. 200DB Computers April 1, 2014 $ 3,890.00 $ 0.00 $ 3,890.00 5 yr. 200DB Totals $ 40,115.00 $ 23,600.00 $ 16,515.00 Regular Tax Depreciation Short Tax Year 200DB Display shelving... $8,950 1 7 200% 4.5 12 = $ 959 Office furniture... $3,675 1 7 200% 4.5 12 = $ 394 Computers... $3,890 1 5 200% 4.5 12 = $ 584 Total regular tax depreciation... $1,937 AMT Short Tax Year 150DB. Refigure depreciation for AMT purposes for property depreciated using the 200% DB method by using the 150% DB method with the same convention and recovery period. Costs recovered under Section 179 do not need to be added back for AMT. Display shelving... $8,950 1 7 150% 4.5 12 = $ 719 Office furniture... $3,675 1 7 150% 4.5 12 = $ 295 Computers... $3,890 1 5 150% 4.5 12 = $ 438 Total AMT depreciation... $1,452 AMT depreciation adjustment: $1,937 $1,452 = $485 Learning Objective 2-E Self-Quiz For answer, see Chapter 2 Self-Quiz Answers, page 44. Test your knowledge and comprehension of information presented in Learning Objective 2-E. 5) Knitter s Guild, Inc. incorporated in March and will file a short-year S corporation tax return for its first year in existence. The S corporation purchased $12,000 in depreciable equipment shortly after the S corporation was formed. What is the fastest way for the S corporation to write off the cost of the equipment? a) Property must be depreciated using the straight-line method in a short tax year. b) Section 179 deduction. c) 200% declining balance. d) 150% declining balance. TheTaxReview Preparing S Corporation Returns Chapter 2 43

NOTES Chapter 2 Self-Quiz Answers 1) Susan and Char decide to go into business and operate as a corporation. After receiving professional advice they decide to be taxed as an S corporation. For federal tax purposes, how will the S corporation be established? a) The S corporation is established by filing Form SS-4, Application for Employer Identification Number. Incorrect. An S corporation should obtain an EIN once it is formed, but the filing of Form SS-4 does not create an S corporation. b) The S corporation is established when the first Form 1120S, U.S. Income Tax Return for an S Corporation, is filed with the IRS. Incorrect. An S corporation must first incorporate and file Form 2553, Election by a Small Business Corporation. c) The corporation is established by filing the necessary documents with the Secretary of State, adopting an Incorporation Agreement and filing Form 2553, Election by a Small Business Corporation. Correct. A corporation is a separate legal entity and certain legal steps must be taken to create a corporation. Form 2553 is then filed to elect to S corporation status although there is relief available if the election is not made timely. d) The S corporation is established by filing documents with the Secretary of State. Incorrect. While this establishes the entity as a corporation, Form 2553 still needs to be filed to elect S corporation status. 2) Which of the following is one of the requirements for a more than 2% shareholder-employee of an S corporation to deduct an above-the-line health insurance deduction? a) The health insurance premium is paid by the shareholder and not reimbursed by the S corporation. Incorrect. The premiums will not qualify for a deduction by the shareholder if they are not paid or reimbursed by the S corporation and included in the shareholder s gross income on Form W-2. b) The health insurance premium is paid by the S corporation but is not included in the shareholder s Form W-2. Incorrect. The premiums will not qualify for a deduction by the shareholder if they are not included in the shareholder s gross income on Form W-2. c) The shareholder has no other wages from the S corporation. Incorrect. Health insurance premiums are generally exempt from FICA tax so the employee needs to earn additional wages from the S corporation in an amount at least equal to the insurance premiums to take a full deduction. d) The shareholder makes the premium payments, furnishes proof to the S corporation and is reimbursed in the current year. 44 Chapter 2 TheTaxReview Preparing S Corporation Returns

Correct. Either the S corporation must make the premium payments or the shareholder can make the payment as long as he or she provides proof to the S corporation and is reimbursed within the current tax year. NOTES 3) Franco, Inc. is an S corporation and has $4,500 in qualified start-up costs. What is the fastest way for the S corporation to write off the costs? a) The start-up costs can be deducted in full on Franco, Inc. s first tax return. Correct. Up to $5,000 in qualified start-up costs can be deducted in full on the S corporation s first tax return. Remaining points can be amortized over 180 months beginning on the date the business starts. b) The start-up costs must be amortized over 180 months beginning on the date the business starts. Incorrect. The start-up costs may be amortized over 180 months beginning on the date the business starts. However, an election is available to write off up to $5,000 of start-up costs on the first tax return of the S corporation. c) The start-up costs may be reported as Section 179 property and deducted on the S corporation s first tax return. Incorrect. Start-up costs are capital expenses and are not Section 179 property. However, an election is available to write off up to $5,000 of start-up costs on the first tax return of the S corporation. d) Start-up costs are capital expenses and are therefore included in the shareholder s basis in the S corporation stock. Start-up costs are not allowed to be deducted, and will reduce gain or increase loss on eventual sale of the stock. Incorrect. Start-up costs are capital expenses, but an election is available to write off up to $5,000 of start-up costs on the first tax return of the S corporation. 4) If an S corporation has a policy requiring a corporate officer as an employee of the corporation to pay certain expenses, how does the shareholder claim the deduction? a) A shareholder is not allowed to deduct S corporation expenses on his or her individual tax return. Incorrect. If an employee-shareholder pays an expense of the employer, the expense may not be deductible to the shareholder unless the corporation has a policy or resolution in place requiring payment by the employee-shareholder. b) A shareholder is allowed to deduct unreimbursed S corporation expenses as an itemized deduction subject to the 2% AGI limitation. Correct. If the corporation has a resolution or policy in place requiring the shareholder to assume certain expenses, those expenses are then deductible by the shareholder, subject to the 2% AGI limitation on Schedule A. TheTaxReview Preparing S Corporation Returns Chapter 2 45

NOTES c) If stated in the S corporation policy, a shareholder is allowed to deduct unreimbursed S corporation expenses on Schedule E of Form 1040. Incorrect. Unreimbursed S corporation expenses are deductible on Schedule A, subject to the 2% limitation. Unreimbursed S corporation expenses are not allowed as a deduction on Schedule E (Form 1040). d) A shareholder may amortize unreimbursed S corporation expenses over a period of 180 months from the date the business starts. Incorrect. Organizational costs and start-up costs may be amortized, but unreimbursed S corporation expenses are deducted on Schedule A of Form 1040 if a corporate resolution has been adopted. 5) Knitter s Guild, Inc. incorporated in March and will file a short-year S corporation tax return for its first year in existence. The S corporation purchased $12,000 in depreciable equipment shortly after the S corporation was formed. What is the fastest way for the S corporation to write off the cost of the equipment? a) Property must be depreciated using the straight-line method in a short tax year. Incorrect. The straight-line method is available for property placed in service in a short tax year, but the Section 179 is available to write off the cost in the year placed in service. b) Section 179 deduction. Correct. The cost of property placed in service in a short tax year may be deducted as a Section 179 expense even in a short tax year. c) 200% declining balance. Incorrect. The 200% declining balance method is available, but the fastest way for the partnership to write off the cost of the equipment is by electing a Section 179 deduction. d) 150% declining balance. Incorrect. The 150% declining balance method is required for AMT purposes, but the Section 179 deduction is available even in short tax years. 46 Chapter 2 TheTaxReview Preparing S Corporation Returns

3 Comprehensive S Corporation Example Preparing Form 1120S Learning Objectives Successful completion of this course will enable the participant to: 3-A Identify the different tax year options available for S corporations and the procedures when an erroneous Schedule K-1 is received. 3-B Reconcile an S corporation s payroll report to extract figures necessary to report on Form 1120S, U.S. Income Tax Return for an S Corporation. 3-C Report all income and expense items on the S corporation tax return. 3-D Recognize items which are separately stated and flow directly through to shareholders on Schedules K and K-1. 3-E Transfer S corporation items from a shareholder s Schedule K-1 to the shareholder s Form 1040 and supporting schedules. Glossary Terms Calendar tax year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Health savings account. A health savings account (HSA) is a tax-exempt or custodial account set up with a qualified HSA trustee to pay or reimburse certain medical expenses incurred by an individual, his or her spouse, and qualified dependents. Separately stated items. Separately stated items are items of income or loss flowing through from an S corporation that may be subject to special limits or computations on the shareholder s individual return. Separately stated items are not included in the business entity s net business income or loss. Short tax year. A short tax year is any tax year less than 12 months. CPE/CE Learning Objective 3-A Identify the different tax year options available for S corporations and the procedures when an erroneous Schedule K-1 is received. Accounting Periods Most taxpayers file using a calendar tax year. In certain situations, it may be appropriate for a taxpayer to use a fiscal year rather than a calendar year. The first or last year of a corporation is usually a short tax year. Calendar tax year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. All taxpayers are allowed to use a calendar tax year. Taxpayers are required to use a calendar year if they keep no books, have no annual accounting period, or are otherwise required to use a calendar year by a provision in the tax code or regulations. In certain situations, it may be appropriate for a taxpayer to use a fiscal year rather than a calendar year. TheTaxReview Preparing S Corporation Returns Chapter 3 47

NOTES Fiscal tax year. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Individuals, C corporations, and estates can elect a fiscal tax year. Partnerships, S corporations, and PSCs may qualify for a fiscal tax year under certain conditions. A trust must use a calendar tax year unless a grantor trust filing Form 1041 has a grantor that uses a fiscal year. Short tax year. A short tax year is any tax year less than 12 months. A short tax year may be required when: The taxpayer is not in existence for an entire tax year, such as the first or last year of a partnership, corporation, estate, or trust, or The taxpayer elects to change the accounting period. EXAMPLE Carla formed a corporation that began operations on July 22, 2014, with a calendar year end of December 31, 2014. Carla must file a return for her corporation for the short period from July 22, 2014 through December 31, 2014. Required Tax Year for S Corporations KEY FACT All S corporations must use a calendar tax year unless any of the following apply. Corporation makes an election under IRC section 444. Corporation elects to use a 52 53 week tax year ending with reference to the calendar year or a tax year elected under IRC section 444. The corporation can establish a business purpose tax year. An S corporation uses Form 2553, Election by a Small Business Corporation, to elect a tax year other than a calendar year. Missing or Erroneous Schedule K-1 If there will be inconsistent treatment between the way an item is reported by a pass-through entity on Schedule K-1 and the way the item is reported on the taxpayer s return, file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). Also use the form to notify the IRS if a pass-through entity has not issued a Schedule K-1. Form 8082 is filed by partners, S corporation shareholders, beneficiaries of estates or trusts, owners of foreign trusts, or residual interest holders in a real estate mortgage investment conduit (REMIC). Greener Pastures, Inc. Greener Pastures, Inc. adopts a calendar tax year. The first tax year is a short tax year beginning on April 1, 2014, and ending on December 31, 2014. The corporation will establish its calendar tax year with the IRS when it files its first income tax return. 48 Chapter 3 TheTaxReview Preparing S Corporation Returns

Learning Objective 3-A Self-Quiz For answer, see Chapter 3 Self-Quiz Answers, page 76. Test your knowledge and comprehension of information presented in Learning Objective 3-A. 1) John will include an S corporation item on his individual return that will be reported inconsistently with the S corporation return. What steps must John take to report the inconsistent item? a) All items reported on each shareholder s return must be reported consistently with the S corporation return. b) John must ask the S corporation to change the corporate tax return before he can file his individual return. c) John reports the inconsistent treatment on Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). d) No reporting is required. NOTES Learning Objective 3-B Reconcile an S corporation s payroll report to extract figures necessary to report on Form 1120S, U.S. Income Tax Return for an S Corporation. Greener Pastures, Inc. Employees Shareholder employees. The S corporation will pay wages of $55,755 to Nate and $44,245 to Tyler. The corporation will pay health insurance premiums and make HSA contributions for each shareholder-employee. See Employee benefits, below. Total wages reported are $63,555 ($55,755 + $4,500 + $3,300) for Nate, and $52,045 ($44,245 + $4,500 + $3,300) for Tyler. Employees. Greener Pastures, Inc. hired Evan to assist Tyler with hydroseeding, Cyndi as an assistant store manager, and Tristan and Jordan as sales people. In addition to wages, the corporation will provide health benefits through HSAs and retirement benefits through a SIMPLE plan. Employee benefits. The S corporation will pay $4,500 towards the premiums for high-deductible medical insurance plans for each of the employees and will also contribute to both HSA and SIMPLE plans for each employee. Health savings accounts. The S corporation will contribute $3,300 to an HSA for each individual. SIMPLE plan. The S corporation will contribute to Savings Incentive Match Plans for Employees (SIMPLE plans) by means of establishing SIMPLE IRAs. The corporation will match employee elective deferrals dollar-for-dollar up to 3% of each employee s wages. Note: Health benefits for S corporation shareholder-employees increase taxable wages, and, therefore, increase the employer matching amount for their SIMPLE contributions. Small Business Health Care Credit. This is a credit designed to encourage small employers to offer health insurance coverage or to maintain the coverage they already provide. Calculation of this credit is beyond the scope of this course. For this example, assume the calculated credit is $9,000. Health benefits for S corporation shareholder-employees increase taxable wages, and, therefore, increase the employer matching amount for their SIMPLE contributions. TheTaxReview Preparing S Corporation Returns Chapter 3 49

NOTES Payroll Report for Year Ended December 31, 2014 Employee Gross Earnings Social Security 6.20% Medicare 1.45% Federal Withholding State Withholding Health Insurance & HSA Contributions SIMPLE Elective Deferrals Net Pay Nate $ 63,555.00 $ 3,456.81 $ 808.45 $ 10,703.00 $ 2,704.00 $ 7,800.00 $ 5,500.00 $ 32,582.74 Tyler $ 52,045.00 $ 2,743.19 $ 641.55 $ 7,619.00 $ 1,924.00 $ 7,800.00 $ 4,500.00 $ 26,817.26 Evan $ 31,200.00 $ 1,934.40 $ 452.40 $ 5,172.00 $ 1,196.00 $ 3,120.00 $ 19,325.20 Cyndi $ 26,000.00 $ 1,612.00 $ 377.00 $ 3,994.00 $ 936.00 $ 2,600.00 $ 16,481.00 Tristan $ 20,800.00 $ 1,289.60 $ 301.60 $ 2,908.00 $ 676.00 $ 2,080.00 $ 13,544.80 Jordan $ 16,640.00 $ 1,031.68 $ 241.28 $ 2,110.00 $ 468.00 $ 1,560.00 $ 11,229.04 Totals $ 210,240.00 $ 12,067.68 $ 2,822.28 $ 32,506.00 $ 7,904.00 $ 15,600.00 $ 19,360.00 $119,980.04 Final Pay Period Taxes Deposited January 2015 Gross Earnings Social Security 6.20% Medicare 1.45% Federal Withholding State Withholding Health Insurance HSA Contributions SIMPLE Elective Deferrals Net Pay $ 3,743.08 $ 232.07 $ 54.27 $ 625.12 $ 152.00 $ 372.31 $ 2,307.31 Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts represent reasonable compensation for services. Filling out Form 1120S Line 7. Compensation of officers. Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts represent reasonable compensation for services. Enter these amounts on line 7. The corporation determines who is an officer under the laws of the state where it is incorporated. In this example, the compensation of officers is $105,600. Although gross earnings on the payroll report show a combined total of $115,600 for the officers, the elective deferrals totaling $10,000 for the officers are combined with pension contributions for other employees and are reported as part of the total on line 17, Pension, profit-sharing, etc., plans. Line 8. Salaries and wages. Enter salaries and wages paid to employees who are not officers and reported on line 8. KEY FACT If the corporation claims a credit for wages paid or incurred, it may need to reduce the deduction for officers compensation and salaries and wages. In this example, the deductible salaries and wages amount is $76,280. The payroll report shows gross earnings of the employees of $94,640, which are reduced by combined elective deferrals to a SIMPLE plan in the amount of $9,360. This amount is further reduced by $9,000 for the allowable Small Business Health Care Tax Credit. Gross employee wages... $94,640 Elective SIMPLE contributions... $(9,360) Small business health care tax credit... $(9,000) Line 8, Salaries and wages... $76,280 The $9,360 in elective deferrals made by the employees are combined with other contributions to the SIMPLE plan, including officers elective deferrals and employer matching amounts, and reported on line 17, Pension, profit-sharing, etc. plans. 50 Chapter 3 TheTaxReview Preparing S Corporation Returns

Line 12. Taxes and licenses. Enter the taxes and licenses paid or incurred in the trade or business of the S corporation unless they are reflected in cost of goods sold. Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the corporation. In this example, taxes of $18,211 (rounded) reported on line 12 consists of the employer portion of Social Security and Medicare tax ($14,889.96), less accrued employer taxes payable in 2015 ($286.34) plus FUTA ($252), and state unemployment tax ($3,355). Employer share of Social Security... $12,067.68 Employer share of Medicare...$2,822.28...$14,889.96 Less accrued employer taxes payable in 2015: Social Security...($232.07) Medicare... ($54.27)... ($286.34) FUTA...$252.00 State unemployment taxes... $3,355.00 Line 12, Taxes and licenses...$18,210.62 Line 17. Pension, profit-sharing, etc. Include deductible contributions not claimed elsewhere on the return for corporation employees under a qualified pension, profit sharing, annuity, or simplified employee pension (SEP) or SIM- PLE plan, and under any other deferred compensation plan. If the corporation contributes to an IRA for employees, include the contributions in salaries and wages. In this example, $25,667 (rounded) consists of $19,360 employee SIMPLE deferrals plus $5,724.75 employee SIMPLE matching contribution. SIMPLE plan employee elective deferrals...$19,360.00 SIMPLE plan employer match (3%)... $6,307.20 Line 17, Pension, profit-sharing, etc...$25,667.20 Line 18. Employee benefit programs. Report amounts for fringe benefits paid or incurred on behalf of employees owning 2% or less of the corporation s stock. Report amounts that are paid on behalf of more than 2% shareholders as wages on line 7 or line 8, whichever applies. In this example, the S corporation made contributions to HSAs for each shareholder in the amount of $3,300 and paid health insurance premiums for each in the amount of $4,500, for a total of $15,600. Because the shareholders own more than 2% of the stock, the HSA contributions and the health insurance premiums are taxable and included as wages on the shareholders Forms W-2. The $31,200 deducted on line 18 consists of $13,200 HSA contributions plus $18,000 health insurance premiums paid on behalf of non-shareholder employees. Health insurance employees ($ 4,500 4)...$18,000 HSA contributions employees ($3,300 4)...$13,200 Line 18, Employee benefit programs...$31,200 NOTES Report amounts that are paid on behalf of more than 2% shareholders as wages on line 7 or line 8, whichever applies. TheTaxReview Preparing S Corporation Returns Chapter 3 51

NOTES Form 1120S U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. Department of the Treasury Internal Revenue Service For calendar year 2014 or tax year beginning, 2014, ending, 20 A S election effective date B Business activity code number (see instructions) TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state or province, country, and ZIP or foreign postal code OMB No. 1545-0123 14 D Employer identification number E Date incorporated F Total assets (see instructions) C Check if Sch. M-3 attached $ G Is the corporation electing to be an S corporation beginning with this tax year? X Yes No If Yes, attach Form 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year......... 2 Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. Income Deductions (see instructions for limitations) Tax and Payments 4/1/14 444200 1 a Gross receipts or sales............... 1a b Returns and allowances.............. 1b c Balance. Subtract line 1b from line 1a................... 1c 2 Cost of goods sold (attach Form 1125-A).................. 2 3 Gross profit. Subtract line 2 from line 1c.................. 3 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797)............ 4 5 Other income (loss) (see instructions attach statement)............. 5 6 Total income (loss). Add lines 3 through 5................ 6 7 Compensation of officers (see instructions attach Form 1125-E).......... 7 8 Salaries and wages (less employment credits)................ 8 9 Repairs and maintenance....................... 9 10 Bad debts........................... 10 11 Rents............................. 11 12 Taxes and licenses......................... 12 13 Interest............................ 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562).... 14 15 Depletion (Do not deduct oil and gas depletion.)............... 15 16 Advertising........................... 16 17 Pension, profit-sharing, etc., plans.................... 17 18 Employee benefit programs...................... 18 19 Other deductions (attach statement)................... 19 20 Total deductions. Add lines 7 through 19................ 20 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 22 a Excess net passive income or LIFO recapture tax (see instructions).. 22a b Tax from Schedule D (Form 1120S)........... 22b c Add lines 22a and 22b (see instructions for additional taxes)............ 22c 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004............ 23b c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Sign Here Paid Preparer Use Only Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below Nate Greener Pastures, Inc. 123 Prairie Point Farmdale, MN 55555 Signature of officer Date Title Print/Type preparer s name Preparer's signature Date 4/1 12/31 14 427,950 31-2345678 4/1/14 153,825 427,950 64,925 363,025 363,025 105,600 76,280 9,000 18,211 916 1,937 3,000 25,667 31,200 17,935 289,746 73,279 (see instructions)? Yes PTIN Check if self-employed Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) X 0 0 * * * No Learning Objective 3-B Self-Quiz For answer, see Chapter 3 Self-Quiz Answers, page 76. Test your knowledge and comprehension of information presented in Learning Objective 3-B. 2) Health insurance paid on behalf of shareholder-employees who are corporate officers owning more than 2% of the S corporation are reported as a deduction on which line of Form 1120S? a) Line 7, Compensation of officers. b) Line 8, Salaries and wages. c) Line 18, Employee benefit programs. d) Not deductible on Form 1120. 52 Chapter 3 TheTaxReview Preparing S Corporation Returns

Learning Objective 3-C Report all income and expense items on the S corporation return. NOTES Greener Pastures, Inc. Line-by-Line Explanations These instructions follow the line numbers on Form 1120S. Specific instructions for most lines are provided. Lines that are not discussed are self-explanatory. Greener Pastures, Inc. s Balance Sheet, Income Statement, and Cash Flow Reconciliation can be found in the Appendix, page 107. Heading Information Item B. Business code number. For a list of applicable code numbers, see Codes for Principal Business Activity and Principal Product or Service, reproduced in the Appendix, page 112. Item D. Employer identification number. Enter the S corporation s employer identification number. Item F. Total assets. Enter the S corporation s total assets at the end of the tax year. If there are no assets at the end of the tax year, enter -0-. If the corporation is required to complete Schedule L, total assets from Schedule L, line 15, column (d) should match page 1, item F. Item H. If the name or address of the corporation has changed since the last return was filed, check the appropriate box on item H. If a change in address occurs after the return is filed, use Form 8822-B, Change of Address Business, to notify the IRS. Income KEY FACT Report only trade or business activity income on lines 1a through 5. Do not report rental activity income or portfolio income on these lines. Rental activity income and portfolio income are reported on Schedules K and K-1. Do not include any tax-exempt income on lines 1a through 5. Report tax-exempt interest income, including exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company on Schedules K and K-1. Line 1. Gross receipts or sales. Enter gross receipts or sales from all trade or business operations. In this example, lawn and garden implement sales of $215,500 and hydroseeding sales of $212,450 add up to $427,950 total sales. Line 2. Cost of goods sold (COGS). The COGS is computed on Form 1125-A, Cost of Goods Sold, and carried to line 2. In this example, COGS equals $64,925. Do not include any tax-exempt income on lines 1a through 5. TheTaxReview Preparing S Corporation Returns Chapter 3 53

NOTES Form (Rev. December 2012) Department of the Treasury Internal Revenue Service Name Attach to Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B. Information about Form 1125-A and its instructions is at www.irs.gov/form1125a. 1 Inventory at beginning of year..................... 1 2 Purchases........................... 2 3 Cost of labor.......................... 3 4 Additional section 263A costs (attach schedule)................ 4 5 Other costs (attach schedule)..................... 5 6 Total. Add lines 1 through 5...................... 6 7 Inventory at end of year....................... 7 8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the appropriate line of your tax return (see instructions)............... 8 9a Check all methods used for valuing closing inventory: (i) (ii) (iii) Cost Lower of cost or market Other (Specify method used and attach explanation.) OMB No. 1545-2225 Employer identification number b Check if there was a writedown of subnormal goods...................... c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)...... d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed under LIFO........................... 9d e If property is produced or acquired for resale, do the rules of section 263A apply to the entity (see instructions)?.. Yes No f 1125-A Cost of Goods Sold Greener Pastures, Inc. X 31-2345678 0 74,025 74,025 9,100 64,925 Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If Yes, attach explanation............................. Yes No X X Corporations should not use Form 4797 to report the sale or other disposition of property if a Section 179 expense deduction was previously passed through to any of its shareholders for that property. Section references are to the Internal Revenue Code unless otherwise noted. Under this accounting method, inventory costs for raw materials purchased for use ending on or after December 31, 2000, has average annual gross receipts of $10 in producing finished goods and million or less for the 3 prior tax years, (b) General Instructions U.S. Income merchandise Tax Return purchased for resale an are S Corporation whose principal business OMB activity No. 1545-0123 is not an Form 1120S deductible in the year the finished goods or ineligible activity, and (c) whose business is Purpose of Form Do not merchandise file this form are unless sold (but the corporation not before the has filed or not is a tax shelter (as defined in section 448 attaching Use Form 1125-A to calculate and deduct year you Form paid 2553 for to the elect raw to materials be an S or corporation. Department of the Treasury (d)(3)). See Rev. Proc. 2002-28, 2002-18 14 Information about Form cost of goods sold for certain entities. merchandise, 1120S and its if you separate are also instructions using the is cash at www.irs.gov/form1120s. Internal Revenue Service I.R.B. 815. For calendar year 2014 or tax year beginning method). 4/1, 2014, ending 12/31 Uniform capitalization, rules. 2014The uniform Who A S election Must effective File date Name If you account for inventoriable items in capitalization D rules Employer of section identification 263A number the same manner materials and supplies generally require you to capitalize, or Filers of 4/1/14 Form 1120, 1120-C, TYPE 1120-F, Greener that are Pastures, not incidental, you Inc. can currently include in inventory, 31-2345678 certain costs incurred 1120S, B Business 1065, activity or 1065-B, code must complete Number, street, deduct and room expenditures or suite no. If for a P.O. direct box, labor see instructions. and all in connection E with Date the incorporated following. and number attach (see Form instructions) 1125-A if the OR applicable indirect costs that would otherwise be entity reports a deduction for cost of goods 123 Prairie Point The production 4/1/14 of real property and included in inventory costs. See the sold. PRINT 444200 City or town, state or province, country, and ZIP or foreign postal code tangible personal F Total property assets (see held instructions) inventory instructions for lines 2 and 7. or held for sale in the ordinary course of Inventories C Check if Sch. M-3 attached Farmdale, For additional MN 55555 guidance on this method business. $ 153,825 Generally, G Is the corporation inventories electing are required to be an at S the corporation of beginning accounting, with this see tax Pub. year? 538, XAccounting Yes No If Yes, Real property attach Form personal 2553 if not property already filed beginning H Check if: and (1) end of Final each return tax year (2) if the Name change Periods (3) and Address Methods. change For guidance (4) on Amended return (tangible (5) and S intangible) election termination acquired or for revocation resale. production, I Enter the purchase, number of or shareholders sale of who were shareholders adopting or changing during any to part this of method the tax of year.. The.. production... of. real. property 2 and merchandise is an income-producing accounting, see Form 3115, Application for Caution. Include only trade or business income and tangible personal property by a corporation factor. See Regulations section 1.471-1. If Change expenses in on Accounting lines 1a through Method, 21. and See its the instructions for more information. for use in its trade or business or in an inventories 1 a Gross are required, receipts you or generally sales..... instructions........... 1a 427,950 activity engaged in for profit. must use b an Returns accrual and method allowances of accounting..... Qualifying... taxpayer..... A qualifying.. 1b for sales and purchases of inventory items. See the discussion on section 263A taxpayer is a taxpayer that, (a) for each c Balance. Subtract line 1b from line 1a................ uniform.. capitalization. 1c rules in the Exception for certain taxpayers. If you prior tax year ending after December 16, 427,950 instructions for your tax return before are a qualifying 2 Cost taxpayer of goods or sold a qualifying (attach Form 1125-A) 1998,. has. average... annual.. gross.. receipts... of...... 2 64,925 completing Form 1125-A. Also see small business 3 Gross taxpayer profit. Subtract (defined below), line 2 from line 1c $1 million.. or. less.. for. the. 3 prior.. tax. years..... Regulations... sections 3 1.263A-1 363,025 through you can 4 adopt Net or gain change (loss) your from accounting Form 4797, line 17 and (attach (b) its Form business 4797) is not. a. tax. shelter.. (as.... 1.263A-3.... See Regulations 4 section method to account for inventoriable items defined in section 448(d)(3)). See Rev. 5 Other income (loss) (see instructions attach 1.263A-4 for rules for property produced in in the same manner as materials and Proc. 2001-10, statement) 2001-2. I.R.B... 272........... 5 a farming business. supplies 6 that Total are not income incidental. (loss). Add lines 3 through Qualifying 5.. small.. business.... taxpayer.... A..... 6 7 Compensation of officers (see instructions attach qualifying small Form business 1125-E) taxpayer.. is. a. taxpayer that, (a) for each prior tax year...... 7 Income Deductions (see instructions for limitations) 8 Salaries and wages (less employment credits)................ 8 9 Repairs and maintenance....................... 9 10 Bad debts........................... 10 11 Rents............................. 11 9,000 12 Taxes and licenses......................... 12 18,211 For Paperwork 13 Interest Reduction.. Act. Notice,... see. instructions.............. Cat.. No.. 55988R...... 13 Form 1125-A 916 (Rev. 12-2012) 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562).... 14 1,937 15 Depletion (Do not deduct oil and gas depletion.)............... 15 16 Advertising........................... 16 3,000 17 Pension, profit-sharing, etc., plans.................... 17 25,667 18 Employee benefit programs...................... 18 31,200 19 Other deductions (attach statement)................... 19 17,935 20 Total deductions. Add lines 7 through 19................ 20 289,746 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 73,279 22 a Excess net passive income or LIFO recapture tax (see instructions).. 22a b Tax from Schedule D (Form 1120S)........... 22b c Add lines 22a and 22b (see instructions for additional taxes)............ 22c 0 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004............ 23b c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 0 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return Sign with the preparer shown below Nate (see instructions)? Here Signature of officer Date Title X Yes No Paid Print/Type preparer s name Preparer's signature Date PTIN Check if Preparer self-employed Use Only Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) Tax and Payments 363,025 105,600 76,280 Line 4. Net gain (loss) from Form 4797. Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on line 19, Form 8825, or line 3, Schedule K and box 3, Schedule K-1, generally as part of the net income or loss from the rental activity. A corporation that is a partner in a partnership must include on Form 4797, Sales of Business Property, its share of ordinary gains (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the partnership s trade or business assets. Corporations should not use Form 4797 to report the sale or other disposition of property if a Section 179 expense deduction was previously passed through to any of its shareholders for that property. Instead, report it in box 17, Schedule K-1 using Code K. 54 Chapter 3 TheTaxReview Preparing S Corporation Returns

Line 5. Other income (loss). Enter any other trade or business income (loss) not included on lines 1a through 4. Examples of other income to report on this line include: Interest income derived in the ordinary course of the corporation s trade or business, such as interest charged on receivable balances. Recoveries of bad debts deducted in prior years under the specific charge-off method. Taxable income from insurance proceeds. The credit from Form 6478, Biofuel Producer Credit. The credit from Form 8864, Biodiesel and Renewable Diesel Fuels Credit. Recapture amount if section 280F listed property drops to 50% or less business use. IRC section 481 adjustments resulting from changes in accounting methods. Part or all of the proceeds received from certain corporate-owned life insurance contracts issued after August 17, 2006. Do not include items requiring separate computations by shareholders that must be reported on Schedules K and K-1. See Separately Stated Items, Learning Objective 3-D, page 61. Deductions Line 7. Compensation of officers. Enter salaries and wages paid to shareholder officers and non-shareholder corporate officers, reduced by certain employment-related credits. In this example, compensation of officers total $105,600. See Learning Objective 3-B, page 49, for the details. Line 8. Salaries and wages. Enter salaries and wages paid to employees who are not officers, reduced by certain employment-related credits. In this example, salaries and wages total $76,280. See Learning Objective 3-B, page 49, for the details. Line 9. Repairs and maintenance. Enter the cost of incidental repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. The corporation can deduct these repairs only to the extent they relate to a trade or business activity. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They must be depreciated or amortized. Line 10. Bad debts. Enter the total debts that became worthless in whole or in part during the tax year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets. A corporation that uses the cash method of accounting cannot claim a bad debt deduction unless the amount was previously included in income. Line 11. Rents. Enter rent paid on business property used in a trade or business activity. Do not deduct rent for a dwelling unit occupied by any shareholder for personal use. In this example, the S corporation paid $9,000 during the year for facility rental. NOTES New buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They must be depreciated or amortized. TheTaxReview Preparing S Corporation Returns Chapter 3 55

NOTES Report only the depreciation claimed on assets used in a trade or business activity. Report amounts that are paid on behalf of more than 2% shareholders as wages on line 7 or line 8, whichever applies. Line 12. Taxes and licenses. Enter the taxes and licenses paid or incurred in the trade or business of the S corporation. In this example, taxes and licenses total $18,211. See Learning Objective 3-B, page 49, for the details. Line 13. Interest. Include interest expense incurred in the trade or business activities that is not claimed elsewhere on the return. Do not include the following interest expenses. Interest on debt used to purchase rental property or debt used in a rental activity. Report such interest on Form 8825, Rental Real Estate Income and Expenses of Partnership or an S Corporation, which is used to pass through net income from a rental activity on Schedule K-1. Interest directly allocable to portfolio or investment income. This interest is a separately stated item on Schedule K-1. Interest on debt allocated to distributions made to shareholders during the tax year. Interest that must be allocated under UNICAP. (IRC 263A) In this example, $916 in interest was paid on the loan for the equipment. Line 14. Depreciation. Report only the depreciation claimed on assets used in a trade or business activity. Complete and attach Form 4562, Depreciation and Amortization, only if the corporation placed property in service during the tax year or claims depreciation on any car or other listed property. Do not include any Section 179 expense on this line. The Section 179 expense is separately stated and is passed through to shareholders on Schedule K-1. In this example, the regular depreciation is $1,937. The Section 179 deduction of $23,600 is passed through to shareholders on Schedule K-1 in proportion to their percentages of stock ownership. Line 15. Depletion. If the S corporation claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule. Line 16. Advertising. Enter advertising incurred in the trade or business of the corporation. In this example, the deduction for advertising is $3,000. Line 17. Pension, profit-sharing, etc. plans. Include deductible contributions not claimed elsewhere on the return for corporation employees under a qualified pension, profit sharing, annuity, or simplified employee pension (SEP) or SIMPLE plan, and under any other deferred compensation plan. If the corporation contributes to an IRA for employees, include the contributions in salaries and wages. In this example, the deduction for pension, profit-sharing, etc. plans is $25,667. See Learning Objective 3-B, page 49, for details. Line 18. Employee benefit programs. Report amounts for fringe benefits paid or incurred on behalf of employees owning 2% or less of the corporation s stock. Report amounts that are paid on behalf of more than 2% shareholders as wages on line 7 or line 8, whichever applies. In this example, the employee benefit programs deduction is $31,200. See Learning Objective 3-B, page 49, for details. 56 Chapter 3 TheTaxReview Preparing S Corporation Returns

Line 19. Other deductions. Attach a schedule listing by type and amount of each deduction included on this line. Other deductions in this example are as follows. Other Deductions Line 19, Form 1120S Accounting (organization costs)... $2,500 Attorney fees (organization costs)... $2,000 Bookkeeping... U.S. Income Tax Return for an S Corporation OMB No. 1545-0123 $2,800 Form 1120S Do not file this form unless the corporation has filed or is Insurance business... attaching Form 2553 to elect to be S corporation. Department of the Treasury $3,250 Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. Internal Revenue Service Meals For calendar and year 2014 entertainment or tax year beginning (1,100 50%)...$550 4/1, 2014, ending 12/31, 2014 A S election effective date Name D Employer identification number Office 4/1/14 expenses... TYPE Greener Pastures, Inc. 31-2345678 $2,325 B Business activity code Number, street, and room or suite no. If a P.O. box, see instructions. E Date incorporated Travel number (see and instructions) OR lodging (start-up 123 Prairie costs)... Point 4/1/14 $1,660 PRINT 444200 City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions) Utilities... $2,850 C Check if Sch. M-3 attached Farmdale, MN 55555 $ 153,825 G Is the corporation electing to be an S corporation beginning with this tax year? X Yes No If Yes, attach Form 2553 if not already filed Total other deductions...$17,935 H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year......... 2 Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. 1 U.S. Income Tax Return for an S Corporation OMB No. 1545-0123 a Gross receipts or sales............... 1a 427,950 Form 1120S b Returns and allowances.. Do. not.. file. this. form.. unless.. the. corporation.. 1b has filed or is attaching Form 2553 to elect to be an S corporation. Department c of Balance. the Treasury Subtract line 1b from line 1a................... 1c 14 Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. 427,950 Internal 2 Revenue Cost Service of goods sold (attach Form 1125-A).................. 2 64,925 For calendar 3 Gross year profit. 2014 Subtract or tax year line beginning 2 from line 1c...... 4/1..,. 2014,.. ending... 12/31.... 3, 20 363,025 14 A S election effective date Name D Employer identification number 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797)............ 4 4/1/14 5 Other income (loss) TYPE (see instructions attach Greener Pastures, statement).. Inc............ 31-2345678 5 B Business activity code Number, street, and room or suite no. If a P.O. box, see instructions. E Date incorporated number 6 (see Total instructions) income (loss). OR Add lines 3 through 5................ 6 363,025 7 Compensation of officers (see 123 instructions attach Prairie Point Form 1125-E).......... 4/1/14 7 PRINT 105,600 444200 City or town, state or province, country, and ZIP or foreign postal code F Total assets (see instructions) 8 Salaries and wages (less employment credits)................ 8 76,280 C Check if Sch. M-3 attached 9 Repairs and maintenance. Farmdale,...... MN.. 55555.............. $ 153,825 9 G Is 10 the corporation Bad debts electing. to. be. an. S. corporation... beginning... with.. this. tax. year?.. X. Yes... No.. If. Yes,.. attach. Form 10 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) 11 Rents...................... Amended... return.. (5).. S election 11 termination or revocation 9,000 I Enter the number of shareholders who were shareholders during any part of the tax year.... 12 Taxes and licenses......................... 12 18,211 2 Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. 13 Interest............................ 13 916 141 a Depreciation Gross receipts not or claimed sales. on. Form.. 1125-A... or elsewhere.... on. return.. (attach. 1aForm 4562) 427,950.... 14 1,937 15 b Depletion Returns and (Do allowances not deduct. oil. and. gas. depletion.)........... 1b........ 15 16 c Advertising Balance. Subtract.. line. 1b. from.. line. 1a.................... 1c 16 427,950 3,000 172 Pension, Cost of goods profit-sharing, sold (attach etc., Form plans 1125-A).................... 17 2 25,667 64,925 183 Employee Gross profit. benefit Subtract programs line 2 from.. line. 1c................... 18 3 363,025 31,200 194 Other Net gain deductions (loss) from (attach Form statement) 4797, line 17.(attach.. Form.. 4797).............. 19 4 17,935 205 Total Other deductions. income (loss) Add (see lines instructions attach 7 through 19 statement)................. 20 5 289,746 6 Total income (loss). Add lines 3 through 5...... 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 6 363,025 73,279 227 a Compensation Excess net passive of officers income (see or LIFO instructions attach recapture tax (see instructions) Form 1125-E)... 22a........ 7 105,600 8 b Tax Salaries from and Schedule wages D (less (Form employment 1120S). credits)........... 22b........ 8 76,280 9 c Repairs Add lines and 22a maintenance and 22b (see. instructions.... for. additional... taxes).............. 22c 9 0 23 10 a Bad 2014 debts estimated. tax. payments... and.. 2013. overpayment..... credited.. to. 2014... 23a........ 10 11 b Tax Rents deposited... with. Form.. 7004............... 23b........ 11 9,000 12 c Taxes Credit and for federal licenses tax. paid. on. fuels.. (attach.. Form.. 4136)........ 23c........ 12 18,211 13 d Add Interest lines 23a.. through.. 23c........................ 23d 13 916 0 24 14 Estimated Depreciation tax not penalty claimed (see on instructions). Form 1125-A Check or elsewhere if Form 2220 on return is attached (attach Form.. 4562)...... 24 14 1,937 25 15 Amount Depletion owed. (Do not If line deduct 23d oil is smaller and gas than depletion.) the total of. lines.. 22c. and. 24,.. enter. amount... owed.... 25 15 26 16 Overpayment. Advertising. If. line. 23d. is. larger.. than.. the. total.. of lines.. 22c. and.. 24,. enter.. amount.. overpaid..... 26 16 3,000 27 17 Pension, Enter amount profit-sharing, from line 26 etc., Credited plans. to 2015.. estimated.... tax......... Refunded.... 27 17 25,667 18 Employee Under penalties benefit of perjury, programs I declare that. I have. examined... this. return,. including... accompanying... schedules... and. statements,... and. to. the best 18 of my knowledge 31,200 and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. 19 Other deductions (attach statement)................... May 19 the IRS discuss 17,935 this return Sign 20 Total deductions. Add lines 7 through 19................ with 20 the preparer 289,746 shown below Nate (see instructions)? Here 21 Ordinary Signature business of officer income (loss). Subtract line 20 from Date line 6.. Title......... 21 73,279 X Yes No 22 a Excess Print/Type net passive preparer s income name or LIFO recapture Preparer's tax (see instructions) signature.. 22a Date PTIN Paid Check if b Tax from Schedule D (Form 1120S)........... 22b self-employed Preparer c Add Firm s lines name 22a and 22b (see instructions for additional taxes)............ Firm's 22c EIN 0 Use 23 Only a 2014 Firm's estimated address tax payments and 2013 overpayment credited to 2014 23a Phone no. b Tax deposited with Form 7004............ 23b Income Deductions Income (see instructions for limitations) Deductions (see Tax instructions and Payments for limitations) Tax and Payments For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 0 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return Sign with the preparer shown below Nate (see instructions)? Here Signature of officer Date Title X Yes No Paid Print/Type preparer s name Preparer's signature Date PTIN Check if Preparer self-employed Use Only Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) Schedule L Balance Sheets per Books The balance sheet on Form 1120S should agree with the S corporation s books and records. Schedule L is not required to be completed if the corporation answered Yes to question 8 on Schedule B (total receipts and total assets less than $250,000). However, even if a balance sheet is not required to be completed on the tax form, a balance sheet should be prepared. If the balance sheet is required to be completed, total assets from line 15, column (d), Schedule L should match page 1, Form 1120S, item F. 14 NOTES The balance sheet on Form 1120S should agree with the S corporation s books and records. TheTaxReview Preparing S Corporation Returns Chapter 3 57

NOTES KEY FACT Corporations with total assets of $10 million or more on the last day of the tax year must complete Schedule M-3 instead of Schedule M-1. See the instructions for Schedule M-3 for provisions that affect Schedule L. Greener Pastures, Inc. s balance sheet can be found in the Appendix, page 107. Line 24. Retained earnings. If the corporation maintains separate accounts for appropriated and unappropriated retained earnings, it may want to continue such accounting for purposes of preparing its financial balance sheet. Also, if the corporation converts to C corporation status in a subsequent year, it will be required to report its appropriated and unappropriated retained earnings on separate lines of Schedule L, Form 1120. An S corporation uses Schedule M-1, Form 1120S to reconcile its book income to the income reported on the tax return. Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Schedule M-1 is not required to be completed if the corporation answered Yes to question 8 on Schedule B (total receipts and total assets less than $250,000). Corporations with total assets of $10 million or more on the last day of the tax year must complete Schedule M-3 instead of Schedule M-1. An S corporation uses Schedule M-1, Form 1120S to reconcile its book income to the income reported on the tax return. Schedule M-1 starts with net income per books. The S corporation then must make certain adjustments, referred to as M-1 adjustments, for book and tax differences to arrive at taxable income. Schedule M-1 should reconcile to taxable income as computed on Form 1120S, page 4, line 18, income/loss reconciliation. Generally, these adjustments fall into four categories. 1) Income subject to tax not recorded on the books, 2) Expenses recorded on the books not deductible for tax purposes, 3) Income recorded on the books not subject to tax, and 4) Expenses deducted on the tax return not recorded on the books. Each item must be listed and described separately. Attach statements to the return as needed. Income subject to tax not recorded on the books. Include income items that are accelerated for tax purposes due to a statutory provision or because of different conventions used for book accounting versus tax accounting, such as depreciation. Examples include: Installment sale income in years subsequent to the year of sale. See Income recorded on the books not subject to tax, page 59. Prepaid rent received. Prepaid interest received. Taxable gain on the sale of depreciable assets in excess of book gain. Expenses recorded on the books not deductible for tax purposes. Include items that are not deductible for tax purposes or are deferred until some future event. Examples include: Book depreciation in excess of tax depreciation. Penalties and fines. 58 Chapter 3 TheTaxReview Preparing S Corporation Returns

Meal and entertainment expenses not deductible because of the 50% limit. Expenses for the use of an entertainment facility. The part of business gifts over $25. Expenses of an individual over $2,000, which are allocable to conventions on cruise ships. Employee achievement awards over $400. The part of the cost of entertainment tickets that exceeds face value (also subject to the 50% limit). The part of the cost of skyboxes that exceeds the face value of non-luxury box seat tickets. The part of the cost of luxury water travel expenses not deductible under IRC section 274(m). Expenses for travel as a form of education. Nondeductible club dues. Other nondeductible travel and entertainment expenses. In the Greener Pastures example, expenses recorded on books not included on Schedule K, Schedule M-1, line 3, includes: Reduction in salaries and wages for the Small Business Health Care Tax Credit...$9,000 50% nondeductible portion of meals and entertainment... $550 Total...$9,550 Income recorded on the books not subject to tax. Include items that are tax exempt or are temporarily deferred for tax purposes. Examples include: Tax-exempt interest. Gain on installment sales. Generally, the entire gain will be recorded on the books in the year of sale, while the taxable gain is spread out over multiple years. Expenses deducted on the tax return not recorded on the books. Include deductible items that are accelerated for tax purposes due to a statutory provision or because of different conventions used for book accounting versus tax accounting, such as depreciation. Examples include: Tax depreciation in excess of book depreciation. Expenses accrued in a prior year but deductible in the current year. Domestic production activities deduction (DPAD). NOTES Form 1120S (2014) Page 5 Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) 1 Net income (loss) per books...... 40,695 5 Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ 2 Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14l (itemize): a Depreciation $ b Travel and entertainment $ 550 Salaries and Wages 9,000 6 Deductions included on Schedule K, lines 1 through 12 and 14l, not charged against book income this year (itemize): a Depreciation $ 7 Add lines 5 and 6..... 4 Add lines 1 through 3........ 50,245 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 50,245 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) 1 Balance at beginning of tax year..... 2 Ordinary income from page 1, line 21... Interest 3 Other additions.......... 4 Loss from page 1, line 21....... 5 Other reductions.......... 6 Combine lines 1 through 5....... 7 Distributions other than dividend distributions 9,550 (a) Accumulated adjustments account 0 73,279 566 ( ) (b) Other adjustments account (c) Shareholders undistributed taxable income previously taxed ( 33,150 ) ( ) 40,695 10,000 TheTaxReview 8 Balance at Preparing end of tax year. S Corporation Subtract line 7 from Returns line 6 30,695 Chapter 3 59 Form 1120S (2014)

NOTES Learning Objective 3-C Self-Quiz For answer, see Chapter 3 Self-Quiz Answers, page 76. Test your knowledge and comprehension of information presented in Learning Objective 3-C. 3) How are regular depreciation and the Section 179 expense reported to shareholders by the S corporation? a) Regular depreciation is reported on line 14, Form 1120S, and any Section 179 deduction is a separately stated item on the shareholder s Schedule K-1. b) Regular depreciation is a separately stated item on Schedule K-1, and the Section 179 deduction is reported on line 14, Form 1120S. c) Regular depreciation is claimed on line 14, Form 1120S. The Section 179 deduction is not allowed for property purchased by an S corporation. d) Regular depreciation and the Section 179 deduction are passed through to the shareholders on Schedule K-1. Learning Objective 3-D Recognize items which are separately stated and flow directly through to shareholders on Schedules K and K-1. If a change of ownership occurred, each shareholder s percentage is weighted for the number of days the stock was held. Flow-Through to S Corporation Shareholders Ordinary business income. Ordinary business income or loss for an S corporation is netted and reported on line 21, page 1, Form 1120S. The ordinary income or loss is then allocated to shareholders based on their percentage of stock ownership. The income or loss is passed through to shareholders on Schedule K-1 (Form 1120S), and the amounts are reported on the shareholders income tax returns. Net ordinary business income from an S corporation is reported to shareholders on a pro-rata basis. Other items pass through to shareholders as separately stated items. Pro-rata allocation/per-share/per-day. Items are passed through to shareholders according to their percentage of ownership based on a per-share/perday method. If there was no change in ownership during the year, the percentage of stock owned is used to determine the amount passed through. If a change of ownership occurred, each shareholder s percentage is weighted for the number of days the stock was held. Allocation formula: Percentage of Stock Owned Percentage of Year Owned 60 Chapter 3 TheTaxReview Preparing S Corporation Returns

EXAMPLE Sam and Dan each own 50% of S&D, an S corporation, for the first half of 2014. On July 1, Elbert purchased 10% of Sam s stock and 10% of Dan s stock. The three shareholders pro-rata shares are determined as follows: % of stock owned % of year owned Pro-rata share Sam...50%... 50%... 25% 40%... 50%... 20% Sam s share 45% Dan...50%... 50%... 25% 40%... 50%... 20% Dan s share 45% Elbert...20%... 50%... Elbert s share 10% NOTES Election to allocate based on two short years. The S corporation may elect to allocate items as if the tax year consisted of two taxable years if the following requirements are met. A shareholder terminates his or her entire interest during the year, or A qualifying disposition took place. Separately Stated Items On Form 1120S, net business income and deductions are computed, and ordinary income or loss is passed through to shareholders according to their prorata percentages. The treatment of some items, however, might be subject to limits or other special treatment on the shareholder s return. These items are separately stated on Schedule K-1. Examples of separately stated items include: Income or loss from rental real estate. Income or loss from other rental activity. Interest. Dividends. Royalties. Capital gains and losses. IRC section 1231 gains and losses. Investment expenses. Charitable contributions. Section 179 expenses. Tax preferences and adjustments for AMT computations. Nonbusiness bad debts. Special disclosure for certain disposals of business property. Special rules apply if any property is disposed by an S corporation for which Section 179 was ever taken. Instead of the S corporation reporting on Form 4797, 6252, 4684, or 8824, each shareholder will report on such forms using information flowing through on Schedule K-1. The treatment of some items, however, might be subject to limits or other special treatment on the shareholder s return. Special rules apply if any property is disposed by an S corporation for which Section 179 was ever taken. TheTaxReview Preparing S Corporation Returns Chapter 3 61

NOTES The following information should be reported by the S corporation for each sale. Description of property. Date the property was acquired and placed in service. Date of the sale or other disposition of the property. Shareholder s share of gross proceeds or amount realized. Shareholder s share of the cost or other basis, plus selling expenses. Shareholder s share of allowed or allowable depreciation exclusive of Section 179 deduction. Shareholder s share of any Section 179 expense deduction and years to which the amounts were passed through. If the disposition is due to casualty or theft, a statement indicating so and any additional information required by the shareholder to complete Form 4684, Casualties and Thefts. If the disposition was an installment sale, any information required by the shareholder to complete Form 6252, Installment Sale Income. If the disposition was property given up in a like-kind exchange, any information required by the shareholders to complete Form 8824, Like-Kind Exchanges. Disposition of property may result in a reduction of unused Section 179 deduction carried over by the shareholders. KEY FACT Character of income. The character of any item passed through from an S corporation to a shareholder is treated as if the shareholder directly realized or incurred the item. For example, a short-term capital gain passed through from an S corporation to a shareholder must be treated as a short-term capital gain by the shareholder. [IRC 1366(b)] Schedule K is a summary schedule of all shareholders shares of the S corporation s income, credits, deductions, etc. Schedules K and K-1 (Form 1120S) Schedule K. Schedule K is a summary schedule of all shareholders shares of the S corporation s income, credits, deductions, etc. Since rental activity income or loss and portfolio income are not reported on page 1, Form 1120S, Schedule K is used to report these and other amounts. Schedule K for the Greener Pastures, Inc. is shown on page 63. 62 Chapter 3 TheTaxReview Preparing S Corporation Returns

Form 1120S (2014) Page 3 Schedule K Shareholders Pro Rata Share Items Total amount 1 Ordinary business income (loss) (page 1, line 21).............. 1 73,279 2 Net rental real estate income (loss) (attach Form 8825)............ 2 3 a Other gross rental income (loss).......... 3a b Expenses from other rental activities (attach statement).. 3b c Other net rental income (loss). Subtract line 3b from line 3a.......... 3c 4 Interest income........................ 4 566 5 Dividends: a Ordinary dividends................... 5a b Qualified dividends.......... 5b 6 Royalties.......................... 6 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S))........ 7 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S))........ 8a b Collectibles (28%) gain (loss)........... 8b c Unrecaptured section 1250 gain (attach statement).... 8c 9 Net section 1231 gain (loss) (attach Form 4797).............. 9 10 Other income (loss) (see instructions).. Type 10 11 Section 179 deduction (attach Form 4562)................ 11 23,600 12 a Charitable contributions..................... 12a b Investment interest expense.................... 12b c Section 59(e)(2) expenditures (1) Type (2) Amount 12c(2) d Other deductions (see instructions)... Type 12d 13a Low-income housing credit (section 42(j)(5))............... 13a b Low-income housing credit (other).................. 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable).. 13c d Other rental real estate credits (see instructions) Type 13d e Other rental credits (see instructions)... Type 13e f Biofuel producer credit (attach Form 6478)............... 13f g Other credits (see instructions)..... Type P Small Business Health 13g 9,000 14a Name of country or U.S. possession Care Tax Credit b Gross income from all sources................... 14b c Gross income sourced at shareholder level............... 14c Foreign gross income sourced at corporate level d Passive category....................... 14d e General category....................... 14e f Other (attach statement)..................... 14f Deductions allocated and apportioned at shareholder level g Interest expense........................ 14g h Other........................... 14h Deductions allocated and apportioned at corporate level to foreign source income i Passive category....................... 14i j General category....................... 14j k Other (attach statement)..................... 14k Other information l Total foreign taxes (check one): Paid Accrued.......... 14l m Reduction in taxes available for credit (attach statement)........... 14m n Other foreign tax information (attach statement) 15 a Post-1986 depreciation adjustment.................. 15a 485 b Adjusted gain or loss...................... 15b c Depletion (other than oil and gas).................. 15c d Oil, gas, and geothermal properties gross income............. 15d e Oil, gas, and geothermal properties deductions.............. 15e f Other AMT items (attach statement).................. 15f Income (Loss) Deductions Credits Foreign Transactions Alternative Minimum Tax (AMT) Items Items Affecting Shareholder Basis 16 a Tax-exempt interest income.................... 16a b Other tax-exempt income..................... 16b c Nondeductible expenses..................... 16c d Distributions (attach statement if required) (see instructions).......... 16d e Repayment of loans from shareholders................. 16e 9,550 10,000 Form 1120S (2014) NOTES Form 1120S (2014) Page 4 Schedule K Shareholders Pro Rata Share Items (continued) Total amount Other Information Reconciliation 17a Investment income....................... 17a b Investment expenses...................... 17b c Dividend distributions paid from accumulated earnings and profits........ 17c d Other items and amounts (attach statement) 18 Income/loss reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14l 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year Assets (a) (b) (c) (d) 1 Cash............. 130,147 Line 2a1. Trade Ordinary notes and accounts income receivable (loss).... Enter the ordinary business income from line b Less allowance for bad debts...... ( ) ( ) 21, page 3 Inventories 1, Form.. 1120S...... This... income. is allocated to shareholders on 9,100 Schedule 4 U.S. government obligations...... K-1 5 based Tax-exempt on securities their (see percentage instructions).. of stock ownership. 6 Other current assets (attach statement)... Line 7 4. Loans Interest to shareholders income...... Do.. not. reduce portfolio income by allocable deductions. 9 Report Other investments such (attach deductions statement).. (other. than interest expense) on line 12d, Sched- 8 Mortgage and real estate loans..... 10a Buildings and other depreciable assets... 40,115 ule K. b Report Less accumulated each depreciation shareholder s..... ( pro-rata share ) in box ( 12, 25,537 Schedule ) 14,578 K-1 using 11a Depletable assets......... codes b I, Less K, accumulated and L. depletion...... ( ) ( ) 12 Land (net of any amortization)...... 13a Intangible assets (amortizable only).... b Less accumulated amortization..... ( ) ( ) TheTaxReview Preparing S Corporation Returns Chapter 3 63 14 Other assets (attach statement)..... 15 Total assets........... 153,825 Liabilities and Shareholders Equity 566 50,245

NOTES Schedule K-1 shows each shareholder s separate share of items from Schedule K. Interest expense allocable to portfolio income is generally investment interest expense. It is reported on line 12b, Schedule K. Report each shareholder s prorata share of interest expenses allocable to portfolio income in box 12, Schedule K-1 using code H. Line 11. Section 179 deduction. Report each shareholder s pro-rata share of the Section 179 expense deduction in box 11, Schedule K-1. If the corporation has more than one rental, trade, or business activity, identify on an attachment to Schedule K-1 the amount of Section 179 deduction from each separate activity. Note: Estates and trusts are not eligible for the Section 179 deduction. Line 13g. Other credits. Attach a statement to Form 1120S that identifies the type and amount of credits not reported elsewhere. In this example, the credit for small employer health insurance premiums (Form 8941) of $9,000 is identified by code P. Line 15a. Post-1986 depreciation adjustment. See Learning Objective 2-E, page 39, for the computation of the $485 amount. Line 16c. Nondeductible expenses. In this example, line 16c amount of $9,550 consists of $550 nondeductible meals and entertainment and $9,000 reduction to salaries and wages due to the Small Business Health Care Tax Credit. Line 16d. Distributions. In this example, line 16d consists of the cash distribution of $10,000 made to the shareholders. Line 17a. Investment income. Enter on line 20a the investment income included on lines 4, 5a, 6, and 10, of Schedule K. Do not include other portfolio gains or losses on this line. Line 17d. Other items and amounts. This should include any other information the shareholders need to prepare their tax returns. In this example, line 17d includes $6,600 for the shareholders portion of the HSA contributions and the shareholders health insurance premiums of $9,000. Schedule K-1 Schedule K-1 shows each shareholder s separate share of items from Schedule K. Attach a copy of each Schedule K-1 to Form 1120S filed with the IRS. Also provide the appropriate copy of Schedule K-1 to each shareholder. In the Greener Pastures, Inc. example, the following items are reported to Nate on Schedule K-1 for reporting on his individual tax return. 64 Chapter 3 TheTaxReview Preparing S Corporation Returns

Schedule K-1, line Amount Description 1 $ 40,303 Distributive share of shareholder s ordinary business income. 4 $ 311 Shareholder s share of interest income. 11 $ 12,980 Shareholder s share of Section 179 expense. 13, code P, Other credits $ 4,950 Shareholder s share of Small Business Health Care Tax Credit 15, code A, Post-1986 depreciation adjustment 16, code C, Nondeductible expenses $ 267 Shareholder s share of AMT depreciation adjustment. $ 5,253 Shareholder s share of nondeductible expenses. 16, code D, Distributions $ 5,500 Shareholder s cash distribution. 17, code V, Other information $ 3,300 Shareholder s share of HSA contribution. $ 4,500 Shareholder s share of health insurance premium. NOTES Schedule K-1 (Form 1120S) Department of the Treasury Internal Revenue Service 14 For calendar year 2014, or tax year beginning 4/1, 2014 ending, 20 Shareholder s Share of Income, Deductions, Credits, etc. See back of form and separate instructions. A B Part I Information About the Corporation Corporation s employer identification number 31-2345678 Corporation s name, address, city, state, and ZIP code Greener Pastures, Inc. 123 Prairie Point Farmdale, MN 55555 12/31 14 671113 Final K-1 Amended K-1 OMB No. 1545-0123 Part III Shareholder s Share of Current Year Income, Deductions, Credits, and Other Items 1 Ordinary business income (loss) 13 Credits 2 Net rental real estate income (loss) 3 Other net rental income (loss) 4 Interest income 5a Ordinary dividends 5b Qualified dividends 6 Royalties 40,303 311 7 Net short-term capital gain (loss) P $4,950 Small Business Health Care Tax Credit 14 Foreign transactions C IRS Center where corporation filed return e-file Part II Information About the Shareholder D Shareholder s identifying number xxx-xx-xxx1 E Shareholder s name, address, city, state, and ZIP code Nate 8a Net long-term capital gain (loss) 8b Collectibles (28%) gain (loss) 8c Unrecaptured section 1250 gain 9 Net section 1231 gain (loss) 10 Other income (loss) 15 Alternative minimum tax (AMT) items A $267 ** F Shareholder s percentage of stock ownership for tax year....... 55 % For IRS Use Only Shareholder basis computations Capital contributions............. $55,000 Ordinary income....................... 40,303 Interest income....................... 311 Section 179 expense................ (12,980) Nondeductible expenses............. (5,253) Distribution............................ (5,500) Shareholder basis 12/31/14..... $71,881 **See S Corporation K-1 Codes, page 125 ***Nondeductible expenses consist of: Nondeductible portion of meals and entertainment......... $303 Nondeductible portion of salaries and wages............. $4,950 $5,253 11 Section 179 deduction 12 Other deductions 16 Items affecting shareholder basis 12,980 C $5,253*** D $5,500 17 Other information V $3,300 HSA contribution V $4,500 Health insurance premium (both included in W-2 income) * See attached statement for additional information. For Paperwork Reduction Act Notice, see Instructions for Form 1120S. IRS.gov/form1120s Cat. No. 11520D Schedule K-1 (Form 1120S) 2014 TheTaxReview Preparing S Corporation Returns Chapter 3 65

NOTES Schedule M-2 Schedule M-2 is an analysis of accumulated adjustments account, other adjustments account, and shareholders undistributed taxable income previously Form 1120S (2014) Page 5 taxed. Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) See 1 Learning Net income (loss) Objective per books.. 1-D,... page. 40,695 15, for information 5 Income recorded on books this about year not included adjustments to 2 Income included on Schedule K, lines 1, 2, 3c, 4, Schedule K, lines 1 through 10 (itemize): these accounts 5a, 6, 7, 8a, 9, and and 10, not ordering recorded on books rules this for distributions. a Tax-exempt interest $ year (itemize) In this 3 Expenses example, recorded line on books 5, Other this year reductions, not consists 6 Deductions of included nondeductible Schedule K, meals and included on Schedule K, lines 1 through 12 and lines 1 through 12 and 14l, not charged entertainment 14l (itemize): expense of $550, Section 179 against expense book income of this $23,600, year (itemize): and a Small a Depreciation $ a Depreciation $ Business b Travel Health and entertainment Care $ Tax Credit of $9,000, and for a total of $33,150. 550 Salaries and Wages 9,000 7 Add lines 5 and 6..... 4 Add lines 1 through 3........ 50,245 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 50,245 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) 1 Balance at beginning of tax year..... 2 Ordinary income from page 1, line 21... Interest 3 Other additions.......... 4 Loss from page 1, line 21....... 5 Other reductions.......... 6 Combine lines 1 through 5....... 7 Distributions other than dividend distributions 8 Balance at end of tax year. Subtract line 7 from line 6 9,550 (a) Accumulated adjustments account 0 73,279 566 (b) Other adjustments account ( ) ( ) ( ) 33,150 40,695 10,000 30,695 (c) Shareholders undistributed taxable income previously taxed Form 1120S (2014) Learning Objective 3-D Self-Quiz For answer, see Chapter 3 Self-Quiz Answers, page 76. Test your knowledge and comprehension of information presented in Learning Objective 3-D. 4) Which of the following best describes the function of Schedule K-1, Form 1120S. a) Schedule K-1 reports only separately stated items passing through from the S corporation. b) Schedule K-1 reports the shareholder s basis in the S corporation. c) Schedule K-1 reports only the distributive share of income or loss from the S corporation. d) Schedule K-1 reports the shareholder s share of income, deductions, credits, and other S corporation items to the shareholder. 66 Chapter 3 TheTaxReview Preparing S Corporation Returns

Learning Objective 3-E Transfer S corporation items from a shareholder s Schedule K-1 to the shareholder s Form 1040 and supporting schedules. NOTES Schedule E (Form 1040), Part II Income or Loss From Partnerships and S Corporations Use Part II, Schedule E (Form 1040), to report income or loss from S corporations. The information to report should be provided to the shareholder, along with instructions on how to report, on Schedule K-1, Form 1120S. Do not attach Schedule K-1 to the Form 1040. Losses from S corporations are limited to the shareholder s basis. See Shareholder Basis, Learning Objective 1-C, page 9. KEY FACT S corporations Schedule K-1. S corporation income is reported to shareholders on Schedule K-1. Items from Schedule K-1 are reported on various forms and schedules of Form 1040 of each partner. See Learning Objective 3-D, page 60, for details on how the S corporation reports all K-1 items. Note: Limits on the allowable Section 179 expense apply to the shareholder separately from the S corporation. Employee-shareholder expenses. Shareholders are personally responsible for paying for their own professional publications, association dues, and sanctioning fees. As corporation shareholders, these amounts will be deducted as employee business expenses on the individual tax returns, subject to the 2% of AGI limitation for employee business expenses. Although an employee-shareholder can deduct employee business expenses, a shareholder of an S corporation cannot deduct expenses paid on behalf of a corporation unless a corporate resolution or policy requires payment of the expense. See Employee Business Expense for S Corporation Shareholder, Learning Objective 2-D, page 37. Note: An S corporation shareholder s share of net income of an S corporation is not subject to SE tax. Pass-through entities fiscal year. Income, loss or deductions passed through to shareholders are reported by recipients in the year in which the entity s tax year ends. Reporting income at the end of an entity s fiscal year can provide income deferral and other tax planning opportunities. EXAMPLE Elmer is a calendar year taxpayer. His marginal tax rate is 25%. Elmer has an interest in Bugs, Inc. that has a fiscal year ending January 31. Elmer s distributive share of Bugs, Inc. income will be $25,000 for the fiscal year ending January 31, 2015. Elmer will owe $6,250 of tax on the income. Even though most of the income was earned in 2014, because of the fiscal year, the income will not be continued on next page Limits on the allowable Section 179 expense apply to the shareholder separately from the S corporation. Income, loss or deductions passed through to shareholders are reported by recipients in the year in which the entity s tax year ends. TheTaxReview Preparing S Corporation Returns Chapter 3 67

NOTES Example continued reported until 2015. Elmer will make estimated payments in four equal installments for tax year 2015, further deferring tax on the earnings. In January 2016, Elmer will make the last estimated payment for the amounts earned in 2014. Greener Pastures, Inc. Following are the filled in forms, Form 1040, Schedule E, Form 3800, and Form 4562 for Nate, a shareholder in the Greener Pastures, Inc. Nate s filled in Schedule K-1 can be found in Learning Objective 3-D, page 60. Form 1040 Department of the Treasury Internal Revenue Service (99) U.S. Individual Income Tax Return OMB No. 1545-0074 IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 2014, or other tax year beginning, 2014, ending, 20 See separate instructions. Your first name and initial Last name Your social security number Nate If a joint return, spouse s first name and initial Last name Spouse s social security number 14 xxx xx xxx1 Home address (number and street). If you have a P.O. box, see instructions. Apt. no. Make sure the SSN(s) above and on line 6c are correct. City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Presidential Election Campaign Foreign country name Foreign province/state/county Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking Foreign postal code a box below will not change your tax or refund. You Spouse Filing Status 1 X Single 4 Head of household (with qualifying person). (See instructions.) If 2 Married filing jointly (even if only one had income) the qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. and full name here. 5 Qualifying widow(er) with dependent child 6a Yourself. If someone can claim you as a dependent, do not check box 6a..... Exemptions X Boxes checked } on 6a and 6b b Spouse........................ No. of children 1 c Dependents: (2) Dependent s (3) Dependent s (4) if child under age 17 on 6c who: (1) First name Last name social security number relationship to you qualifying for child tax credit lived with you (see instructions) did not live with you due to divorce or separation If more than four dependents, see instructions and (see instructions) Dependents on 6c not entered above check here Add numbers on d Total number of exemptions claimed................. lines above 1 58,055 311 Income 7 Wages, salaries, tips, etc. Attach Form(s) W-2............ 7 8a Taxable interest. Attach Schedule B if required............ 8a b Tax-exempt interest. Do not include on line 8a... 8b Attach Form(s) W-2 here. Also 9 a Ordinary dividends. Attach Schedule B if required........... 9a attach Forms b Qualified dividends........... 9b W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes...... 10 1099-R if tax 11 Alimony received..................... 11 was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ.......... 12 13 Capital gain or (loss). Attach Schedule D if required. If not required, check here 13 If you did not 14 Other gains or (losses). Attach Form 4797.............. 14 get a W-2, see instructions. 15 a IRA distributions. 15a b Taxable amount... 15b 16 a Pensions and annuities 16a b Taxable amount... 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 27,323 18 Farm income or (loss). Attach Schedule F.............. 18 19 Unemployment compensation................. 19 20 a Social security benefits 20a b Taxable amount... 20b 21 Other income. List type and amount 21 22 Combine the amounts in the far right column for lines 7 through 21. This is your total income 22 85,689 23 Educator expenses........... 23 Adjusted 24 Certain business expenses of reservists, performing artists, and Gross fee-basis government officials. Attach Form 2106 or 2106-EZ 24 Income 25 Health savings account deduction. Attach Form 8889. 25 3,300 26 Moving expenses. Attach Form 3903...... 26 27 Deductible part of self-employment tax. Attach Schedule SE. 27 28 Self-employed SEP, SIMPLE, and qualified plans.. 28 4,500 29 Self-employed health insurance deduction.... 29 30 Penalty on early withdrawal of savings...... 30 31 a Alimony paid b Recipient s SSN 31a 32 IRA deduction............. 32 33 Student loan interest deduction........ 33 34 Tuition and fees. Attach Form 8917....... 34 35 Domestic production activities deduction. Attach Form 8903 35 36 Add lines 23 through 35................... 36 7,800 37 Subtract line 36 from line 22. This is your adjusted gross income..... 37 77,889 For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2014) 68 Chapter 3 TheTaxReview Preparing S Corporation Returns

Form 1040 (2014) Page 2 38 Amount from line 37 (adjusted gross income).............. 38 39a Tax and Check You were born before January 2, 1950, Blind. Total boxes { } 77,889 if: Spouse was born before January 2, 1950, Blind. checked 39a Credits b If your spouse itemizes on a separate return or you were a dual-status alien, check here 39b Standard Deduction for People who check any box on line 39a or 39b or who can be claimed as a dependent, see instructions. All others: Single or Married filing separately, $6,200 Married filing jointly or Qualifying widow(er), $12,400 Head of household, $9,100 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin).. 40 41 Subtract line 40 from line 38................... 41 42 Exemptions. If line 38 is $152,525 or less, multiply $3,950 by the number on line 6d. Otherwise, see instructions 42 43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0-.. 43 44 Tax (see instructions). Check if any from: a Form(s) 8814 b Form 4972 c 44 45 Alternative minimum tax (see instructions). Attach Form 6251......... 45 46 Excess advance premium tax credit repayment. Attach Form 8962........ 46 47 Add lines 44, 45, and 46................... 47 48 Foreign tax credit. Attach Form 1116 if required.... 48 49 Credit for child and dependent care expenses. Attach Form 2441 49 50 Education credits from Form 8863, line 19..... 50 51 Retirement savings contributions credit. Attach Form 8880 51 52 Child tax credit. Attach Schedule 8812, if required... 52 53 Residential energy credits. Attach Form 5695.... 53 54 Other credits from Form: a 3800 b 8801 c 54 55 Add lines 48 through 54. These are your total credits............ 55 56 Subtract line 55 from line 47. If line 55 is more than line 47, enter -0-...... 56 57 Self-employment tax. Attach Schedule SE............... 57 Other 58 Unreported social security and Medicare tax from Form: a 4137 b 8919.. 58 59 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required.. 59 Taxes 60 a Household employment taxes from Schedule H.............. 60a b First-time homebuyer credit repayment. Attach Form 5405 if required........ 60b 61 Health care: individual responsibility (see instructions) Full-year coverage..... 61 62 Taxes from: a Form 8959 b Form 8960 c Instructions; enter code(s) 62 63 Add lines 56 through 62. This is your total tax............. 63 Payments 64 Federal income tax withheld from Forms W-2 and 1099.. 64 10,703 65 2014 estimated tax payments and amount applied from 2013 return 65 If you have a qualifying child, attach Schedule EIC. 66a Earned income credit (EIC).......... 66a b Nontaxable combat pay election 66b 67 Additional child tax credit. Attach Schedule 8812..... 67 68 American opportunity credit from Form 8863, line 8... 68 69 Net premium tax credit. Attach Form 8962...... 69 70 Amount paid with request for extension to file..... 70 71 Excess social security and tier 1 RRTA tax withheld.... 71 72 Credit for federal tax on fuels. Attach Form 4136.... 72 73 Credits from Form: a 2439 b Reserved c Reserved d 73 74 Add lines 64, 65, 66a, and 67 through 73. These are your total payments..... 74 Refund 75 If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75 76a Amount of line 75 you want refunded to you. If Form 8888 is attached, check here. 76a Direct deposit? b Routing number c Type: Checking Savings See d Account number instructions. 77 Amount of line 75 you want applied to your 2015 estimated tax 77 Amount 78 Amount you owe. Subtract line 74 from line 63. For details on how to pay, see instructions 78 You Owe 79 Estimated tax penalty (see instructions)....... 79 Third Party Designee Sign Here Joint return? See instructions. Keep a copy for your records. Paid Preparer Use Only Do you want to allow another person to discuss this return with the IRS (see instructions)? Yes. Complete below. No Designee s Phone Personal identification name no. number (PIN) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number Spouse s signature. If a joint return, both must sign. X Date Spouse s occupation Print/Type preparer s name Preparer s signature Date 4,950 6,200 71,689 3,950 67,739 12,788 12,788 4,950 7,838 7,838 10,703 2,865 2,865 If the IRS sent you an Identity Protection PIN, enter it here (see inst.) PTIN Check if self-employed Firm s name Firm's EIN Firm s address Phone no. www.irs.gov/form1040 Form 1040 (2014) NOTES TheTaxReview Preparing S Corporation Returns Chapter 3 69

NOTES Schedule E (Form 1040) 2014 Attachment Sequence No. 13 Page 2 Name(s) shown on return. Do not enter name and social security number if shown on other side. Your social security number Nate xxx-xx-xxx1 Caution. The IRS compares amounts reported on your tax return with amounts shown on Schedule(s) K-1. Part II Income or Loss From Partnerships and S Corporations Note. If you report a loss from an at-risk activity for which any amount is not at risk, you must check the box in column (e) on line 28 and attach Form 6198. See instructions. 27 Are you reporting any loss not allowed in a prior year due to the at-risk, excess farm loss, or basis limitations, a prior year unallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed partnership expenses? If you answered Yes, see instructions before completing this section. Yes No 28 (a) Name A B C D Passive Income and Loss (f) Passive loss allowed (attach Form 8582 if required) (g) Passive income from Schedule K 1 (b) Enter P for partnership; S for S corporation (h) Nonpassive loss from Schedule K 1 (c) Check if foreign partnership (d) Employer identification number Nonpassive Income and Loss (i) Section 179 expense deduction from Form 4562 (e) Check if any amount is not at risk (j) Nonpassive income from Schedule K 1 A B C D 29a Totals b Totals 12,980 30 Add columns (g) and (j) of line 29a..................... 30 40,303 31 Add columns (f), (h), and (i) of line 29b................... 31 ( 12,980 ) 32 Total partnership and S corporation income or (loss). Combine lines 30 and 31. Enter the result here and include in the total on line 41 below............... 32 27,323 Part III Income or Loss From Estates and Trusts 33 (a) Name A B Greener Pastures, Inc. Passive Income and Loss (c) Passive deduction or loss allowed (attach Form 8582 if required) (d) Passive income from Schedule K 1 (b) Employer identification number Nonpassive Income and Loss (e) Deduction or loss from Schedule K 1 (f) Other income from Schedule K 1 A B 34a Totals b Totals 35 Add columns (d) and (f) of line 34a..................... 35 36 Add columns (c) and (e) of line 34b.................... 36 ( ) 37 Total estate and trust income or (loss). Combine lines 35 and 36. Enter the result here and include in the total on line 41 below.................... 37 Part IV Income or Loss From Real Estate Mortgage Investment Conduits (REMICs) Residual Holder 38 (a) Name (b) Employer identification number S (c) Excess inclusion from Schedules Q, line 2c (see instructions) 31-2345678 12,980 (d) Taxable income (net loss) from Schedules Q, line 1b X 40,303 (e) Income from Schedules Q, line 3b 39 Combine columns (d) and (e) only. Enter the result here and include in the total on line 41 below 39 Part V Summary 40 Net farm rental income or (loss) from Form 4835. Also, complete line 42 below...... 40 41 Total income or (loss). Combine lines 26, 32, 37, 39, and 40. Enter the result here and on Form 1040, line 17, or Form 1040NR, line 18 41 42 Reconciliation of farming and fishing income. Enter your gross farming and fishing income reported on Form 4835, line 7; Schedule K-1 (Form 1065), box 14, code B; Schedule K-1 (Form 1120S), box 17, code V; and Schedule K-1 (Form 1041), box 14, code F (see instructions).. 42 43 Reconciliation for real estate professionals. If you were a real estate professional (see instructions), enter the net income or (loss) you reported anywhere on Form 1040 or Form 1040NR from all rental real estate activities in which you materially participated under the passive activity loss rules.. 43 27,323 Schedule E (Form 1040) 2014 70 Chapter 3 TheTaxReview Preparing S Corporation Returns

Form 4562 Depreciation and Amortization (Including Information on Listed Property) Attach to your tax return. Information about Form 4562 and its separate instructions is at www.irs.gov/form4562. OMB No. 1545-0172 Department of the Treasury Attachment Internal Revenue Service (99) Sequence No. 179 Name(s) shown on return Business or activity to which this form relates Identifying number Nate Greener Pastures, Inc. xxx-xx-xxx1 Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I. 1 Maximum amount (see instructions)....................... 1 2 Total cost of section 179 property placed in service (see instructions)........... 2 3 Threshold cost of section 179 property before reduction in limitation (see instructions)...... 3 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0-.......... 4 5 Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions......................... 5 6 (a) Description of property (b) Cost (business use only) (c) Elected cost Schedule K-1 #31-2345678 12,980 12,980 14 500,000 12,980 2,000,000 0 500,000 NOTES 7 Listed property. Enter the amount from line 29......... 7 8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7...... 8 9 Tentative deduction. Enter the smaller of line 5 or line 8................ 9 10 Carryover of disallowed deduction from line 13 of your 2013 Form 4562........... 10 11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11 12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11..... 12 13 Carryover of disallowed deduction to 2015. Add lines 9 and 10, less line 12 13 Note: Do not use Part II or Part III below for listed property. Instead, use Part V. Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions)...................... 14 15 Property subject to section 168(f)(1) election.................... 15 16 Other depreciation (including ACRS)...................... 16 Part III MACRS Depreciation (Do not include listed property.) (See instructions.) Section A 17 MACRS deductions for assets placed in service in tax years beginning before 2014....... 17 18 If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here...................... Section B Assets Placed in Service During 2014 Tax Year Using the General Depreciation System (a) Classification of property (b) Month and year placed in service (c) Basis for depreciation (business/investment use only see instructions) (d) Recovery period 12,980 12,980 98,358 12,980 (e) Convention (f) Method (g) Depreciation deduction 19a 3-year property b 5-year property c 7-year property d 10-year property e 15-year property f 20-year property g 25-year property h Residential rental property i Nonresidential real property 25 yrs. 27.5 yrs. 27.5 yrs. 39 yrs. MM MM MM MM S/L S/L S/L S/L S/L Section C Assets Placed in Service During 2014 Tax Year Using the Alternative Depreciation System 20a Class life b 12-year c 40-year 12 yrs. 40 yrs. MM S/L S/L S/L Part IV Summary (See instructions.) 21 Listed property. Enter amount from line 28.................... 21 22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations see instructions. 22 23 For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs....... 23 For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N Form 4562 (2014) TheTaxReview Preparing S Corporation Returns Chapter 3 71

NOTES Form 3800 Department of the Treasury Internal Revenue Service (99) Name(s) shown on return General Business Credit Information about Form 3800 and its separate instructions is at www.irs.gov/form3800. You must attach all pages of Form 3800, pages 1, 2, and 3, to your tax return. Identifying number OMB No. 1545-0895 14 Attachment Sequence No. 22 Nate xxx-xx-xxx1 Part I Current Year Credit for Credits Not Allowed Against Tentative Minimum Tax (TMT) (See instructions and complete Part(s) III before Parts I and II) 1 General business credit from line 2 of all Parts III with box A checked......... 1 2 Passive activity credits from line 2 of all Parts III with box B checked 2 3 Enter the applicable passive activity credits allowed for 2014 (see instructions)...... 3 4 Carryforward of general business credit to 2014. Enter the amount from line 2 of Part III with box C checked. See instructions for statement to attach............. 4 5 Carryback of general business credit from 2015. Enter the amount from line 2 of Part III with box D checked (see instructions)..................... 5 6 Add lines 1, 3, 4, and 5........................ 6 Part II Allowable Credit 7 Regular tax before credits: Individuals. Enter the sum of the amounts from Form 1040, lines 44 and 46, or the } sum of the amounts from Form 1040NR, lines 42 and 44........ Corporations. Enter the amount from Form 1120, Schedule J, Part I, line 2; or the applicable line of your return.................... 7 12,788 Estates and trusts. Enter the sum of the amounts from Form 1041, Schedule G, lines 1a and 1b; or the amount from the applicable line of your return.... 8 Alternative minimum tax: Individuals. Enter the amount from Form 6251, line 35........ Corporations. Enter the amount from Form 4626, line 14........... 8 } Estates and trusts. Enter the amount from Schedule I (Form 1041), line 56.. 9 Add lines 7 and 8.......................... 9 12,788 10a Foreign tax credit................ 10a b Certain allowable credits (see instructions)........ 10b c Add lines 10a and 10b........................ 10c 11 Net income tax. Subtract line 10c from line 9. If zero, skip lines 12 through 15 and enter -0- on line 16 11 12 Net regular tax. Subtract line 10c from line 7. If zero or less, enter -0-12 12,788 12,788 13 Enter 25% (.25) of the excess, if any, of line 12 over $25,000 (see instructions).................. 13 14 Tentative minimum tax: Individuals. Enter the amount from Form 6251, line 33... Corporations. Enter the amount from Form 4626, line 12... 14 Estates and trusts. Enter the amount from Schedule I } (Form 1041), line 54............... 15 Enter the greater of line 13 or line 14.................... 15 16 Subtract line 15 from line 11. If zero or less, enter -0-.............. 16 17 Enter the smaller of line 6 or line 16.................... 17 C corporations: See the line 17 instructions if there has been an ownership change, acquisition, or reorganization. 12,788 0 For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12392F Form 3800 (2014) 72 Chapter 3 TheTaxReview Preparing S Corporation Returns

Form 3800 (2014) Page 2 Part II Allowable Credit (Continued) Note. If you are not required to report any amounts on lines 22 or 24 below, skip lines 18 through 25 and enter -0- on line 26. NOTES 18 Multiply line 14 by 75% (.75) (see instructions)................. 18 19 Enter the greater of line 13 or line 18.................... 19 20 Subtract line 19 from line 11. If zero or less, enter -0-.............. 20 21 Subtract line 17 from line 20. If zero or less, enter -0-.............. 21 12,788 12,788 22 Combine the amounts from line 3 of all Parts III with box A, C, or D checked....... 22 23 Passive activity credit from line 3 of all Parts III with box B checked 23 24 Enter the applicable passive activity credit allowed for 2014 (see instructions)...... 24 25 Add lines 22 and 24......................... 25 26 Empowerment zone and renewal community employment credit allowed. Enter the smaller of line 21 or line 25.......................... 26 27 Subtract line 13 from line 11. If zero or less, enter -0-.............. 27 12,788 28 Add lines 17 and 26......................... 28 29 Subtract line 28 from line 27. If zero or less, enter -0-.............. 29 30 Enter the general business credit from line 5 of all Parts III with box A checked...... 30 12,788 4,950 31 Reserved............................. 31 32 Passive activity credits from line 5 of all Parts III with box B checked 32 33 Enter the applicable passive activity credits allowed for 2014 (see instructions)...... 33 34 Carryforward of business credit to 2014. Enter the amount from line 5 of Part III with box C checked and line 6 of Part III with box G checked. See instructions for statement to attach.. 34 35 Carryback of business credit from 2015. Enter the amount from line 5 of Part III with box D checked (see instructions)....................... 35 36 Add lines 30, 33, 34, and 35....................... 36 37 Enter the smaller of line 29 or line 36................... 37 38 Credit allowed for the current year. Add lines 28 and 37. Report the amount from line 38 (if smaller than the sum of Part I, line 6, and Part II, lines 25 and 36, see instructions) as indicated below or on the applicable line of your return: Individuals. Form 1040, line 54, or Form 1040NR, line 51...... Corporations. Form 1120, Schedule J, Part I, line 5c........ Estates and trusts. Form 1041, Schedule G, line 2b........ }.... 38 4,950 4,950 4,950 Form 3800 (2014) TheTaxReview Preparing S Corporation Returns Chapter 3 73

NOTES Form 3800 (2014) Page 3 Name(s) shown on return Identifying number Nate xxx-xx-xxx1 Part III General Business Credits or Eligible Small Business Credits (see instructions) Complete a separate Part III for each box checked below. (see instructions) A X General Business Credit From a Non-Passive Activity E Reserved B General Business Credit From a Passive Activity F Reserved C General Business Credit Carryforwards G Eligible Small Business Credit Carryforwards D General Business Credit Carrybacks H Reserved I If you are filing more than one Part III with box A or B checked, complete and attach first an additional Part III combining amounts from all Parts III with box A or B checked. Check here if this is the consolidated Part III.................... (a) Description of credit Note. On any line where the credit is from more than one source, a separate Part III is needed for each pass-through entity. 1a Investment (Form 3468, Part II only) (attach Form 3468)....... 1a b Reserved...................... 1b c Increasing research activities (Form 6765)........... 1c d Low-income housing (Form 8586, Part I only).......... 1d e Disabled access (Form 8826) (see instructions for limitation)..... 1e f Renewable electricity, refined coal, and Indian coal production (Form 8835) 1f g Indian employment (Form 8845)............... 1g h Orphan drug (Form 8820)................. 1h i New markets (Form 8874)................. 1i j Small employer pension plan startup costs (Form 8881) (see instructions for limitation) 1j k Employer-provided child care facilities and services (Form 8882) (see instructions for limitation)................. 1k l Biodiesel and renewable diesel fuels (attach Form 8864)....... 1l m Low sulfur diesel fuel production (Form 8896).......... 1m n Distilled spirits (Form 8906)................ 1n o Nonconventional source fuel (Form 8907)........... 1o p Energy efficient home (Form 8908).............. 1p q Energy efficient appliance (Form 8909)............ 1q r Alternative motor vehicle (Form 8910)............. 1r s Alternative fuel vehicle refueling property (Form 8911)....... 1s t Reserved...................... 1t u Mine rescue team training (Form 8923)............ 1u v Agricultural chemicals security (Form 8931) (see instructions for limitation). 1v w Employer differential wage payments (Form 8932)......... 1w x Carbon dioxide sequestration (Form 8933)........... 1x y Qualified plug-in electric drive motor vehicle (Form 8936)...... 1y z Qualified plug-in electric vehicle (carryforward only)........ 1z aa New hire retention (carryforward only)............. 1aa bb General credits from an electing large partnership (Schedule K-1 (Form 1065-B)) 1bb zz Other....................... 1zz 2 Add lines 1a through 1zz and enter here and on the applicable line of Part I 2 3 Enter the amount from Form 8844 here and on the applicable line of Part II. 3 4a Investment (Form 3468, Part III) (attach Form 3468)........ 4a b Work opportunity (Form 5884)............... 4b c Biofuel producer (Form 6478)............... 4c d Low-income housing (Form 8586, Part II)............ 4d e Renewable electricity, refined coal, and Indian coal production (Form 8835) 4e f Employer social security and Medicare taxes paid on certain employee tips (Form 8846) 4f g Qualified railroad track maintenance (Form 8900)......... 4g h Small employer health insurance premiums (Form 8941)....... 4h i Reserved...................... 4i j Reserved...................... 4j z Other....................... 4z 5 Add lines 4a through 4z and enter here and on the applicable line of Part II. 5 6 Add lines 2, 3, and 5 and enter here and on the applicable line of Part II.. 6 (b) If claiming the credit from a pass-through entity, enter the EIN 31-2345678 (c) Enter the appropriate amount 4,950 4,950 4,950 Form 3800 (2014) 74 Chapter 3 TheTaxReview Preparing S Corporation Returns

Learning Objective 3-E Self-Quiz For answer, see Chapter 3 Self-Quiz Answers, page 76. Test your knowledge and comprehension of information presented in Learning Objective 3-E. 5) Where does a shareholder report line 1, Schedule K-1 (1120S), ordinary business income (loss), and line 11, Schedule K-1 (1120S), Section 179 deduction, on his or her Form 1040? a) Line 1 and line 11, Schedule K-1 are reported directly on line 17, Form 1040. b) Line 1, Schedule K-1 is reported on Part II, Schedule E and line 11, Schedule K-1 is reported on Form 4562. c) Line 1 and line 11, Schedule K-1 are reported directly on Part II, Schedule E. d) Line 1 and line 11, Schedule K-1 are reported first on Form 4562 and then on Part II, Schedule E. NOTES TheTaxReview Preparing S Corporation Returns Chapter 3 75

NOTES Chapter 3 Self-Quiz Answers 1) John will include an S corporation item on his individual return that will be reported inconsistently with the S corporation return. What steps must John take to report the inconsistent item? a) All items reported on each shareholder s return must be reported consistently with the S corporation return. Incorrect. Inconsistent treatment is reported on Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). b) John must ask the S corporation to change the corporate tax return before he can file his individual return. Incorrect. The S corporation return does not have to be changed in order for the taxpayer to report an inconsistent item. Inconsistent treatment is reported on Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). c) John reports the inconsistent treatment on Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). Correct. Form 8082 is used to report inconsistent treatment between the way an item is reported by an S corporation and the way an item is reported on the taxpayer s return. d) No reporting is required. Incorrect. If a taxpayer will report S corporation items inconsistently with the S corporation return, the taxpayer must report the inconsistent treatment on Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR). 2) Health insurance paid on behalf of shareholder-employees who are corporate officers owning more than 2% of the S corporation are reported as a deduction on which line of Form 1120S? a) Line 7, Compensation of officers. Correct. Health insurance paid on behalf of corporate officers who are more than 2% shareholders are included as wages and reported on line 7, Form 1120S. b) Line 8, Salaries and wages. Incorrect. If the shareholder-employee is not a corporate officer, the health insurance paid would be included on line 8, salaries and wages. Amounts paid to or on behalf of corporate officers are reported on line 7, compensation of officers. c) Line 18, Employee benefit programs. Incorrect. Costs of health insurance paid for employees of an S corporation who are not more than 2% shareholders are reported on line 18, Form 1120S. If the employee is a more than 2% shareholder, the health insurance is included as wages on line 7 or line 8, Form 1120S. 76 Chapter 3 TheTaxReview Preparing S Corporation Returns

d) Not deductible on Form 1120. Incorrect. Health insurance paid for more than 2% shareholders are deductible to the S corporation on line 7 or line 8, Form 1120S and also reported to the shareholder as wages on Form W-2. NOTES 3) How are regular depreciation and the Section 179 expense reported to shareholders by the S corporation? a) Regular depreciation is reported on line 14, Form 1120S, and any Section 179 deduction is a separately stated item on the shareholder s Schedule K-1. Correct. Regular depreciation is deducted from S corporation income. The Section 179 deduction is claimed by the shareholder on Schedule E, Form 1040. b) Regular depreciation is a separately stated item on Schedule K-1, and the Section 179 deduction is reported on line 14, Form 1120S. Incorrect. Regular depreciation is deducted from S corporation income. The Section 179 deduction is claimed by the shareholder on Schedule E, Form 1040. c) Regular depreciation is claimed on line 14, Form 1120S. The Section 179 deduction is not allowed for property purchased by an S corporation. Incorrect. The Section 179 deduction is allowed for S corporation property. The deduction is passed through to the shareholder as a separately stated item. d) Regular depreciation and the Section 179 deduction are passed through to the shareholders on Schedule K-1. Incorrect. Only the Section 179 deduction is passed through to shareholders on Schedule K-1. 4) Which of the following best describes the function of Schedule K-1, Form 1120S. a) Schedule K-1 reports only separately stated items passing through from the S corporation. Incorrect. Schedule K-1 does report separately stated items, but also reports the shareholders distributive share of S corporation income or loss. b) Schedule K-1 reports the shareholder s basis in the S corporation. Incorrect. The shareholder s basis is calculated separately from the Schedule K-1. c) Schedule K-1 reports only the distributive share of income or loss from the S corporation. Incorrect. Schedule K-1 does report distributive share of income or loss from the S corporation, but also reports separately stated items. d) Schedule K-1 reports the shareholder s share of income, deductions, credits, and other S corporation items to the shareholder. Correct. Schedule K-1 also reports information about the shareholder and information to calculate shareholder basis. TheTaxReview Preparing S Corporation Returns Chapter 3 77

NOTES 5) Where does a shareholder report line 1, Schedule K-1 (1120S), ordinary business income (loss), and line 11, Schedule K-1 (1120S), Section 179 deduction, on his or her Form 1040? a) Line 1 and line 11, Schedule K-1 are reported directly on line 17, Form 1040. Incorrect. The amount on line 17, Form 1040 is reported first on Schedule E and Form 4562. b) Line 1, Schedule K-1 is reported on Part II, Schedule E and line 11, Schedule K-1 is reported on Form 4562. Correct. Ordinary business income (loss) is reported on Part II, Schedule E and the Section 179 deduction is reported first on Form 4562 to determine if there are any limitations on the deduction at the shareholder level. c) Line 1 and line 11, Schedule K-1 are reported directly on Part II, Schedule E. Incorrect. Ordinary business income is reported on Part II, Schedule E but the Section 179 deduction is reported first on Form 4562. d) Line 1 and line 11, Schedule K-1 are reported first on Form 4562 and then on Part II, Schedule E. Incorrect. Only the Section 179 deduction is reported on Form 4562. The allowed portion of the Section 179 deduction then flows to Part II, Schedule E where the ordinary business income (loss) is also reported. 78 Chapter 3 TheTaxReview Preparing S Corporation Returns

4 Sale of a S Corporation Learning Objectives Successful completion of this course will enable the participant to: 4-A Determine classes of assets upon sale of a business and for reporting on Form 8594, Asset Acquisition Statement. 4-B Differentiate asset allocations favoring the buyer or the seller in the sale of a business situation. 4-C Identify the tax consequences to shareholders upon the liquidation of an S corporation. 4-D Recognize how the sale of a business is reported by an S corporation. 4-E Report the sale of the S corporation business on the shareholder s Form 1040 and supporting schedules. CPE/CE Glossary Terms Consideration. The buyer s consideration is the cost of the assets acquired. The seller s consideration is the amount realized, money plus the fair market value of property received, from the sale of assets. Depreciation recapture. Depreciation recapture is the amount of gain treated as ordinary income upon the sale or other disposition of the property. Goodwill. Goodwill is the favor or advantage that a business has acquired especially through its brands and good reputation. It is also the excess of the purchase price of a company over its book value which represents the value of goodwill as an intangible asset. Trade or business. A group of assets makes up a trade or business if goodwill or going concern value could, under any circumstances, attach to such assets. TheTaxReview Preparing S Corporation Returns Chapter 4 79

NOTES Note: For purposes of illustrating the sale of the business assume that Greener Pastures, Inc. began in 2011 rather than 2014. For Chapter 4 do not refer to the financial statements in the Appendix. Learning Objective 4-A Determine classes of assets upon sale of a business and for reporting on Form 8594, Asset Acquisition Statement. Sale of Business Assets The sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. KEY FACT A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock-in-trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than one year results in gain or loss from an IRC section 1231 transaction. The sale of inventory results in ordinary income or loss. A group of assets makes up a trade or business if goodwill or going concern value could, under any circumstances, attach to such assets. Trade or business. A group of assets makes up a trade or business if goodwill or going concern value could, under any circumstances, attach to such assets. Factors to consider in determining whether goodwill or going concern value could attach include: The purchase price includes Section 197 assets or other intangible assets. However, the transfer of such an asset in the absence of other assets is not a trade or business. The book value of tangible assets shown on the buyer s financial statements exceeds the total paid for all assets. The sale includes a license, a lease agreement, a covenant not-to-compete, a management contract, an employment contract, or other similar agreement between the buyer and seller. EXAMPLE #1 Larry sells Sue and Mary one of his old carpet cleaning machines and some cleaning supplies so that Sue and Mary can start a carpet cleaning business. Larry continues to operate his carpet cleaning business with other equipment. Even though the purchase of the machine and supplies is a major portion of the cost for Sue and Mary to start up their business, it does not constitute a sale of a group of assets because there were no intangible assets sold, and Larry continues to operate his business. 80 Chapter 4 TheTaxReview Preparing S Corporation Returns

EXAMPLE #2 Assume the same facts as Example #1, except that Larry also sells his customer list for a price and discontinues his business. The group of assets sold to Sue and Mary makes up a trade or business because the customer list is an intangible asset and its value represents the goodwill in Larry s carpet cleaning business. Corporate liquidations. Corporate liquidations of property generally are treated as a sale or exchange. Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Gain or loss is also generally recognized on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. See S Corporation Liquidation, Learning Objective 4-C, page 87. Allocation of consideration paid for a business. The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method to allocate the consideration to each business asset transferred. This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. It also determines the buyer s basis in the business assets. Consideration. The buyer s consideration is the cost of the assets acquired. The seller s consideration is the amount realized, money plus the fair market value of property received, from the sale of assets. Residual method. The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer s basis is determined only by the amount paid for the assets. This applies to both direct and indirect transfers. A group of assets constitutes a trade or business if either of the following applies. Goodwill or going concern value could, under any circumstances, attach to them. The use of the assets would constitute an active trade or business under IRC section 355. The residual method provides for the consideration to be reduced first by the amount of Class I assets. The consideration remaining after this reduction must be allocated among the various business assets in a certain order. NOTES Corporate liquidations of property generally are treated as a sale or exchange. Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method to allocate the consideration to each business asset transferred. The residual method provides for the consideration to be reduced first by the amount of Class I assets. Classes of Assets Each asset in the group of assets reported on Form 8594, Asset Acquisition Statement Under Section 1060, must be categorized into one of seven classes of assets. The consideration must be allocated among the assets in the following order and, other than Class VII assets, the amount allocated to each asset cannot exceed its fair market value on the purchase date. TheTaxReview Preparing S Corporation Returns Chapter 4 81

NOTES Asset Class Includes Class I Class II Class III Class IV Class V Class VI Class VII Cash and general deposit accounts (including checking and savings accounts) but not certificates of deposit. Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities. Accounts receivable, other debt instruments, and assets that the taxpayer marks-to-market at least annually for federal income tax purposes. See Form 8594 for certain exceptions. Inventory or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Assets not classified elsewhere. Generally includes furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a business. Section 197 intangibles other than goodwill and going concern value. Goodwill and going concern value. Class VI assets. Section 197 intangibles include: Workforce in place. Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers. Patent, copyright, formula, process, design, pattern know-how, format, or similar item. Customer-based intangibles (such as a customer base, circulation base, or mortgage servicing contract). Supplier-based intangible (such as favorable credit rating or favorable supply contact). Licenses, permits, or other rights granted by a governmental unit or agency. Covenant not-to-compete in connection with the acquisition of an interest in a trade or business. Franchise, trademark, or trade names. A contract for the use of, or a term interest in, any item in this list. The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Allocation of consideration. An allocation of the purchase price must be made on Form 8594, Asset Acquisition Statement, to determine the purchaser s basis in each acquired asset and the seller s gain or loss on the transfer of each asset. The residual method is used for the allocation of the sales price among the amortizable Section 197 intangible and other assets transferred. The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Consideration should be allocated as follows: 1) Reduce the consideration by the amount of Class I assets transferred. 2) Allocate the remaining consideration to Class II assets, then to Class III, IV, V, and VI assets in that order. Within each class, allocate the remaining consideration to the class assets in proportion to their fair market values on the purchase date. 3) Allocate consideration to Class VII assets. 82 Chapter 4 TheTaxReview Preparing S Corporation Returns

EXAMPLE Dan sells his business for $50,000, which consists of $30,000 equipment at fair market value and inventory of $15,000. No bank accounts were sold in the transaction. His allocation is as follows. Assets Fair Market Value Allocation of Sales Price Class I... $ 0... $ 0 Class II... $ 0... $ 0 Class III... $ 0... $ 0 Class IV (inventory)...$ 15,000... $ 15,000 Class V (equipment)...$ 30,000... $ 30,000 Class VI... $ 0... $ 0 Class VII (goodwill)... $ 0...$ 5,000 Reallocation after an increase or decrease in consideration. After the purchase date, if there is an increase or decrease in consideration that must be taken into account to re-determine the seller s amount realized on the sale, or the purchaser s cost basis in the assets, the seller and/or purchaser must allocate the increase or decrease among the assets. If the increase or decrease occurs in the same tax year as the purchase date, the increase or decrease is considered to have occurred on the purchase date. If the increase or decrease occurs after the tax year of the purchase date, it is considered to occur in the tax year the increase or decrease occurred. See When to File, page 84. Agreement. The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. KEY FACT If an asset can be included in more than one class, include it in the lower numbered class. For example, if an asset is described in both Class II and Class IV, choose Class II. NOTES This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Reporting requirement. Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among Section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. See Asset Acquisition Statement, below. Asset Acquisition Statement Form 8594, Asset Acquisition Statement. Both the seller and buyer of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to the assets of the business, and if the buyer s basis in the assets is determined only by the amount paid for the assets. TheTaxReview Preparing S Corporation Returns Chapter 4 83

NOTES When to file. Unless one of the exceptions below applies, the seller and buyer must file identical Forms 8594 and attach to Form 1040, 1041, 1065, 1120, 1120S, or any other business entity form in the year of sale. This applies whether the group of assets constitutes a trade or business in the hands of the seller, the buyer, or both. This also applies if a portion of the selling price is under an installment sales contract. If the amount allocated to any asset is increased or decreased after the year of sale, the seller and/or buyer (whoever is affected) must complete Parts I and III of Form 8594 and attach the form to the income tax return for the year in which the increase or decrease is taken into account. Exceptions: The filing of Form 8594 is not required if either of the following apply. A group of assets that makes up a trade or business is exchanged for likekind property in a section 1031 like-kind exchange. An interest in a partnership is transferred to a new partner. Penalty. A $100 penalty may apply under IRC section 6721 if either the seller or buyer fails to file Form 8594. Exceptions apply for reasonable cause. Learning Objective 4-A Self-Quiz For answer, see Chapter 4 Self-Quiz Answers, page 105. Test your knowledge and comprehension of information presented in Learning Objective 4-A. 1) On Form 8594, Asset Acquisition Statement, in what class of assets is goodwill? a) Class IV. b) Class V. c) Class VI. d) Class VII. 84 Chapter 4 TheTaxReview Preparing S Corporation Returns

Learning Objective 4-B NOTES Differentiate asset allocations favoring the buyer or the seller in the sale of a business situation. Buyer vs. Seller The seller and buyer of a business must come to an agreement as to the value placed upon each class of asset. Often the value placed on the various assets can be a point of contention between the two parties. Often the value placed on the various assets can be a point of contention between the two parties. Tax Treatment for Sellers and Buyers Asset Seller s Tax Treatment of Gain Buyer s Tax Treatment of Cost Inventory Taxed as ordinary income. Deductible when sold to customers. Equipment Buildings The amount that represents prior depreciation is recaptured as ordinary income. Any excess is a capital gain. The amount that represents prior depreciation is unrecaptured section 1250 gain. Any excess is a capital gain. Generally depreciable over 5 or 7 years, or currently deductible under Section 179. Depreciable over 27.5 or 39 years. Land Taxed as a capital gain. Not deductible. Cost is capitalized until sold. Covenant not-tocompete Taxed as ordinary income. Amortized over 15 years. Self created goodwill and other intangibles Taxed as a capital gain. Amortized over 15 years. Acquired Section 197 intangibles The amount that represents prior amortization is recaptured as ordinary income. Any excess is a capital gain. Amortized over 15 years. Tax rates for sellers who are individuals: Ordinary income is taxed at the taxpayer s highest marginal rate, which can be up to 39.6%. The maximum capital gain rate on assets held more than one year is 20%. The maximum capital gain rate on unrecaptured section 1250 gain is 25%. Losses. A loss on the sale of any business asset is an ordinary loss under section 1231. A loss on the disposition of a Section 197 intangible asset that was acquired along with other Section 197 intangible assets is not allowed until the last Section 197 asset is sold. KEY FACT Buyer s classification. Buyers generally want the majority of the purchase price allocated to inventory so that it can be expensed when it is sold. Buyers will want minimal value allocated to: Land as it is not a depreciable asset, Buildings and equipment because the longer depreciable life of these assets will be slower to offset income, and Goodwill and other intangibles as these also are amortized over a number of years. Seller s classification. Sellers will likely prefer the majority of the value be allocated to buildings and equipment, which generally receive capital gains treatment. Sellers will want minimal amounts allocated to inventory and noncompete agreements which are taxed at ordinary income rates. TheTaxReview Preparing S Corporation Returns Chapter 4 85

NOTES When an S corporation sells assets, it does not pay tax on any gain realized through the sale. Sale of Stock vs. Sale of Assets Sale of stock. The sale of a corporation can be as simple as selling the stock. The seller would benefit if the stock is sold because the seller would receive capital gain treatment on the sale. However, purchasing the stock means the buyer is purchasing an existing entity along with any liabilities it may have, including any unknown liabilities of the corporation at the time of purchase. Sale of assets. The buyer might want to consider purchasing the assets of the corporation and forming a new corporation rather than purchasing the stock of the existing corporation. Purchasing the assets allows the buyer to depreciate or amortize the cost of the assets, whereas the cost of stock is capitalized until sold. If the seller agrees to sell the assets of the corporation rather than its stock, the corporation reports gain or loss on each asset sold. Cash from the sale is then distributed to shareholders when the corporation is liquidated. S corporation. When an S corporation sells assets, it does not pay tax on any gain realized through the sale. Instead, the gains of the corporation flow through to the shareholders. Sale of assets which generate a capital gain are passed on to the shareholders as a capital gain. Ordinary income is passed on to the shareholders as ordinary income. Gain recognized at the corporate level and passing through to the shareholders will increase the basis in the corporation for each shareholder. This reduces the gain on the liquidating distribution that will occur after the sale of assets. Learning Objective 4-B Self-Quiz For answer, see Chapter 4 Self-Quiz Answers, page 105. Test your knowledge and comprehension of information presented in Learning Objective 4-B. 2) When a company goes out of business and sells a group of assets that make up a trade or business, gain from which of the following type of assets is taxed as a capital gain. a) Gain from the sale of inventory. b) Gain on the sale of land. c) Gain on equipment that represents prior depreciation. d) Gain on acquired Section 197 intangibles that represent prior amortization. 86 Chapter 4 TheTaxReview Preparing S Corporation Returns

Learning Objective 4-C NOTES Identify the tax consequences to shareholders upon the liquidation of an S corporation. S Corporation Liquidation Generally, the same rules apply to an S corporation as to a C corporation regarding a corporate liquidation. See Complete Liquidation C or S Corporations, below. However, since S corporation pass-through rules still apply, any taxable gain will flow through to the shareholders. The liquidating S corporation will not incur any taxes unless the built-in gains tax applies. The liquidating S corporation will not incur any taxes unless the builtin gains tax applies. KEY FACT Tax consequences to shareholders. Amounts distributed to a shareholder in complete liquidation of an S corporation are treated as full payment in exchange for stock. The character of any gain or loss recognized will depend on whether the stock is a capital asset to the shareholder and whether or not the corporation is completely liquidated. Any suspended losses may or may not be utilized. Deducting Shareholder s Suspended Pass-Through Losses Cause of Treatment at Liquidation Suspended Loss Basis limitation. Permanently lost. [Reg. 1.1366-2(a)(5)] At-risk limitation. Offset gain recognized from disposition of stock. [Prop. Reg. 1.465-66(a)] Any remaining loss carried over indefinitely. [IRC 465(a)(2)] Passive activity rules. Suspended passive losses allowed. [IRS 469(g)(1)(A)] Exception: Loss is not allowed on the sale to a related party. IRC 267(b)(2) and IRC 469(g)(1)(B)] Complete Liquidation C or S Corporations A corporation will terminate upon complete liquidation of the corporation s assets. Note: A complete liquidation can occur even though the corporation retains a small amount of assets to settle debts, pay final administrative costs, etc. Amounts remaining are then distributed to shareholders. In a complete liquidation, the corporation distributes all assets to shareholders and recognizes gain or loss as if the property was sold to the distributees at FMV. Amounts received by shareholders in a complete liquidation are treated as full payment in exchange for the shareholders stock. Liabilities. For distributed property subject to a liability, if the liability is greater than FMV, the amount of liability is treated as FMV. A complete liquidation can occur even though the corporation retains a small amount of assets to settle debts, pay final administrative costs, etc. TheTaxReview Preparing S Corporation Returns Chapter 4 87

NOTES File Form 966 within 30 days after the corporation adopts its plan to dissolve the corporation or liquidate any of its stock. EXAMPLE Bruce receives a liquidating distribution of property from Lawn Corporation. The corporation s basis in the property is $4,000, the FMV is $10,000, and the property is subject to a liability of $12,000, which Bruce assumes. Because the liability is greater than FMV, the amount of liability is treated as FMV. The corporation recognizes gain of $8,000 ($12,000 $4,000). Bruce is treated as having received a liquidating distribution of $12,000. Post-termination expenses. Expenses of a corporation incurred by a shareholder after a complete liquidation are treated as capital expenses (additions to stock basis). Loss limitations. In a complete liquidation, losses are not recognized on property distributed to a related person (defined in IRC section 267) if the distribution is not pro rata, or if the property is disqualified property. Disqualified property means any property which is acquired by the liquidating corporation in an IRC section 351 exchange, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Form 966, Corporate Dissolution or Liquidation. A corporation must file Form 966 if it adopts a plan to dissolve the corporation or liquidate any of its stock. Exempt organizations and qualified S subsidiaries are not required to file Form 966. Note: Do not file Form 966 for a deemed liquidation (such as an IRC section 338 election to treat acquisition of stock as a purchase of assets) or an election to be treated as a disregarded entity. File Form 966 within 30 days after the corporation adopts its plan to dissolve the corporation or liquidate any of its stock. If the plan is amended or supplemented after Form 966 is filed, file another Form 966 within 30 days after the amended plan is adopted. The form is filed at the address where the corporation files its income tax return. Attach a certified copy of the resolution or plan to liquidate the corporation to Form 966. Form 1099-DIV, Dividends and Distributions. Form 1099-DIV must be filed to report liquidation distributions of $600 or more ($10 or more for other corporate distributions). Election to Treat Stock Purchase as Asset Acquisition A corporation that purchases stock of another corporation can make an election to treat the acquisition as a purchase of assets. Gain or loss is recognized by the target corporation as if it has sold all its assets on the date of acquisition. The acquiring corporation receives a stepped up basis in the assets. Revenue Procedure 2011-35 describes methods a corporation may use to establish its basis in the stock of another corporation. 88 Chapter 4 TheTaxReview Preparing S Corporation Returns

Learning Objective 4-C Self-Quiz For answer, see Chapter 4 Self-Quiz Answers, page 105. Test your knowledge and comprehension of information presented in Learning Objective 4-C. 3) In the complete liquidation of an S corporation, a shareholder may deduct in full which of the following suspended losses? a) Suspended loss due to basis limitation. b) Suspended loss due to at-risk limitation. c) Suspended passive losses when disposition is to an unrelated party. d) Suspended passive losses when sale is to a related party. NOTES Learning Objective 4-D Recognize how the sale of a business is reported by an S corporation. S Corporation Sale of Business Example Greener Pastures, Inc. The two owners of Greener Pastures, Inc. are Nate, who owns 55% of the stock, and Tyler, who owns 45% of the stock. For purposes of this sale of business example, assume they started operation as a business on April 1, 2011. After being profitable for 2½ years, a buyer by the name of Sam approached them on October 1, 2013, with an offer, and both Nate and Tyler decide to sell. Terms of the sales agreement. Nate and Tyler agree to sell all the assets, not including the cash, to Sam. The sale will take place on January 2, 2014, prior to the conduct of any business during the new year. KEY FACT Sam will purchase all the tangible and intangible assets of Greener Pastures, Inc. for $130,000 and pay 40% down ($52,000 cash), with the remaining 60% paid over five years with a balloon payment for the balance due on December 2, 2019 ($78,000 installment note at 7% annual interest). Any liabilities of Greener Pastures, Inc. will remain with Greener Pastures. The corporation will pay off liabilities with cash received from the down payment and then liquidate by distributing the remaining cash and installment note to Nate and Tyler on January 31, 2014. Installment note. The S corporation does not recognize gain when it distributes the installment note upon liquidation. The installment obligation must have been acquired by the S corporation during the 12-month period beginning on the date a plan of complete liquidation was adopted, and the liquidation must be completed within that 12-month period. The shareholder reports gain as payments are received on the installment obligation. Sale of other assets. In this example, the S corporation passes the gain on the sale of its assets through to the shareholders. The corporation will pay off liabilities with cash received from the down payment and then liquidate by distributing the remaining cash and installment note to Nate and Tyler on January 31, 2014. The S corporation passes the gain on the sale of its assets through to the shareholders. TheTaxReview Preparing S Corporation Returns Chapter 4 89

NOTES Balance sheet prior to sale. As of January 2, 2014, Greener Pastures has the following balance sheet prior to the sale. Assets: Book & Tax FMV Cash... $100,000...$100,000 Inventory...$8,500...$14,600 Equipment...$23,600...$13,000 Minus accumulated depreciation... ($23,600)...$0 Display shelving...$8,950...$3,500 Minus accumulated depreciation... ($5,455)*...$0 Office furniture...$3,675...$2,000 Minus accumulated depreciation... ($2,240)*...$0 Computers...$3,890... $900 Minus accumulated depreciation... ($2,938)*...$0 Organizational costs...$4,500...$0 Minus accumulated amortization... ($4,500)...$0 Start-up costs...$1,660...$0 Minus accumulated amortization... ($1,660)...$0 Goodwill (customer list, etc.)...$ 0...$56,000 Covenant not-to-compete...$ 0...$40,000 Total assets... $114,382...$230,000 Total FMV of assets sold (everything except cash)...$130,000 Liabilities: Withholding payable...$1,800...n/a SIMPLE employee deferrals payable...$750...n/a Sales tax payable...$1,400...n/a Loan payable...$8,500...n/a Total liabilities...$12,450 Equity: Common stock... $100,000...n/a Current earnings... ($1,060)*...n/a Retained earnings...$2,992...n/a Total equity... $101,932 Total liabilities + equity... $114,382 *Includes half-year tax depreciation under MACRS for year of sale. Form 8594. See completed Form 8594 at the end of this Learning Objective, page 92. Income statement. After the sale to Sam, the final income statement for Greener Pastures, Inc. is as follows. Revenue: Book & Tax Sales of inventory...$14,600 Gain or (loss) on sale of equipment...$13,000 Gain or (loss) on sale of display shelving...$5 Gain or (loss) on sale of office furniture... $565 Gain or (loss) on sale of computers...($52) Sale of customer list*...$0 Agreement not-to-compete income*...$40,000 Gross income...$68,118 continued on next page 90 Chapter 4 TheTaxReview Preparing S Corporation Returns

continued Cost of goods sold: Beginning inventory...$8,500 Purchases...$0 Minus ending inventory...$0 Cost of goods sold...$8,500 Gross profit...$59,618 Expenses: Depreciation (half-year for year of sale)...$1,060 Miscellaneous administrative expenses...$2,500 Total expenses...$3,560 Net income...$56,058 * The $56,000 capital gain portion of the installment note is not recognized as income until payments are received under the installment method. Since the S corporation does not recognize income when it distributes the installment note to the shareholders upon liquidation, the S corporation income statement does not record it as income. However, only capital gains qualify for installment method reporting. The covenant not-to-compete is ordinary income; therefore, that portion of the installment note must be reported as income in the year of sale. NOTES The $56,000 capital gain portion of the installment note is not recognized as income until payments are received under the installment method. Cash flow. The corporation cash flow for 2014 is as follows. 1/1/14 cash on hand...$100,000 Cash received on date of sale (40% down payment)...$52,000 Pay off corporate liabilities...($12,450) Miscellaneous administrative expenses...($2,500) Cash available at liquidation...$137,050 Note: The corporation checking account is the one asset that is not included in the sale. Thus, the cash stays with the corporation. Balance sheet after sale. After the sale to Sam on January 2, 2014, and after liabilities and miscellaneous administrative expenses are paid, Greener Pastures, Inc. has the following balance sheet per books prior to the final liquidation on January 31, 2014. Assets: Per Books Cash...$137,050 Installment note...$78,000 Total assets...$215,050 Liabilities: Deferred income installment note...$56,000 Total liabilities...$56,000 Equity: Common stock...$100,000 Current earnings...$56,058 Retained earnings...$2,992 Total liabilities + equity...$215,050 TheTaxReview Preparing S Corporation Returns Chapter 4 91

NOTES Liquidation. Upon the final liquidation of the S corporation, there are two assets; $137,050 of cash and the installment note of $78,000, for a total of $215,050 available for distribution. Nate owns 55% of the S corporation and is entitled to $118,278 ($215,050 55%). Tyler owns 45% of the outstanding stock and is entitled to $96,772 ($215,050 45%). In this example, assume Nate agrees to take the $78,000 installment note plus $40,278 cash for his $118,278 liquidation proceeds. Tyler receives a liquidating cash distribution of $96,772. 8594 Form (Rev. December 2012) Department of the Treasury Internal Revenue Service Name as shown on return Greener Pastures, Inc. Attach to your income tax return. Information about Form 8594 and its separate instructions is at www.irs.gov/form8594 Identifying number as shown on return Check the box that identifies you: Purchaser X Seller Part I General Information 1 Name of other party to the transaction Other party s identifying number Sam Address (number, street, and room or suite no.) 123 Prairie Point Asset Acquisition Statement Under Section 1060 31-2345678 xxx-xx-xxx3 City or town, state, and ZIP code Farmdale, MN 55555 2 Date of sale 3 Total sales price (consideration) 1/2/14 130,000 Part II Original Statement of Assets Transferred 4 Assets Aggregate fair market value (actual amount for Class I) Allocation of sales price OMB No. 1545-1021 Attachment Sequence No. 169 Class I $ $ Class II $ $ Class III $ $ Class IV $ $ Class V $ $ Class VI and VII $ $ 0 0 0 14,600 19,400 96,000 0 0 0 14,600 19,400 96,000 130,000 130,000 Total $ $ 5 Did the purchaser and seller provide for an allocation of the sales price in the sales contract or in another written document signed by both parties?...................... Yes No If Yes, are the aggregate fair market values (FMV) listed for each of asset Classes I, II, III, IV, V, VI, and VII the amounts agreed upon in your sales contract or in a separate written document?........ Yes No X X 6 In the purchase of the group of assets (or stock), did the purchaser also purchase a license or a covenant not to compete, or enter into a lease agreement, employment contract, management contract, or similar arrangement with the seller (or managers, directors, owners, or employees of the seller)?...... Yes No If Yes, attach a statement that specifies (a) the type of agreement and (b) the maximum amount of consideration (not including interest) paid or to be paid under the agreement. See instructions. X For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 63768Z Form 8594 (Rev. 12-2012) 92 Chapter 4 TheTaxReview Preparing S Corporation Returns

Learning Objective 4-D Self-Quiz For answer, see Chapter 4 Self-Quiz Answers, page 105. Test your knowledge and comprehension of information presented in Learning Objective 4-D. 4) In the Greener Pastures, Inc. example, how is the gain on the sale of equipment and other assets reported for tax purposes? a) Separately stated item passed through on Schedule K-1. b) Capital gain. c) S corporation income on Form 1120S. d) Because of the installment note, gain on the sale of equipment is deferred until payments on the note are made. NOTES Learning Objective 4-E Report the sale of the S corporation business on the shareholder s Form 1040 and supporting schedules. Sale of S Corporation Shareholder s Return Filled-in forms for reference are at the end of this Learning Objective, page 95. Nate s tax return. Nate received the installment note from the liquidating corporation. $56,000 out of the $78,000 installment note qualifies for installment method reporting on Form 6252, Installment Sale Income. This rule requires Nate to allocate his basis in the stock among the two assets received (the installment method portion of the note and the cash plus ordinary income portion of the installment note). KEY FACT As an S corporation, basis in stock equals the initial cash contribution he made on April 1, 2011, of $55,000, plus or minus all Schedule K-1 items of income or loss since that date, minus distributions. Assume Nate s stock basis as of December 31, 2013 equals $9,437. His 2014 Schedule K-1 allocates $30,832 to him ($56,058 55%), for a total basis prior to liquidation of $40,269. This rule requires Nate to allocate his basis in the stock among the two assets received (the installment method portion of the note and the cash plus ordinary income portion of the installment note). The $40,278 of cash plus $22,000 of the installment note that represents ordinary income (the covenant not-to-compete portion) totals $62,278. The other $18,000 of the covenant not-to-compete was part of the $52,000 down payment that the S corporation received in cash on January 2, 2014. The $62,278 amount represents 53% of Nate s total distribution. 53% of his $40,269 basis equals $21,343 ($40,269 53%). He reports $62,278 gross proceeds from the liquidation of his stock on Form 8949, Sales and Other Dispositions of Capital Assets, with a basis of $21,343. These numbers then flow through to Schedule D (Form 1040) to compute a long-term capital gain of $40,935. TheTaxReview Preparing S Corporation Returns Chapter 4 93

NOTES The principal portion of each payment is reported on Form 6252, Installment Sale Income. Nate also begins to receive payments from Sam on the installment note during the rest of 2014. He reports the interest portion of each payment on his Schedule B (Form 1040). The principal portion of each payment is reported on Form 6252, Installment Sale Income. His basis in the installment note is $40,926 ($40,269 $21,343 + $22,000). His gross profit in the installment note is $37,074 ($78,000 $40,926 basis). His gross profit percentage equals 47.53% ($37,074 $78,000). Assume that during the rest of 2014, Nate received $8,400 in principal and $4,760 in interest from Sam. The gain calculated on his Form 6252 that is carried to Schedule D (Form 1040) is $3,993 ($8,400 47.53%). He also reports interest income on Schedule B in the amount of $4,760. Allocation of Nate s Liquidation Distribution: Distribution Proceeds Cash Installment Note Total Distribution % Allocable to stock sale $ 40,278 $ 22,000 $ 62,278 53% Allocable to installment note $ 0 $ 56,000 $ 56,000 47% Total $ 40,278 $ 78,000 $ 118,278 100% Allocation of Nate s basis: 12/31/2013 stock basis... $9,437 2014 Schedule K-1 allocation...$30,832 Basis prior to liquidation...$40,269 Allocation %... 53% Basis for stock sale...$21,343 Basis prior to liquidation...$40,269 Less basis for stock sale...($21,343) Plus covenant not-to-compete portion...$22,000 Basis for installment sale...$40,926 Check Nate s calculations. Once Nate receives $78,000 of total payments on the installment note, he will have reported total gain of $37,073 on Form 6252 ($78,000 47.53%). Add that to the $40,935 gain reported on Schedule D upon liquidation, and his total gain equals $78,008 ($37,073 + $40,935). Nate s 55% share of the corporation at the time of liquidation equals $118,278 ($215,050 55%). His total gain is $78,009 ($118,278 minus $40,269 stock basis). The $1 difference is due to rounding percentages. 94 Chapter 4 TheTaxReview Preparing S Corporation Returns

Form 1120S U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. Department of the Treasury Internal Revenue Service For calendar year 2014 or tax year beginning, 2014, ending, 20 A S election effective date B Business activity code number (see instructions) TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state or province, country, and ZIP or foreign postal code OMB No. 1545-0123 14 D Employer identification number E Date incorporated F Total assets (see instructions) C Check if Sch. M-3 attached $ G Is the corporation electing to be an S corporation beginning with this tax year? Yes X No If Yes, attach Form 2553 if not already filed H Check if: (1) X Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year......... 2 Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. Income Deductions (see instructions for limitations) Tax and Payments 4/1/11 444200 1 a Gross receipts or sales............... 1a b Returns and allowances.............. 1b c Balance. Subtract line 1b from line 1a................... 1c 2 Cost of goods sold (attach Form 1125-A).................. 2 3 Gross profit. Subtract line 2 from line 1c.................. 3 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797)............ 4 5 Other income (loss) (see instructions attach statement)............. 5 6 Total income (loss). Add lines 3 through 5................ 6 7 Compensation of officers (see instructions attach Form 1125-E).......... 7 8 Salaries and wages (less employment credits)................ 8 9 Repairs and maintenance....................... 9 10 Bad debts........................... 10 11 Rents............................. 11 12 Taxes and licenses......................... 12 13 Interest............................ 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562).... 14 15 Depletion (Do not deduct oil and gas depletion.)............... 15 16 Advertising........................... 16 17 Pension, profit-sharing, etc., plans.................... 17 18 Employee benefit programs...................... 18 19 Other deductions (attach statement)................... 19 20 Total deductions. Add lines 7 through 19................ 20 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 22 a Excess net passive income or LIFO recapture tax (see instructions).. 22a b Tax from Schedule D (Form 1120S)........... 22b c Add lines 22a and 22b (see instructions for additional taxes)............ 22c 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004............ 23b c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Sign Here Paid Preparer Use Only Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below Nate Greener Pastures, Inc. 123 Prairie Point Farmdale, MN 55555 Signature of officer Date Title Print/Type preparer s name Preparer's signature Date 1/1 1/31 14 14,600 31-2345678 4/1/11 (see instructions)? Yes PTIN Check if self-employed Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) 0 14,600 8,500 6,100 53,518 59,618 1,060 2,500 3,560 56,058 X No NOTES TheTaxReview Preparing S Corporation Returns Chapter 4 95

NOTES Form 1120S (2014) Page 3 Schedule K Shareholders Pro Rata Share Items Total amount 1 Ordinary business income (loss) (page 1, line 21).............. 1 56,058 2 Net rental real estate income (loss) (attach Form 8825)............ 2 3 a Other gross rental income (loss).......... 3a b Expenses from other rental activities (attach statement).. 3b c Other net rental income (loss). Subtract line 3b from line 3a.......... 3c 4 Interest income........................ 4 5 Dividends: a Ordinary dividends................... 5a b Qualified dividends.......... 5b 6 Royalties.......................... 6 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S))........ 7 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S))........ 8a b Collectibles (28%) gain (loss)........... 8b c Unrecaptured section 1250 gain (attach statement).... 8c 9 Net section 1231 gain (loss) (attach Form 4797).............. 9 10 Other income (loss) (see instructions).. Type 10 11 Section 179 deduction (attach Form 4562)................ 11 12 a Charitable contributions..................... 12a b Investment interest expense.................... 12b c Section 59(e)(2) expenditures (1) Type (2) Amount 12c(2) d Other deductions (see instructions)... Type 12d 13a Low-income housing credit (section 42(j)(5))............... 13a b Low-income housing credit (other).................. 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable).. 13c d Other rental real estate credits (see instructions) Type 13d e Other rental credits (see instructions)... Type 13e f Biofuel producer credit (attach Form 6478)............... 13f g Other credits (see instructions)..... Type 13g 14a Name of country or U.S. possession b Gross income from all sources................... 14b c Gross income sourced at shareholder level............... 14c Foreign gross income sourced at corporate level d Passive category....................... 14d e General category....................... 14e f Other (attach statement)..................... 14f Deductions allocated and apportioned at shareholder level g Interest expense........................ 14g h Other........................... 14h Deductions allocated and apportioned at corporate level to foreign source income i Passive category....................... 14i j General category....................... 14j k Other (attach statement)..................... 14k Other information l Total foreign taxes (check one): Paid Accrued.......... 14l m Reduction in taxes available for credit (attach statement)........... 14m n Other foreign tax information (attach statement) Income (Loss) Deductions Credits Foreign Transactions Alternative Minimum Tax (AMT) Items Items Affecting Shareholder Basis 15 a Post-1986 depreciation adjustment.................. 15a b Adjusted gain or loss...................... 15b c Depletion (other than oil and gas).................. 15c d Oil, gas, and geothermal properties gross income............. 15d e Oil, gas, and geothermal properties deductions.............. 15e f Other AMT items (attach statement).................. 15f 16 a Tax-exempt interest income.................... 16a b Other tax-exempt income..................... 16b c Nondeductible expenses..................... 16c d Distributions (attach statement if required) (see instructions).......... 16d e Repayment of loans from shareholders................. 16e 215,050 Form 1120S (2014) Form (Rev. December 2012) Department of the Treasury Internal Revenue Service Name Attach to Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B. Information about Form 1125-A and its instructions is at www.irs.gov/form1125a. 1 Inventory at beginning of year..................... 1 2 Purchases........................... 2 3 Cost of labor.......................... 3 4 Additional section 263A costs (attach schedule)................ 4 5 Other costs (attach schedule)..................... 5 6 Total. Add lines 1 through 5...................... 6 7 Inventory at end of year....................... 7 8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the appropriate line of your tax return (see instructions)............... 8 9a Check all methods used for valuing closing inventory: (i) (ii) (iii) Cost Lower of cost or market Other (Specify method used and attach explanation.) OMB No. 1545-2225 Employer identification number b Check if there was a writedown of subnormal goods...................... c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)...... d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed under LIFO........................... 9d e If property is produced or acquired for resale, do the rules of section 263A apply to the entity (see instructions)?.. Yes No f 1125-A Cost of Goods Sold Greener Pastures, Inc. X 31-2345678 8,500 8,500 0 8,500 Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If Yes, attach explanation............................. Yes No X X Section references are to the Internal Revenue Code unless otherwise noted. Under this accounting method, inventory costs for raw materials purchased for use 96 Chapter 4 in producing finished goods and TheTaxReview million or Preparing less for the 3 S prior Corporation tax years, (b) Returns General Instructions merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the ending on or after December 31, 2000, has average annual gross receipts of $10 whose principal business activity is not an ineligible activity, and (c) whose business is not a tax shelter (as defined in section 448

Form 4797 Department of the Treasury Internal Revenue Service Name(s) shown on return Greener Pastures, Inc. OMB No. 1545-0184 Under Sections 179 and 280F(b)(2)) 14 Attach to your tax return. Information about Form 4797 and its separate instructions is at www.irs.gov/form4797. Identifying number Attachment Sequence No. 27 1 Enter the gross proceeds from sales or exchanges reported to you for 2014 on Form(s) 1099-B or 1099-S (or substitute statement) that you are including on line 2, 10, or 20 (see instructions)........ 1 Part I Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft Most Property Held More Than 1 Year (see instructions) 2 (a) Description of property Computers Sales of Business Property (Also Involuntary Conversions and Recapture Amounts (b) Date acquired (mo., day, yr.) (c) Date sold (mo., day, yr.) (d) Gross sales price (e) Depreciation allowed or allowable since acquisition 31-2345678 (f) Cost or other basis, plus improvements and expense of sale 4/1/11 1/2/14 900 2,938 3,890 (g) Gain or (loss) Subtract (f) from the sum of (d) and (e) (52) NOTES 3 Gain, if any, from Form 4684, line 39........................ 3 4 Section 1231 gain from installment sales from Form 6252, line 26 or 37.............. 4 5 Section 1231 gain or (loss) from like-kind exchanges from Form 8824.............. 5 6 Gain, if any, from line 32, from other than casualty or theft.................. 6 7 Combine lines 2 through 6. Enter the gain or (loss) here and on the appropriate line as follows:....... 7 (52) Partnerships (except electing large partnerships) and S corporations. Report the gain or (loss) following the instructions for Form 1065, Schedule K, line 10, or Form 1120S, Schedule K, line 9. Skip lines 8, 9, 11, and 12 below. Individuals, partners, S corporation shareholders, and all others. If line 7 is zero or a loss, enter the amount from line 7 on line 11 below and skip lines 8 and 9. If line 7 is a gain and you did not have any prior year section 1231 losses, or they were recaptured in an earlier year, enter the gain from line 7 as a long-term capital gain on the Schedule D filed with your return and skip lines 8, 9, 11, and 12 below. 8 Nonrecaptured net section 1231 losses from prior years (see instructions)............. 8 9 Subtract line 8 from line 7. If zero or less, enter -0-. If line 9 is zero, enter the gain from line 7 on line 12 below. If line 9 is more than zero, enter the amount from line 8 on line 12 below and enter the gain from line 9 as a long-term capital gain on the Schedule D filed with your return (see instructions).............. 9 Part II Ordinary Gains and Losses (see instructions) 10 Ordinary gains and losses not included on lines 11 through 16 (include property held 1 year or less): Covenant not-to-compete 1/2/14 1/2/14 40,000 0 0 40,000 11 Loss, if any, from line 7............................ 11 ( ) 12 Gain, if any, from line 7 or amount from line 8, if applicable................. 12 13 Gain, if any, from line 31........................... 13 13,570 14 Net gain or (loss) from Form 4684, lines 31 and 38a................... 14 15 Ordinary gain from installment sales from Form 6252, line 25 or 36............... 15 16 Ordinary gain or (loss) from like-kind exchanges from Form 8824................ 16 17 Combine lines 10 through 16.......................... 17 53,518 18 For all except individual returns, enter the amount from line 17 on the appropriate line of your return and skip lines a and b below. For individual returns, complete lines a and b below: a If the loss on line 11 includes a loss from Form 4684, line 35, column (b)(ii), enter that part of the loss here. Enter the part of the loss from income-producing property on Schedule A (Form 1040), line 28, and the part of the loss from property used as an employee on Schedule A (Form 1040), line 23. Identify as from Form 4797, line 18a. See instructions.. 18a b Redetermine the gain or (loss) on line 17 excluding the loss, if any, on line 18a. Enter here and on Form 1040, line 14 18b For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 13086I Form 4797 (2014) 52 TheTaxReview Preparing S Corporation Returns Chapter 4 97

NOTES Form 4797 (2014) Page 2 Part III Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255 (see instructions) 19 (a) Description of section 1245, 1250, 1252, 1254, or 1255 property: A B C D Equipment Display Shelving Office Furniture These columns relate to the properties on lines 19A through 19D. 20 Gross sales price (Note: See line 1 before completing.). 20 21 Cost or other basis plus expense of sale..... 21 22 Depreciation (or depletion) allowed or allowable... 22 23 Adjusted basis. Subtract line 22 from line 21.... 23 (b) Date acquired (mo., day, yr.) (c) Date sold (mo., day, yr.) Property A Property B Property C Property D 13,000 23,600 23,600 0 3,500 8,950 5,455 3,495 4/1/11 4/1/11 4/1/11 2,000 3,675 2,240 1,435 1/2/14 1/2/14 1/2/14 24 Total gain. Subtract line 23 from line 20..... 24 25 If section 1245 property: a Depreciation allowed or allowable from line 22... 25a b Enter the smaller of line 24 or 25a...... 25b 26 If section 1250 property: If straight line depreciation was used, enter -0- on line 26g, except for a corporation subject to section 291. a Additional depreciation after 1975 (see instructions). 26a b Applicable percentage multiplied by the smaller of line 24 or line 26a (see instructions)....... 26b c Subtract line 26a from line 24. If residential rental property or line 24 is not more than line 26a, skip lines 26d and 26e 26c d Additional depreciation after 1969 and before 1976.. 26d e Enter the smaller of line 26c or 26d...... 26e f Section 291 amount (corporations only)..... 26f g Add lines 26b, 26e, and 26f......... 26g 27 If section 1252 property: Skip this section if you did not dispose of farmland or if this form is being completed for a partnership (other than an electing large partnership). a Soil, water, and land clearing expenses..... 27a b Line 27a multiplied by applicable percentage (see instructions) 27b c Enter the smaller of line 24 or 27b...... 27c 28 If section 1254 property: 13,000 23,600 13,000 a Intangible drilling and development costs, expenditures for development of mines and other natural deposits, mining exploration costs, and depletion (see instructions)............. 28a b Enter the smaller of line 24 or 28a...... 28b 29 If section 1255 property: a Applicable percentage of payments excluded from income under section 126 (see instructions).... 29a b Enter the smaller of line 24 or 29a (see instructions). 29b Summary of Part III Gains. Complete property columns A through D through line 29b before going to line 30. 30 Total gains for all properties. Add property columns A through D, line 24............. 30 31 Add property columns A through D, lines 25b, 26g, 27c, 28b, and 29b. Enter here and on line 13...... 31 32 Subtract line 31 from line 30. Enter the portion from casualty or theft on Form 4684, line 33. Enter the portion from other than casualty or theft on Form 4797, line 6.................... 32 Part IV Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less (see instructions) 33 Section 179 expense deduction or depreciation allowable in prior years........ 33 34 Recomputed depreciation (see instructions)................ 34 35 Recapture amount. Subtract line 34 from line 33. See the instructions for where to report.. 35 5 5,455 5 565 2,240 565 (a) Section 179 13,570 13,570 0 (b) Section 280F(b)(2) Form 4797 (2014) 98 Chapter 4 TheTaxReview Preparing S Corporation Returns

Schedule K-1 (Form 1120S) Department of the Treasury Internal Revenue Service For calendar year 2014, or tax 14 year beginning, 2014 ending, 20 Shareholder s Share of Income, Deductions, Credits, etc. See back of form and separate instructions. A B Part I Information About the Corporation Corporation s employer identification number 31-2345678 Corporation s name, address, city, state, and ZIP code Greener Pastures, Inc. 123 Prairie Point Farmdale, MN 55555 1/1 1/31 14 x 671113 Final K-1 Amended K-1 OMB No. 1545-0123 Part III Shareholder s Share of Current Year Income, Deductions, Credits, and Other Items 1 Ordinary business income (loss) 13 Credits 2 Net rental real estate income (loss) 3 Other net rental income (loss) 4 Interest income 5a Ordinary dividends 5b Qualified dividends 6 Royalties 30,832 7 Net short-term capital gain (loss) 14 Foreign transactions NOTES C IRS Center where corporation filed return e-file Part II Information About the Shareholder D Shareholder s identifying number xxx-xx-xxx1 E Shareholder s name, address, city, state, and ZIP code Nate 8a Net long-term capital gain (loss) 8b Collectibles (28%) gain (loss) 8c Unrecaptured section 1250 gain 9 Net section 1231 gain (loss) 10 Other income (loss) 15 Alternative minimum tax (AMT) items F Shareholder s percentage of stock ownership for tax year....... 55 % For IRS Use Only Shareholder s basis computations 1/1/14 beginning basis............. $9,437 Ordinary income...................... 30,832 Basis prior to allocation....... $40,269 11 Section 179 deduction 12 Other deductions 16 Items affecting shareholder basis D $62,278 17 Other information * See attached statement for additional information. For Paperwork Reduction Act Notice, see Instructions for Form 1120S. IRS.gov/form1120s Cat. No. 11520D Schedule K-1 (Form 1120S) 2014 TheTaxReview Preparing S Corporation Returns Chapter 4 99

NOTES Form 1040 Department of the Treasury Internal Revenue Service (99) U.S. Individual Income Tax Return OMB No. 1545-0074 IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 2014, or other tax year beginning, 2014, ending, 20 See separate instructions. Your first name and initial Last name Your social security number Nate If a joint return, spouse s first name and initial Last name Spouse s social security number 14 xxx xx xxx1 Home address (number and street). If you have a P.O. box, see instructions. Apt. no. Make sure the SSN(s) above and on line 6c are correct. City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Presidential Election Campaign Foreign country name Foreign province/state/county Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking Foreign postal code a box below will not change your tax or refund. You Spouse Filing Status 1 X Single 4 Head of household (with qualifying person). (See instructions.) If 2 Married filing jointly (even if only one had income) the qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. and full name here. 5 Qualifying widow(er) with dependent child 6a Yourself. If someone can claim you as a dependent, do not check box 6a..... Exemptions X Boxes checked } on 6a and 6b b Spouse........................ No. of children 1 c Dependents: (2) Dependent s (3) Dependent s (4) if child under age 17 on 6c who: (1) First name Last name social security number relationship to you qualifying for child tax credit lived with you (see instructions) did not live with you due to divorce or separation If more than four dependents, see instructions and (see instructions) Dependents on 6c not entered above check here Add numbers on d Total number of exemptions claimed................. lines above 1 7 Wages, salaries, tips, etc. Attach Form(s) W-2............ 7 Income 8a Taxable interest. Attach Schedule B if required............ 8a 4,760 b Tax-exempt interest. Do not include on line 8a... 8b Attach Form(s) W-2 here. Also 9 a Ordinary dividends. Attach Schedule B if required........... 9a attach Forms b Qualified dividends........... 9b W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes...... 10 1099-R if tax 11 Alimony received..................... 11 was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ.......... 12 13 Capital gain or (loss). Attach Schedule D if required. If not required, check here 13 44,928 If you did not 14 Other gains or (losses). Attach Form 4797.............. 14 get a W-2, see instructions. 15 a IRA distributions. 15a b Taxable amount... 15b 16 a Pensions and annuities 16a b Taxable amount... 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 30,832 18 Farm income or (loss). Attach Schedule F.............. 18 19 Unemployment compensation................. 19 20 a Social security benefits 20a b Taxable amount... 20b 21 Other income. List type and amount 21 22 Combine the amounts in the far right column for lines 7 through 21. This is your total income 22 80,520 23 Educator expenses........... 23 Adjusted 24 Certain business expenses of reservists, performing artists, and Gross fee-basis government officials. Attach Form 2106 or 2106-EZ 24 Income 25 Health savings account deduction. Attach Form 8889. 25 26 Moving expenses. Attach Form 3903...... 26 27 Deductible part of self-employment tax. Attach Schedule SE. 27 28 Self-employed SEP, SIMPLE, and qualified plans.. 28 29 Self-employed health insurance deduction.... 29 30 Penalty on early withdrawal of savings...... 30 31 a Alimony paid b Recipient s SSN 31a 32 IRA deduction............. 32 33 Student loan interest deduction........ 33 34 Tuition and fees. Attach Form 8917....... 34 35 Domestic production activities deduction. Attach Form 8903 35 36 Add lines 23 through 35................... 36 37 Subtract line 36 from line 22. This is your adjusted gross income..... 37 80,520 For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2014) 100 Chapter 4 TheTaxReview Preparing S Corporation Returns

Form 8949 (2014) Attachment Sequence No. 12A Page 2 Name(s) shown on return. Name and SSN or taxpayer identification no. not required if shown on other side Nate Social security number or taxpayer identification number Before you check Box D, E, or F below, see whether you received any Form(s) 1099-B or substitute statement(s) from your broker. A substitute statement will have the same information as Form 1099-B. Either may show your basis (usually your cost) even if your broker did not report it to the IRS. Brokers must report basis to the IRS for most stock you bought in 2011 or later (and for certain debt instruments you bought in 2014 or later). Part II Long-Term. Transactions involving capital assets you held more than 1 year are long term. For short-term transactions, see page 1. Note. You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 8a; you are not required to report these transactions on Form 8949 (see instructions). You must check Box D, E, or F below. Check only one box. If more than one box applies for your long-term transactions, complete a separate Form 8949, page 2, for each applicable box. If you have more long-term transactions than will fit on this page for one or more of the boxes, complete as many forms with the same box checked as you need. (D) Long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS (see Note above) (E) Long-term transactions reported on Form(s) 1099-B showing basis was not reported to the IRS X (F) Long-term transactions not reported to you on Form 1099-B 1 (a) Description of property (Example: 100 sh. XYZ Co.) (b) Date acquired (Mo., day, yr.) (c) Date sold or disposed (Mo., day, yr.) (d) Proceeds (sales price) (see instructions) (e) Cost or other basis. See the Note below and see Column (e) in the separate instructions xxx-xx-xxx1 Adjustment, if any, to gain or loss. If you enter an amount in column (g), enter a code in column (f). See the separate instructions. (f) Code(s) from instructions (g) Amount of adjustment (h) Gain or (loss). Subtract column (e) from column (d) and combine the result with column (g) 55,000 shares Greener Pastures, Inc. 4/1/11 1/31/14 62,278 21,343 40,935 NOTES 2 Totals. Add the amounts in columns (d), (e), (g), and (h) (subtract negative amounts). Enter each total here and include on your Schedule D, line 8b (if Box D above is checked), line 9 (if Box E above is checked), or line 10 (if Box F above is checked) 62,278 21,343 40,935 Note. If you checked Box D above but the basis reported to the IRS was incorrect, enter in column (e) the basis as reported to the IRS, and enter an adjustment in column (g) to correct the basis. See Column (g) in the separate instructions for how to figure the amount of the adjustment. Form 8949 (2014) TheTaxReview Preparing S Corporation Returns Chapter 4 101

NOTES SCHEDULE D (Form 1040) Department of the Treasury Internal Revenue Service (99) Name(s) shown on return Nate Part I Capital Gains and Losses Attach to Form 1040 or Form 1040NR. Information about Schedule D and its separate instructions is at www.irs.gov/scheduled. Use Form 8949 to list your transactions for lines 1b, 2, 3, 8b, 9, and 10. Short-Term Capital Gains and Losses Assets Held One Year or Less OMB No. 1545-0074 14 Attachment Sequence No. 12 Your social security number xxx-xx-xxx1 See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars. (d) Proceeds (sales price) (e) Cost (or other basis) (g) Adjustments to gain or loss from Form(s) 8949, Part I, line 2, column (g) (h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g) 1a Totals for all short-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b. 1b Totals for all transactions reported on Form(s) 8949 with Box A checked............. 2 Totals for all transactions reported on Form(s) 8949 with Box B checked............. 3 Totals for all transactions reported on Form(s) 8949 with Box C checked............. 4 Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824. 4 5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1............................ 5 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions....................... 6 ( ) 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in column (h). If you have any longterm capital gains or losses, go to Part II below. Otherwise, go to Part III on the back..... 7 Part II Long-Term Capital Gains and Losses Assets Held More Than One Year See instructions for how to figure the amounts to enter on the lines below. This form may be easier to complete if you round off cents to whole dollars. (d) Proceeds (sales price) (e) Cost (or other basis) (g) Adjustments to gain or loss from Form(s) 8949, Part II, line 2, column (g) 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b. 8b Totals for all transactions reported on Form(s) 8949 with Box D checked............. 9 Totals for all transactions reported on Form(s) 8949 with Box E checked............. 10 Totals for all transactions reported on Form(s) 8949 with Box F checked.............. 62,278 21,343 11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824...................... 11 12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 12 (h) Gain or (loss) Subtract column (e) from column (d) and combine the result with column (g) 40,935 3,993 13 Capital gain distributions. See the instructions.................. 13 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions....................... 14 ( ) 15 Net long-term capital gain or (loss). Combine lines 8a through 14 in column (h). Then go to Part III on the back............................... 15 44,928 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11338H Schedule D (Form 1040) 2014 102 Chapter 4 TheTaxReview Preparing S Corporation Returns

Form 6252 Department of the Treasury Internal Revenue Service Name(s) shown on return Nate Installment Sale Income OMB No. 1545-0228 Attach to your tax return. Use a separate form for each sale or other disposition of property on the installment method. Attachment Information about Form 6252 and its instructions is at www.irs.gov/form6252. Sequence No. 79 Identifying number xxx-xx-xxx1 Greener Pastures, Inc. (Installment Note) 1 Description of property 2 a Date acquired (mm/dd/yyyy) 4/1/2011 b Date sold (mm/dd/yyyy) 1/31/2014 3 Was the property sold to a related party (see instructions) after May 14, 1980? If No, skip line 4.... Yes X No 4 Was the property you sold to a related party a marketable security? If Yes, complete Part III. If No, complete Part III for the year of sale and the 2 years after the year of sale............ Yes No Part I Gross Profit and Contract Price. Complete this part for the year of sale only. 5 Selling price including mortgages and other debts. Do not include interest, whether stated or unstated 5 78,000 6 Mortgages, debts, and other liabilities the buyer assumed or took the property subject to (see instructions)........... 6 7 Subtract line 6 from line 5............... 7 8 Cost or other basis of property sold........... 8 9 Depreciation allowed or allowable............ 9 10 Adjusted basis. Subtract line 9 from line 8......... 10 11 Commissions and other expenses of sale......... 11 12 Income recapture from Form 4797, Part III (see instructions)... 12 78,000 40,926 40,926 13 Add lines 10, 11, and 12......................... 13 14 Subtract line 13 from line 5. If zero or less, do not complete the rest of this form (see instructions) 14 15 If the property described on line 1 above was your main home, enter the amount of your excluded gain (see instructions). Otherwise, enter -0-................... 15 16 Gross profit. Subtract line 15 from line 14................... 16 17 Subtract line 13 from line 6. If zero or less, enter -0-................ 17 18 Contract price. Add line 7 and line 17.................... 18 37,074 0 78,000 Part II Installment Sale Income. Complete this part for the year of sale and any year you receive a payment or have certain debts you must treat as a payment on installment obligations. 19 Gross profit percentage (expressed as a decimal amount). Divide line 16 by line 18. For years after the year of sale, see instructions...................... 19 47.53% 20 If this is the year of sale, enter the amount from line 17. Otherwise, enter -0-........ 20 0 21 Payments received during year (see instructions). Do not include interest, whether stated or unstated 21 8,400 22 Add lines 20 and 21.......................... 22 8,400 23 Payments received in prior years (see instructions). Do not include interest, whether stated or unstated........... 23 24 Installment sale income. Multiply line 22 by line 19................ 24 25 Enter the part of line 24 that is ordinary income under the recapture rules (see instructions)... 25 26 Subtract line 25 from line 24. Enter here and on Schedule D or Form 4797 (see instructions)... 26 3,993 Part III Related Party Installment Sale Income. Do not complete if you received the final payment this tax year. 27 Name, address, and taxpayer identifying number of related party 0 14 40,926 37,074 3,993 NOTES 28 Did the related party resell or dispose of the property ( second disposition ) during this tax year?..... Yes No 29 a If the answer to question 28 is Yes, complete lines 30 through 37 below unless one of the following conditions is met. Check the box that applies. The second disposition was more than 2 years after the first disposition (other than dispositions of marketable securities). If this box is checked, enter the date of disposition (mm/dd/yyyy)..... b The first disposition was a sale or exchange of stock to the issuing corporation. c The second disposition was an involuntary conversion and the threat of conversion occurred after the first disposition. d The second disposition occurred after the death of the original seller or buyer. e It can be established to the satisfaction of the IRS that tax avoidance was not a principal purpose for either of the dispositions. If this box is checked, attach an explanation (see instructions). 30 Selling price of property sold by related party (see instructions)............ 30 31 Enter contract price from line 18 for year of first sale................ 31 32 Enter the smaller of line 30 or line 31..................... 32 33 Total payments received by the end of your 2014 tax year (see instructions)........ 33 34 Subtract line 33 from line 32. If zero or less, enter -0-............... 34 35 Multiply line 34 by the gross profit percentage on line 19 for year of first sale........ 35 36 Enter the part of line 35 that is ordinary income under the recapture rules (see instructions)... 36 37 Subtract line 36 from line 35. Enter here and on Schedule D or Form 4797 (see instructions)... 37 For Paperwork Reduction Act Notice, see page 4. Cat. No. 13601R Form 6252 (2014) TheTaxReview Preparing S Corporation Returns Chapter 4 103

NOTES Learning Objective 4-E Self-Quiz For answer, see Chapter 4 Self-Quiz Answers, page 105. Test your knowledge and comprehension of information presented in Learning Objective 4-E. 5) In the Greener Pastures, Inc. example, how was Nate s basis in the S corporation allocated to the installment note received? a) Nate s basis in the S corporation was allocated first toward the sale of the S corporation stock. There was no basis left to apply to the installment note. b) Because 47% of the sales price was allocated to the installment note, 47% of Nate s basis is applied toward the installment note. c) Nate s basis in the S corporation was applied 100% to the installment note. d) Because this was a sale of S corporation assets and not stock, Nate could not apply his basis in the S corporation to items exchanged in the sale. 104 Chapter 4 TheTaxReview Preparing S Corporation Returns

Chapter 4 Self-Quiz Answers NOTES 1) On Form 8594, Asset Acquisition Statement, in what class of assets is goodwill? a) Class IV. Incorrect. Class IV assets consist of inventory items. b) Class V. Incorrect. Class V assets are assets that are not classified under another classification on Form 8594, and include items such as furniture and fixtures, buildings, land, and equipment. c) Class VI. Incorrect. Class VI assets consist of Section 197 intangibles other than goodwill and going concern value. d) Class VII. Correct. Class VII assets include goodwill and going concern value. 2) When a company goes out of business and sells a group of assets that make up a trade or business, gain from which of the following type of assets is taxed as a capital gain. a) Gain from the sale of inventory. Incorrect. Gain on the sale of inventory is taxed as ordinary income. b) Gain on the sale of land. Correct. Gain on the sale of land is taxed as a capital gain. c) Gain on equipment that represents prior depreciation. Incorrect. The amount of gain on equipment that represents prior depreciation is recaptured as ordinary income. d) Gain on acquired Section 197 intangibles that represent prior amortization. Incorrect. The amount of gain on acquired Section 197 intangibles that represents prior amortization is recaptured as ordinary income. 3) In the complete liquidation of an S corporation, a shareholder may deduct in full which of the following suspended losses? a) Suspended loss due to basis limitation. Incorrect. Any loss that was suspended due to basis limitations is permanently lost. b) Suspended passive losses when disposition is to an unrelated party. Incorrect. Loss that was suspended due to at-risk limitations is deductible up to the amount of gain recognized from the disposition of stock. Any remaining loss is carried over indefinitely. c) Suspended passive losses when disposition is to an unrelated party. Correct. In the complete liquidation of an S corporation, any loss that was suspended due to the passive activity rules is allowed in full and treated as a loss which is not from a passive activity. d) Suspended passive losses when sale is to a related party. Incorrect. If the sale is to a related party, the suspended passive losses are not allowed until the interest is acquired by an unrelated party. TheTaxReview Preparing S Corporation Returns Chapter 4 105

NOTES 4) In the Greener Pastures, Inc. example, how is the gain on the sale of equipment and other assets reported for tax purposes? a) Separately stated item passed through on Schedule K-1. Incorrect. The gain on sale of equipment is reported as S corporation income on Form 1120S. b) Capital gain. Incorrect. Since the agreement was for the sale of assets and not stock, the gain on the sale is reported as S corporation income on Form 1120S. c) S corporation income on Form 1120S. Correct. Gain from the sale of the assets is combined with other S corporation income and reported on Form 1120S. d) Because of the installment note, gain on the sale of equipment is deferred until payments on the note are made. Incorrect. The installment note was distributed to a shareholder at liquidation. Gain from the sale of the assets is included in S corporation income on Form 1120S. 5) In the Greener Pastures, Inc. example, how was Nate s basis in the S corporation allocated to the installment note received? a) Nate s basis in the S corporation was allocated first toward the sale of the S corporation stock. There was no basis left to apply to the installment note. Incorrect. The basis is allocated based on the percentage of sale price. Therefore, 47% of Nate s basis applied toward the installment note. Ordering rules do not apply. b) Because 47% of the sales price was allocated to the installment note, 47% of Nate s basis is applied toward the installment note. Correct. The basis is allocated based on the percentage of sale price. c) Nate s basis in the S corporation was applied 100% to the installment note. Incorrect. The basis is allocated based on the percentage of sale price. Ordering rules do not apply. d) Because this was a sale of S corporation assets and not stock, Nate could not apply his basis in the S corporation to items exchanged in the sale. Incorrect. Nate s basis is allocated based on the percentage of sales price. 106 Chapter 4 TheTaxReview Preparing S Corporation Returns

Appendix Payroll Report for Year Ended December 31, 2014 Employee Gross Earnings Social Security 6.20% Medicare 1.45% Federal Withholding State Withholding Health Insurance & HSA Contributions SIMPLE Elective Deferrals Net Pay Nate $ 63,555.00 $ 3,456.81 $ 808.45 $ 10,703.00 $ 2,704.00 $ 7,800.00 $ 5,500.00 $ 32,582.74 Tyler $ 52,045.00 $ 2,743.19 $ 641.55 $ 7,619.00 $ 1,924.00 $ 7,800.00 $ 4,500.00 $ 26,817.26 Evan $ 31,200.00 $ 1,934.40 $ 452.40 $ 5,172.00 $ 1,196.00 $ 3,120.00 $ 19,325.20 Cyndi $ 26,000.00 $ 1,612.00 $ 377.00 $ 3,994.00 $ 936.00 $ 2,600.00 $ 16,481.00 Tristan $ 20,800.00 $ 1,289.60 $ 301.60 $ 2,908.00 $ 676.00 $ 2,080.00 $ 13,544.80 Jordan $ 16,640.00 $ 1,031.68 $ 241.28 $ 2,110.00 $ 468.00 $ 1,560.00 $ 11,229.04 Totals $ 210,240.00 $ 12,067.68 $ 2,822.28 $ 32,506.00 $ 7,904.00 $ 15,600.00 $ 19,360.00 $119,980.04 Final Pay Period Taxes Deposited January 2015 Gross Earnings Social Security 6.20% Medicare 1.45% Federal Withholding State Withholding Health Insurance HSA Contributions SIMPLE Elective Deferrals Net Pay $ 3,743.08 $ 232.07 $ 54.27 $ 625.12 $ 152.00 $ 372.31 $ 2,307.31 CPE/CE Balance Sheet Greener Pastures, Inc. December 31, 2014 Assets: Cash... $130,146.50 Rounding...0.01 Inventory...9,100.00 Equipment...23,600.00 Display shelving...8,950.00 Office furniture...3,675.00 Computers...3,890.00 Accumulated depreciation... (25,537.00) Total assets...$153,824.51 Liabilities: Withholding payable...$ 1,063.46 SIMPLE employee deferrals payable... 372.31 Sales tax payable...1,234.64 Loan payable... 20,459.27 Total liabilities...$ 23,129.68 Equity: Common stock... $100,000.00 Current earnings...40,694.83 Distributions... (10,000.00) Total equity...$130,694.83 Total liabilities plus equity...$153,824.51 TheTaxReview Preparing S Corporation Returns Appendix 107

APPENDIX Income Statement Greener Pastures, Inc. Year ended December 31, 2014 Revenue: Lawn and garden implement sales... $215,500.00 Hydroseeding services...212,450.00 Interest earned... 566.00 Gross income...$428,516.00 Cost of goods sold: Beginning inventory... $ 0.00 Purchases...74,025.00 Ending inventory... (9,100.00) Cost of goods sold...$ 64,925.00 Gross profit...$363,591.00 Expenses: Accounting (organization costs)... $ 2,500.00 Advertising...3,000.00 Attorney fees (organization costs)...2,000.00 Bookkeeping...2,800.00 Depreciation...25,537.00 Employee benefit programs HSA contributions...13,200.00 Health insurance...18,000.00 SIMPLE employer match...6,307.20 Insurance business...3,250.00 Interest expense... 916.36 Meals and entertainment...1,100.00 Office expenses...2,325.00 Payroll taxes...18,210.61 Rent...9,000.00 Travel (start-up costs)...1,660.00 Utilities...2,850.00 Wages (includes $6,600 for shareholder HSA contributions and $9,000 for health insurance)... 210,240.00 Total expenses...$322,896.17 Net income per books...$ 40,694.83 108 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Cash Flow Reconciliation Business Name: Greener Pastures, Inc. Period: 4/1/14 to 12/31/14 EIN: 31 2345678 1) Starting cash balance... 1) 0.00 Cash In 2) Customer receipts: categories Lawn and garden implement sales 215,500.00 Hydroseeding services 212,450.00 Sales tax collected 14,815.63 Total customer receipts... 2) 442,765.63 3) Investment income: interest, dividends, etc. Interest income 566.00 Total investment income... 3) 566.00 4) Cash received from accounts receivable not listed elsewhere... 4) 5) Cash received from sale of assets... 5) 6) Cash received from loan repayments... 6) 7) Cash received from loan proceeds... 7) 8) Contributions to capital... 8) 100,000.00 9) Other receipts... 9) Total starting cash balance plus cash in... 543,331.63 Cash Out 10) Business expenses: categories Accounting (organization costs) 2,500.00 Advertising 3,000.00 Attorney fees (organization costs) 2,000.00 Bookkeeping 2,800.00 Employee benefit programs: HSA contributions (includes $6,600 for shareholders) 19,800.00 Health insurance (includes $9,000 for shareholders) 27,000.00 SIMPLE plan employer match 6,307.20 SIMPLE plan employee elective deferrals 18,987.69 Insurance business 3,250.00 Meals and entertainment 1,100.00 Office expenses 2,325.00 Payroll taxes: Federal unemployment (FUTA) 252.00 Federal quarterly (Form 941) 61,088.12 State unemployment 3,355.00 State withholding 7,752.00 Rent 9,000.00 Sales tax 13,580.99 Travel (start-up costs) 1,660.00 Utilities 2,850.00 Wages / net 119,980.04 Total business expenses... 10) 308,588.04 11) Purchases of inventory... 11) 74,025.00 12) Loans payable Asset Equipment Principal 3,140.73 Interest 916.36 = Total... 4,057.09 Asset Principal Interest = Total... Total loans payable... 12) 4,057.09 13) Paid on accounts payable... 13) 14) Cash disbursements on loans receivable... 14) 15) Cash distributions to owners... 15) 10,000.00 16) Cash paid for asset purchases... 16) 16,515.00 17) Other cash out: categories... Total other cash out... 17) Total cash out for period... 413,185.13 Ending cash balance... 130,146.50 TheTaxReview Preparing S Corporation Returns Appendix 109

APPENDIX Organizational Costs and Start-Up Costs: Statement of Election to Amortize Attach a separate statement for each election Name of Business: EIN: Deduction and amortization. Costs paid or incurred in 2014 are allowed as a current deduction in the year the active trade or business begins, up to $5,000 for organizational costs and $5,000 for start-up costs. The current deduction allowed for organizational costs is reduced dollar-for-dollar by the amount of total organizational costs that exceed $50,000. The current deduction allowed for start-up costs is reduced dollar-for-dollar by the amount of total start-up costs that exceed $50,000. Any remaining costs that cannot be deducted currently are amortized ratably over 180 months. If no amortization is taken because organizational and/or start-up costs do not exceed the limits, and a full deduction is allowed, this statement is not required. Organizational Costs Business organizational costs are amounts paid or incurred to create a corporation or partnership business entity. Partnership Organizational Costs This partnership hereby elects to amortize, under IRC section 709, its organizational expenses over a period of 180 months for expenditures incurred in organizing the business which began on (enter date). Corporation Organizational Costs This corporation hereby elects to amortize, under IRC section 248, its organizational expenses over a period of 180 months for expenditures incurred in organizing the business which began on (enter date). Description of Organizational Cost Date Incurred Amount Total costs. If total is $55,000 or greater, STOP HERE. You cannot take a current year deduction. Use this amount to determine amortization in Part VI, Form 4562... Current deduction. If total is $50,000 or less, enter the lesser of $5,000 or the actual costs. If total is greater than $50,000 but less than $55,000, subtract the total from $55,000 and enter result here... Total amortizable costs. Subtract current deduction from total costs and use this amount to determine amortization in Part VI, Form 4562... Start-Up Costs Business start-up costs are amounts paid or incurred for investigating or creating an active trade or business that would be deductible if paid or incurred by an existing business. Business Start-Up Costs This business hereby elects to amortize, under IRC section 195, its start-up costs over a period of 180 months for expenditures incurred in starting the business which began on (enter date). Description of Start-Up Cost Date Incurred Amount Total costs. If total is $55,000 or greater, STOP HERE. You cannot take a current year deduction. Use this amount to determine amortization in Part VI, Form 4562... Current deduction. If total is $50,000 or less, enter the lesser of $5,000 or the actual costs. If total is greater than $50,000 but less than $55,000, subtract the total from $55,000 and enter result here... Total amortizable costs. Subtract current deduction from total costs and use this amount to determine amortization in Part VI, Form 4562... 110 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX S Corporation Shareholder s Adjusted Basis Worksheet Name of Shareholder: Name of S Corporation: Stock Basis Worksheet Stock Basis 1) Stock basis from the end of prior year... 1) 2) Capital contributed during the year... 2) 3) Stock sold or exchanged during the year... 3) ( ) 4) Adjusted basis of property contributed during year... 4) 5) Gain (if any) recognized on contribution of property from line 4... 5) 6) Stock basis before increases and decreases (combine lines 1 through 5)... 6) Stock Basis Increases 7) Ordinary income from line 1, Schedule K-1 (Form 1120S)... 7) 8) Excess deductions for depletion over the basis of the property subject to depletion... 8) 9) Other items of income, including separately stated items and tax-exempt income. Total line 9... 9) 10) Total of lines 7, 8, and 9... 10) 11) Amount from line 10 used to restore loan basis*... 11) ( ) 12) Total stock basis increases. Line 10 minus line 11... 12) 13) Stock basis plus increases. Line 6 plus line 12... 13) Basis Decreases 14) Distributions of cash or FMV of property... 14) 15) Subtract line 14 from line 13. Do not enter less than zero. Any negative amount is a capital gain... 15) 16) Nondeductible expenses**... 16) 17) Depletion deduction for any oil and gas property but only to the extent the shareholder s pro rata share of the property s adjusted basis exceeds that deduction... 17) 18) Ordinary loss from line 1, Schedule K-1 (Form 1120S)... 18) 19) Separately stated losses and deductions. Total line 19... 19) 20) Total flow-through deductions and losses. Add lines 16 through 19... 20) 21) Ending stock basis (line 15 minus line 20). Do not enter less than zero. If a negative number, loan basis can be applied ***... 21) Current year suspended loss Cumulative suspended losses Loan Basis Worksheet Face Value Loan Basis Shareholder loans beginning of the year... Additional loans made during the year... Loan repayments to shareholder during the year. Basis cannot go below zero. Payments in excess of loan basis are capital gains... ( ) ( ) Loan basis applied to current year losses (applicable amount from line 21)... ( ) Restoration of loan basis (applicable amount from line 11)... End of year loan face value and loan basis (cannot be less than zero)... Note: This worksheet assumes loans from the shareholder are combined and not evidenced by separate written instruments. * If loan basis has been reduced in prior years, subsequent income passed through the S corporation must be applied first to restoration of loan basis. ** An election is available to switch the order of basis adjustments between nondeductible expenses and pass-through losses. See Election to switch order of basis adjustments, page 11. *** If stock basis is not sufficient to offset deductions and losses, the excess can be offset by loan basis from direct shareholder loans. Note: Loan basis can only be used to allow the shareholder to claim pass-through losses and deductions. Loan basis cannot be applied to distributions to the shareholder of cash or property. TheTaxReview Preparing S Corporation Returns Appendix 111

APPENDIX Principal Business Activity Codes This list of principal business activities and their associated codes is designed to classify an enterprise by the type of activity in which it is engaged to facilitate the administration of the Internal Revenue Code. These principal business activity codes are based on the North American Industry Classification System. Using the list of activities and codes below, determine from which activity the company derives Agriculture, Forestry, Fishing and Hunting Crop Production 111100 Oilseed & Grain Farming 111210 Vegetable & Melon Farming (including potatoes & yams) 111300 Fruit & Tree Nut Farming 111400 Greenhouse, Nursery, & Floriculture Production 111900 Other Crop Farming (including tobacco, cotton, sugarcane, hay, peanut, sugar beet & all other crop farming) Animal Production 112111 Beef Cattle Ranching & Farming 112112 Cattle Feedlots 112120 Dairy Cattle & Milk Production 112210 Hog & Pig Farming 112300 Poultry & Egg Production 112400 Sheep & Goat Farming 112510 Aquaculture (including shellfish & finfish farms & hatcheries) 112900 Other Animal Production Forestry and Logging 113110 Timber Tract Operations 113210 Forest Nurseries & Gathering of Forest Products 113310 Logging Fishing, Hunting and Trapping 114110 Fishing 114210 Hunting & Trapping Support Activities for Agriculture and Forestry 115110 Support Activities for Crop Production (including cotton ginning, soil preparation, planting, & cultivating) 115210 Support Activities for Animal Production 115310 Support Activities For Forestry Mining 211110 Oil & Gas Extraction 212110 Coal Mining 212200 Metal Ore Mining 212310 Stone Mining & Quarrying 212320 Sand, Gravel, Clay, & Ceramic & Refractory Minerals Mining & Quarrying 212390 Other Nonmetallic Mineral Mining & Quarrying 213110 Support Activities for Mining Utilities 221100 Electric Power Generation, Transmission & Distribution 221210 Natural Gas Distribution 221300 Water, Sewage & Other Systems 221500 Combination Gas & Electric Construction Construction of Buildings 236110 Residential Building Construction 236200 Nonresidential Building Construction Heavy and Civil Engineering Construction 237100 Utility System Construction 237210 Land Subdivision 237310 Highway, Street, & Bridge Construction 237990 Other Heavy & Civil Engineering Construction the largest percentage of its total receipts. Total receipts is defined as the sum of gross receipts or sales (page 1, line 1a); all other income (page 1, lines 4 and 5); income reported on Schedule K, lines 4, 5a, and 6; income or net gain reported on Schedule K, lines 7, 8a, 9, and 10; and income or net gain reported on Form 8825, lines 2, 19, and 20a. If the company purchases raw materials and supplies them to a subcontractor to produce the finished product, but retains title to the product, the company is Specialty Trade Contractors 238100 Foundation, Structure, & Building Exterior Contractors (including framing carpentry, masonry, glass, roofing, & siding) 238210 Electrical Contractors 238220 Plumbing, Heating, & Air-Conditioning Contractors 238290 Other Building Equipment Contractors 238300 Building Finishing Contractors (including drywall, insulation, painting, wallcovering, flooring, tile, & finish carpentry) 238900 Other Specialty Trade Contractors (including site preparation) Manufacturing Food Manufacturing 311110 Animal Food Mfg 311200 Grain & Oilseed Milling 311300 Sugar & Confectionery Product Mfg 311400 Fruit & Vegetable Preserving & Specialty Food Mfg 311500 Dairy Product Mfg 311610 Animal Slaughtering and Processing 311710 Seafood Product Preparation & Packaging 311800 Bakeries, Tortilla, & Dry Pasta Mfg 311900 Other Food Mfg (including coffee, tea, flavorings & seasonings) Beverage and Tobacco Product Manufacturing 312110 Soft Drink & Ice Mfg 312120 Breweries 312130 Wineries 312140 Distilleries 312200 Tobacco Manufacturing Textile Mills and Textile Product Mills 313000 Textile Mills 314000 Textile Product Mills Apparel Manufacturing 315100 Apparel Knitting Mills 315210 Cut & Sew Apparel Contractors 315220 Men's & Boys' Cut & Sew Apparel Mfg 315240 Women's, Girls', & Infants' Cut & Sew Apparel Mfg 315280 Other Cut & Sew Apparel Mfg 315990 Apparel Accessories & Other Apparel Mfg Leather and Allied Product Manufacturing 316110 Leather & Hide Tanning & Finishing 316210 Footwear Mfg (including rubber & plastics) 316990 Other Leather & Allied Product Mfg Wood Product Manufacturing 321110 Sawmills & Wood Preservation 321210 Veneer, Plywood, & Engineered Wood Product Mfg 321900 Other Wood Product Mfg Paper Manufacturing 322100 Pulp, Paper, & Paperboard Mills 322200 Converted Paper Product Mfg Printing and Related Support Activities 323100 Printing & Related Support Activities Petroleum and Coal Products Manufacturing 324110 Petroleum Refineries (including integrated) 324120 Asphalt Paving, Roofing, & Saturated Materials Mfg 324190 Other Petroleum & Coal Products Mfg Chemical Manufacturing 325100 Basic Chemical Mfg 325200 Resin, Synthetic Rubber, & Artificial & Synthetic Fibers & Filaments Mfg 325300 Pesticide, Fertilizer, & Other Agricultural Chemical Mfg 325410 Pharmaceutical & Medicine Mfg 325500 Paint, Coating, & Adhesive Mfg 325600 Soap, Cleaning Compound, & Toilet Preparation Mfg 325900 Other Chemical Product & Preparation Mfg Plastics and Rubber Products Manufacturing 326100 Plastics Product Mfg 326200 Rubber Product Mfg Nonmetallic Mineral Product Manufacturing 327100 Clay Product & Refractory Mfg 327210 Glass & Glass Product Mfg 327300 Cement & Concrete Product Mfg 327400 Lime & Gypsum Product Mfg 327900 Other Nonmetallic Mineral Product Mfg Primary Metal Manufacturing 331110 Iron & Steel Mills & Ferroalloy Mfg 331200 Steel Product Mfg from Purchased Steel 331310 Alumina & Aluminum Production & Processing 331400 Nonferrous Metal (except Aluminum) Production & Processing 331500 Foundries Fabricated Metal Product Manufacturing 332110 Forging & Stamping 332210 Cutlery & Handtool Mfg 332300 Architectural & Structural Metals Mfg 332400 Boiler, Tank, & Shipping Container Mfg 332510 Hardware Mfg 332610 Spring & Wire Product Mfg 332700 Machine Shops; Turned Product; & Screw, Nut, & Bolt Mfg 332810 Coating, Engraving, Heat Treating, & Allied Activities 332900 Other Fabricated Metal Product Mfg Machinery Manufacturing 333100 Agriculture, Construction, & Mining Machinery Mfg 333200 Industrial Machinery Mfg 333310 Commercial & Service Industry Machinery Mfg 333410 Ventilation, Heating, Air-Conditioning, & Commercial Refrigeration Equipment Mfg 333510 Metalworking Machinery Mfg considered a manufacturer and must use one of the manufacturing codes (311110-339900). Once the principal business activity is determined, enter the six-digit code from the list below on page 1, item B. Also enter the business activity on page 2, Schedule B, line 2(a) and a brief description of the principal product or service of the business on line 2(b). 333610 Engine, Turbine & Power Transmission Equipment Mfg 333900 Other General Purpose Machinery Mfg Computer and Electronic Product Manufacturing 334110 Computer & Peripheral Equipment Mfg 334200 Communications Equipment Mfg 334310 Audio & Video Equipment Mfg 334410 Semiconductor & Other Electronic Component Mfg 334500 Navigational, Measuring, Electromedical, & Control Instruments Mfg 334610 Manufacturing & Reproducing Magnetic & Optical Media Electrical Equipment, Appliance, and Component Manufacturing 335100 Electric Lighting Equipment Mfg 335200 Household Appliance Mfg 335310 Electrical Equipment Mfg 335900 Other Electrical Equipment & Component Mfg Transportation Equipment Manufacturing 336100 Motor Vehicle Mfg 336210 Motor Vehicle Body & Trailer Mfg 336300 Motor Vehicle Parts Mfg 336410 Aerospace Product & Parts Mfg 336510 Railroad Rolling Stock Mfg 336610 Ship & Boat Building 336990 Other Transportation Equipment Mfg Furniture and Related Product Manufacturing 337000 Furniture & Related Product Manufacturing Miscellaneous Manufacturing 339110 Medical Equipment & Supplies Mfg 339900 Other Miscellaneous Manufacturing Wholesale Trade Merchant Wholesalers, Durable Goods 423100 Motor Vehicle & Motor Vehicle Parts & Supplies 423200 Furniture & Home Furnishings 423300 Lumber & Other Construction Materials 423400 Professional & Commercial Equipment & Supplies 423500 Metal & Mineral (except Petroleum) 423600 Household Appliances & Electrical & Electronic Goods 423700 Hardware, & Plumbing & Heating Equipment & Supplies 423800 Machinery, Equipment, & Supplies 423910 Sporting & Recreational Goods & Supplies 423920 Toy & Hobby Goods & Supplies 423930 Recyclable Materials 423940 Jewelry, Watch, Precious Stone, & Precious Metals 423990 Other Miscellaneous Durable Goods Merchant Wholesalers, Nondurable Goods 424100 Paper & Paper Products 424210 Drugs & Druggists' Sundries 112 Appendix TheTaxReview Preparing S Corporation Returns

Principal Business Activity Codes continued 424300 Apparel, Piece Goods, & Notions 424400 Grocery & Related Products 424500 Farm Product Raw Materials 424600 Chemical & Allied Products 424700 Petroleum & Petroleum Products 424800 Beer, Wine, & Distilled Alcoholic Beverages 424910 Farm Supplies 424920 Book, Periodical, & Newspapers 424930 Flower, Nursery Stock, & Florists' Supplies 424940 Tobacco & Tobacco Products 424950 Paint, Varnish, & Supplies 424990 Other Miscellaneous Nondurable Goods Wholesale Electronic Markets and Agents and Brokers 425110 Business to Business Electronic Markets 425120 Wholesale Trade Agents & Brokers Retail Trade Motor Vehicle and Parts Dealers 441110 New Car Dealers 441120 Used Car Dealers 441210 Recreational Vehicle Dealers 441222 Boat Dealers 441228 Motorcycle, ATV, & All Other Motor Vehicle Dealers 441300 Automotive Parts, Accessories, & Tire Stores Furniture and Home Furnishings Stores 442110 Furniture Stores 442210 Floor Covering Stores 442291 Window Treatment Stores 442299 All Other Home Furnishings Stores Electronics and Appliance Stores 443141 Household Appliance Stores 443142 Electronics Stores (including Audio, Video, Computer, & Camera Stores) Building Material and Garden Equipment and Supplies Dealers 444110 Home Centers 444120 Paint & Wallpaper Stores 444130 Hardware Stores 444190 Other Building Material Dealers 444200 Lawn & Garden Equipment & Supplies Stores Food and Beverage Stores 445110 Supermarkets and Other Grocery (except Convenience) Stores 445120 Convenience Stores 445210 Meat Markets 445220 Fish & Seafood Markets 445230 Fruit & Vegetable Markets 445291 Baked Goods Stores 445292 Confectionery & Nut Stores 445299 All Other Specialty Food Stores 445310 Beer, Wine, & Liquor Stores Health and Personal Care Stores 446110 Pharmacies & Drug Stores 446120 Cosmetics, Beauty Supplies, & Perfume Stores 446130 Optical Goods Stores 446190 Other Health & Personal Care Stores Gasoline Stations 447100 Gasoline Stations (including convenience stores with gas) Clothing and Clothing Accessories Stores 448110 Men's Clothing Stores 448120 Women's Clothing Stores 448130 Children's & Infants' Clothing Stores 448140 Family Clothing Stores 448150 Clothing Accessories Stores 448190 Other Clothing Stores 448210 Shoe Stores 448310 Jewelry Stores 448320 Luggage & Leather Goods Stores Sporting Goods, Hobby, Book, and Music Stores 451110 Sporting Goods Stores 451120 Hobby, Toy, & Game Stores 451130 Sewing, Needlework, & Piece Goods Stores 451140 Musical Instrument & Supplies Stores 451211 Book Stores 451212 News Dealers & Newsstands General Merchandise Stores 452110 Department Stores 452900 Other General Merchandise Stores Miscellaneous Store Retailers 453110 Florists 453210 Office Supplies & Stationery Stores 453220 Gift, Novelty, & Souvenir Stores 453310 Used Merchandise Stores 453910 Pet & Pet Supplies Stores 453920 Art Dealers 453930 Manufactured (Mobile) Home Dealers 453990 All Other Miscellaneous Store Retailers (including tobacco, candle, & trophy shops) Nonstore Retailers 454110 Electronic Shopping & Mail-Order Houses 454210 Vending Machine Operators 454310 Fuel Dealers (including Heating Oil & Liquefied Petroleum) 454390 Other Direct Selling Establishments (including door-to-door retailing, frozen food plan providers, party plan merchandisers, & coffee-break service providers) Transportation and Warehousing Air, Rail, and Water Transportation 481000 Air Transportation 482110 Rail Transportation 483000 Water Transportation Truck Transportation 484110 General Freight Trucking, Local 484120 General Freight Trucking, Long-distance 484200 Specialized Freight Trucking Transit and Ground Passenger Transportation 485110 Urban Transit Systems 485210 Interurban & Rural Bus Transportation 485310 Taxi Service 485320 Limousine Service 485410 School & Employee Bus Transportation 485510 Charter Bus Industry 485990 Other Transit & Ground Passenger Transportation Pipeline Transportation 486000 Pipeline Transportation Scenic & Sightseeing Transportation 487000 Scenic & Sightseeing Transportation Support Activities for Transportation 488100 Support Activities for Air Transportation 488210 Support Activities for Rail Transportation 488300 Support Activities for Water Transportation 488410 Motor Vehicle Towing 488490 Other Support Activities for Road Transportation 488510 Freight Transportation Arrangement 488990 Other Support Activities for Transportation Couriers and Messengers 492110 Couriers 492210 Local Messengers & Local Delivery Warehousing and Storage 493100 Warehousing & Storage (except lessors of miniwarehouses & self-storage units) Information Publishing Industries (except Internet) 511110 Newspaper Publishers 511120 Periodical Publishers 511130 Book Publishers 511140 Directory & Mailing List Publishers 511190 Other Publishers 511210 Software Publishers Motion Picture and Sound Recording Industries 512100 Motion Picture & Video Industries (except video rental) 512200 Sound Recording Industries Broadcasting (except Internet) 515100 Radio & Television Broadcasting 515210 Cable & Other Subscription Programming Telecommunications 517000 Telecommunications (including paging, cellular, satellite, cable & other program distribution, resellers, other telecommunications, & Internet service providers) Data Processing Services 518210 Data Processing, Hosting, & Related Services Other Information Services 519100 Other Information Services (including news syndicates, libraries, Internet publishing, & broadcasting) Finance and Insurance Depository Credit Intermediation 522110 Commercial Banking 522120 Savings Institutions 522130 Credit Unions 522190 Other Depository Credit Intermediation Nondepository Credit Intermediation 522210 Credit Card Issuing 522220 Sales Financing 522291 Consumer Lending 522292 Real Estate Credit (including mortgage bankers & originators) 522293 International Trade Financing 522294 Secondary Market Financing 522298 All Other Nondepository Credit Intermediation Activities Related to Credit Intermediation 522300 Activities Related to Credit Intermediation (including loan brokers, check clearing, & money transmitting) Securities, Commodity Contracts, and Other Financial Investments and Related Activities 523110 Investment Banking & Securities Dealing 523120 Securities Brokerage 523130 Commodity Contracts Dealing 523140 Commodity Contracts Brokerage 523210 Securities & Commodity Exchanges 523900 Other Financial Investment Activities (including portfolio management & investment advice) Insurance Carriers and Related Activities 524140 Direct Life, Health, & Medical Insurance & Reinsurance Carriers 524150 Direct Insurance & Reinsurance (except Life, Health, & Medical) Carriers 524210 Insurance Agencies & Brokerages 524290 Other Insurance Related Activities (including third-party APPENDIX administration of insurance and pension funds) Funds, Trusts, and Other Financial Vehicles 525100 Insurance & Employee Benefit Funds 525910 Open-End Investment Funds (Form 1120-RIC) 525920 Trusts, Estates, & Agency Accounts 525990 Other Financial Vehicles (including mortgage REITs & closed-end investment funds) Offices of Bank Holding Companies and Offices of Other Holding Companies are located under Management of Companies (Holding Companies) below. Real Estate and Rental and Leasing Real Estate 531110 Lessors of Residential Buildings & Dwellings (including equity REITs) 531120 Lessors of Nonresidential Buildings (except Miniwarehouses) (including equity REITs) 531130 Lessors of Miniwarehouses & Self-Storage Units (including equity REITs) 531190 Lessors of Other Real Estate Property (including equity REITs) 531210 Offices of Real Estate Agents & Brokers 531310 Real Estate Property Managers 531320 Offices of Real Estate Appraisers 531390 Other Activities Related to Real Estate Rental and Leasing Services 532100 Automotive Equipment Rental & Leasing 532210 Consumer Electronics & Appliances Rental 532220 Formal Wear & Costume Rental 532230 Video Tape & Disc Rental 532290 Other Consumer Goods Rental 532310 General Rental Centers 532400 Commercial & Industrial Machinery & Equipment Rental & Leasing Lessors of Nonfinancial Intangible Assets (except copyrighted works) 533110 Lessors of Nonfinancial Intangible Assets (except copyrighted works) Professional, Scientific, and Technical Services Legal Services 541110 Offices of Lawyers 541190 Other Legal Services Accounting, Tax Preparation, Bookkeeping, and Payroll Services 541211 Offices of Certified Public Accountants 541213 Tax Preparation Services 541214 Payroll Services 541219 Other Accounting Services Architectural, Engineering, and Related Services 541310 Architectural Services 541320 Landscape Architecture Services 541330 Engineering Services 541340 Drafting Services 541350 Building Inspection Services 541360 Geophysical Surveying & Mapping Services 541370 Surveying & Mapping (except Geophysical) Services 541380 Testing Laboratories Specialized Design Services 541400 Specialized Design Services (including interior, industrial, graphic, & fashion design) TheTaxReview Preparing S Corporation Returns Appendix 113

APPENDIX Principal Business Activity Codes continued Computer Systems Design and Related Services 541511 Custom Computer Programming Services 541512 Computer Systems Design Services 541513 Computer Facilities Management Services 541519 Other Computer Related Services Other Professional, Scientific, and Technical Services 541600 Management, Scientific, & Technical Consulting Services 541700 Scientific Research & Development Services 541800 Advertising & Related Services 541910 Marketing Research & Public Opinion Polling 541920 Photographic Services 541930 Translation & Interpretation Services 541940 Veterinary Services 541990 All Other Professional, Scientific, & Technical Services Management of Companies (Holding Companies) 551111 Offices of Bank Holding Companies 551112 Offices of Other Holding Companies Administrative and Support and Waste Management and Remediation Services Administrative and Support Services 561110 Office Administrative Services 561210 Facilities Support Services 561300 Employment Services 561410 Document Preparation Services 561420 Telephone Call Centers 561430 Business Service Centers (including private mail centers & copy shops) 561440 Collection Agencies 561450 Credit Bureaus 561490 Other Business Support Services (including repossession services, court reporting, & stenotype services) 561500 Travel Arrangement & Reservation Services 561600 Investigation & Security Services 561710 Exterminating & Pest Control Services 561720 Janitorial Services 561730 Landscaping Services 561740 Carpet & Upholstery Cleaning Services 561790 Other Services to Buildings & Dwellings 561900 Other Support Services (including packaging & labeling services, & convention & trade show organizers) Waste Management and Remediation Services 562000 Waste Management & Remediation Services Educational Services 611000 Educational Services (including schools, colleges, & universities) Health Care and Social Assistance Offices of Physicians and Dentists 621111 Offices of Physicians (except mental health specialists) 621112 Offices of Physicians, Mental Health Specialists 621210 Offices of Dentists Offices of Other Health Practitioners 621310 Offices of Chiropractors 621320 Offices of Optometrists 621330 Offices of Mental Health Practitioners (except Physicians) 621340 Offices of Physical, Occupational & Speech Therapists, & Audiologists 621391 Offices of Podiatrists 621399 Offices of All Other Miscellaneous Health Practitioners Outpatient Care Centers 621410 Family Planning Centers 621420 Outpatient Mental Health & Substance Abuse Centers 621491 HMO Medical Centers 621492 Kidney Dialysis Centers 621493 Freestanding Ambulatory Surgical & Emergency Centers 621498 All Other Outpatient Care Centers Medical and Diagnostic Laboratories 621510 Medical & Diagnostic Laboratories Home Health Care Services 621610 Home Health Care Services Other Ambulatory Health Care Services 621900 Other Ambulatory Health Care Services (including ambulance services & blood & organ banks) Hospitals 622000 Hospitals Nursing and Residential Care Facilities 623000 Nursing & Residential Care Facilities Social Assistance 624100 Individual & Family Services 624200 Community Food & Housing, & Emergency & Other Relief Services 624310 Vocational Rehabilitation Services 624410 Child Day Care Services Arts, Entertainment, and Recreation Performing Arts, Spectator Sports, and Related Industries 711100 Performing Arts Companies 711210 Spectator Sports (including sports clubs & racetracks) 711300 Promoters of Performing Arts, Sports, & Similar Events 711410 Agents & Managers for Artists, Athletes, Entertainers, & Other Public Figures 711510 Independent Artists, Writers, & Performers Museums, Historical Sites, and Similar Institutions 712100 Museums, Historical Sites, & Similar Institutions Amusement, Gambling, and Recreation Industries 713100 Amusement Parks & Arcades 713200 Gambling Industries 713900 Other Amusement & Recreation Industries (including golf courses, skiing facilities, marinas, fitness centers, & bowling centers) Accommodation and Food Services Accommodation 721110 Hotels (except Casino Hotels) & Motels 721120 Casino Hotels 721191 Bed & Breakfast Inns 721199 All Other Traveler Accommodation 721210 RV (Recreational Vehicle) Parks & Recreational Camps 721310 Rooming & Boarding Houses Food Services and Drinking Places 722300 Special Food Services (including food service contractors & caterers) 722410 Drinking Places (Alcoholic Beverages) 722511 Full Service Restaurants 722513 Limited Service Restaurants 722514 Cafeterias & Buffets 722515 Snack & Non-alcoholic Beverage Bars Other Services Repair and Maintenance 811110 Automotive Mechanical & Electrical Repair & Maintenance 811120 Automotive Body, Paint, Interior, & Glass Repair 811190 Other Automotive Repair & Maintenance (including oil change & lubrication shops & car washes) 811210 Electronic & Precision Equipment Repair & Maintenance 811310 Commercial & Industrial Machinery & Equipment (except Automotive & Electronic) Repair & Maintenance 811410 Home & Garden Equipment & Appliance Repair & Maintenance 811420 Reupholstery & Furniture Repair 811430 Footwear & Leather Goods Repair 811490 Other Personal & Household Goods Repair & Maintenance Personal and Laundry Services 812111 Barber Shops 812112 Beauty Salons 812113 Nail Salons 812190 Other Personal Care Services (including diet & weight reducing centers) 812210 Funeral Homes & Funeral Services 812220 Cemeteries & Crematories 812310 Coin-Operated Laundries & Drycleaners 812320 Drycleaning & Laundry Services (except Coin-Operated) 812330 Linen & Uniform Supply 812910 Pet Care (except Veterinary) Services 812920 Photofinishing 812930 Parking Lots & Garages 812990 All Other Personal Services Religious, Grantmaking, Civic, Professional, and Similar Organizations 813000 Religious, Grantmaking, Civic, Professional, & Similar Organizations (including condominium and homeowners associations) 114 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1040 Department of the Treasury Internal Revenue Service (99) U.S. Individual Income Tax Return OMB No. 1545-0074 IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 2014, or other tax year beginning, 2014, ending, 20 See separate instructions. Your first name and initial Last name Your social security number 14 If a joint return, spouse s first name and initial Last name Spouse s social security number Home address (number and street). If you have a P.O. box, see instructions. Apt. no. Make sure the SSN(s) above and on line 6c are correct. City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions). Presidential Election Campaign Foreign country name Foreign province/state/county Foreign postal code Check here if you, or your spouse if filing jointly, want $3 to go to this fund. Checking a box below will not change your tax or refund. You Spouse Filing Status 1 Single 4 Head of household (with qualifying person). (See instructions.) If 2 Married filing jointly (even if only one had income) the qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. and full name here. 5 Qualifying widow(er) with dependent child 6a Yourself. If someone can claim you as a dependent, do not check box 6a..... Boxes checked Exemptions } on 6a and 6b b Spouse........................ No. of children c Dependents: (2) Dependent s (3) Dependent s (4) if child under age 17 on 6c who: (1) First name Last name social security number relationship to you qualifying for child tax credit lived with you (see instructions) did not live with you due to divorce If more than four dependents, see instructions and or separation (see instructions) Dependents on 6c not entered above check here Add numbers on d Total number of exemptions claimed................. lines above Income 7 Wages, salaries, tips, etc. Attach Form(s) W-2............ 7 8a Taxable interest. Attach Schedule B if required............ 8a b Tax-exempt interest. Do not include on line 8a... 8b Attach Form(s) 9 a Ordinary dividends. Attach Schedule B if required........... 9a W-2 here. Also attach Forms b Qualified dividends........... 9b W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes...... 10 1099-R if tax 11 Alimony received..................... 11 was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ.......... 12 13 Capital gain or (loss). Attach Schedule D if required. If not required, check here 13 If you did not 14 Other gains or (losses). Attach Form 4797.............. 14 get a W-2, see instructions. 15 a IRA distributions. 15a b Taxable amount... 15b 16 a Pensions and annuities 16a b Taxable amount... 16b 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 18 Farm income or (loss). Attach Schedule F.............. 18 19 Unemployment compensation................. 19 20 a Social security benefits 20a b Taxable amount... 20b 21 Other income. List type and amount 21 22 Combine the amounts in the far right column for lines 7 through 21. This is your total income 22 23 Educator expenses........... 23 Adjusted 24 Certain business expenses of reservists, performing artists, and Gross fee-basis government officials. Attach Form 2106 or 2106-EZ 24 Income 25 Health savings account deduction. Attach Form 8889. 25 26 Moving expenses. Attach Form 3903...... 26 27 Deductible part of self-employment tax. Attach Schedule SE. 27 28 Self-employed SEP, SIMPLE, and qualified plans.. 28 29 Self-employed health insurance deduction.... 29 30 Penalty on early withdrawal of savings...... 30 31 a Alimony paid b Recipient s SSN 31a 32 IRA deduction............. 32 33 Student loan interest deduction........ 33 34 Tuition and fees. Attach Form 8917....... 34 35 Domestic production activities deduction. Attach Form 8903 35 36 Add lines 23 through 35................... 36 37 Subtract line 36 from line 22. This is your adjusted gross income..... 37 For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2014) TheTaxReview Preparing S Corporation Returns Appendix 115

APPENDIX Form 1040 (2014) Page 2 38 Amount from line 37 (adjusted gross income).............. 38 39a Tax and Check You were born before January 2, 1950, Blind. Total boxes { } if: Spouse was born before January 2, 1950, Blind. checked 39a Credits b If your spouse itemizes on a separate return or you were a dual-status alien, check here 39b Standard 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin).. 40 Deduction for 41 Subtract line 40 from line 38................... 41 People who 42 Exemptions. If line 38 is $152,525 or less, multiply $3,950 by the number on line 6d. Otherwise, see instructions 42 check any box on line 43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0-.. 43 39a or 39b or 44 Tax (see instructions). Check if any from: a Form(s) 8814 b Form 4972 c 44 who can be claimed as a 45 Alternative minimum tax (see instructions). Attach Form 6251......... 45 dependent, see 46 Excess advance premium tax credit repayment. Attach Form 8962........ 46 instructions. 47 Add lines 44, 45, and 46................... 47 All others: 48 Foreign tax credit. Attach Form 1116 if required.... 48 Single or Married filing 49 Credit for child and dependent care expenses. Attach Form 2441 49 separately, $6,200 50 Education credits from Form 8863, line 19..... 50 Married filing 51 Retirement savings contributions credit. Attach Form 8880 51 jointly or Qualifying 52 Child tax credit. Attach Schedule 8812, if required... 52 widow(er), $12,400 53 Residential energy credits. Attach Form 5695.... 53 Head of 54 Other credits from Form: a 3800 b 8801 c 54 household, $9,100 55 Add lines 48 through 54. These are your total credits............ 55 56 Subtract line 55 from line 47. If line 55 is more than line 47, enter -0-...... 56 57 Self-employment tax. Attach Schedule SE............... 57 Other 58 Unreported social security and Medicare tax from Form: a 4137 b 8919.. 58 59 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required.. 59 Taxes 60 a Household employment taxes from Schedule H.............. 60a b First-time homebuyer credit repayment. Attach Form 5405 if required........ 60b 61 Health care: individual responsibility (see instructions) Full-year coverage..... 61 62 Taxes from: a Form 8959 b Form 8960 c Instructions; enter code(s) 62 63 Add lines 56 through 62. This is your total tax............. 63 Payments 64 Federal income tax withheld from Forms W-2 and 1099.. 64 65 2014 estimated tax payments and amount applied from 2013 return 65 If you have a qualifying child, attach Schedule EIC. Refund Direct deposit? See instructions. Amount You Owe Third Party Designee Sign Here Joint return? See instructions. Keep a copy for your records. Paid Preparer Use Only 66a Earned income credit (EIC).......... 66a b Nontaxable combat pay election 66b 67 Additional child tax credit. Attach Schedule 8812..... 67 68 American opportunity credit from Form 8863, line 8... 68 69 Net premium tax credit. Attach Form 8962...... 69 70 Amount paid with request for extension to file..... 70 71 Excess social security and tier 1 RRTA tax withheld.... 71 72 Credit for federal tax on fuels. Attach Form 4136.... 72 73 Credits from Form: a 2439 b Reserved c Reserved d 73 74 Add lines 64, 65, 66a, and 67 through 73. These are your total payments..... 74 75 If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75 76a Amount of line 75 you want refunded to you. If Form 8888 is attached, check here. 76a b Routing number c Type: Checking Savings d Account number 77 Amount of line 75 you want applied to your 2015 estimated tax 77 78 Amount you owe. Subtract line 74 from line 63. For details on how to pay, see instructions 78 79 Estimated tax penalty (see instructions)....... 79 Do you want to allow another person to discuss this return with the IRS (see instructions)? Yes. Complete below. No Designee s Phone Personal identification name no. number (PIN) Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Your signature Date Your occupation Daytime phone number Spouse s signature. If a joint return, both must sign. Date Spouse s occupation Print/Type preparer s name Preparer s signature Date If the IRS sent you an Identity Protection PIN, enter it here (see inst.) PTIN Check if self-employed Firm s name Firm's EIN Firm s address Phone no. www.irs.gov/form1040 Form 1040 (2014) 116 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX SCHEDULE A (Form 1040) Department of the Treasury Internal Revenue Service (99) Name(s) shown on Form 1040 Medical and Dental Expenses Taxes You Paid Interest You Paid Note. Your mortgage interest deduction may be limited (see instructions). Gifts to Charity If you made a gift and got a benefit for it, see instructions. OMB No. 1545-0074 Itemized Deductions Information about Schedule A and its separate instructions is at www.irs.gov/schedulea. 14 Attachment Attach to Form 1040. Sequence No. 07 Your social security number Caution. Do not include expenses reimbursed or paid by others. 1 Medical and dental expenses (see instructions)..... 1 2 Enter amount from Form 1040, line 38 2 3 Multiply line 2 by 10% (.10). But if either you or your spouse was born before January 2, 1950, multiply line 2 by 7.5% (.075) instead 3 4 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-........ 4 5 State and local (check only one box): a Income taxes, or b General sales taxes }........... 5 6 Real estate taxes (see instructions)......... 6 7 Personal property taxes............. 7 8 Other taxes. List type and amount 8 9 Add lines 5 through 8...................... 9 10 Home mortgage interest and points reported to you on Form 1098 10 11 Home mortgage interest not reported to you on Form 1098. If paid to the person from whom you bought the home, see instructions and show that person s name, identifying no., and address 11 12 Points not reported to you on Form 1098. See instructions for special rules................. 12 13 Mortgage insurance premiums (see instructions)..... 13 14 Investment interest. Attach Form 4952 if required. (See instructions.) 14 15 Add lines 10 through 14..................... 15 16 Gifts by cash or check. If you made any gift of $250 or more, see instructions................ 16 17 Other than by cash or check. If any gift of $250 or more, see instructions. You must attach Form 8283 if over $500... 17 18 Carryover from prior year............ 18 19 Add lines 16 through 18..................... 19 Casualty and Theft Losses 20 Casualty or theft loss(es). Attach Form 4684. (See instructions.)........ 20 Job Expenses and Certain Miscellaneous Deductions 21 Unreimbursed employee expenses job travel, union dues, job education, etc. Attach Form 2106 or 2106-EZ if required. (See instructions.) 21 22 Tax preparation fees............. 22 23 Other expenses investment, safe deposit box, etc. List type and amount 23 24 Add lines 21 through 23............ 24 25 Enter amount from Form 1040, line 38 25 26 Multiply line 25 by 2% (.02)........... 26 27 Subtract line 26 from line 24. If line 26 is more than line 24, enter -0-...... 27 Other 28 Other from list in instructions. List type and amount Miscellaneous Deductions 28 Total Itemized Deductions 29 Is Form 1040, line 38, over $152,525? No. Your deduction is not limited. Add the amounts in the far right column } for lines 4 through 28. Also, enter this amount on Form 1040, line 40.. Yes. Your deduction may be limited. See the Itemized Deductions. 29 Worksheet in the instructions to figure the amount to enter. 30 If you elect to itemize deductions even though they are less than your standard deduction, check here................... For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 17145C Schedule A (Form 1040) 2014 TheTaxReview Preparing S Corporation Returns Appendix 117

APPENDIX Schedule E (Form 1040) 2014 Attachment Sequence No. 13 Page 2 Name(s) shown on return. Do not enter name and social security number if shown on other side. Your social security number Caution. The IRS compares amounts reported on your tax return with amounts shown on Schedule(s) K-1. Part II Income or Loss From Partnerships and S Corporations Note. If you report a loss from an at-risk activity for which any amount is not at risk, you must check the box in column (e) on line 28 and attach Form 6198. See instructions. 27 Are you reporting any loss not allowed in a prior year due to the at-risk, excess farm loss, or basis limitations, a prior year unallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed partnership expenses? If you answered Yes, see instructions before completing this section. Yes No 28 (a) Name A B C D Passive Income and Loss (f) Passive loss allowed (attach Form 8582 if required) (g) Passive income from Schedule K 1 (b) Enter P for partnership; S for S corporation (h) Nonpassive loss from Schedule K 1 (c) Check if foreign partnership (d) Employer identification number Nonpassive Income and Loss (i) Section 179 expense deduction from Form 4562 (e) Check if any amount is not at risk (j) Nonpassive income from Schedule K 1 A B C D 29a Totals b Totals 30 Add columns (g) and (j) of line 29a..................... 30 31 Add columns (f), (h), and (i) of line 29b................... 31 ( ) 32 Total partnership and S corporation income or (loss). Combine lines 30 and 31. Enter the result here and include in the total on line 41 below............... 32 Part III Income or Loss From Estates and Trusts 33 (a) Name A B Passive Income and Loss (c) Passive deduction or loss allowed (attach Form 8582 if required) (d) Passive income from Schedule K 1 (b) Employer identification number Nonpassive Income and Loss (e) Deduction or loss from Schedule K 1 (f) Other income from Schedule K 1 A B 34a Totals b Totals 35 Add columns (d) and (f) of line 34a..................... 35 36 Add columns (c) and (e) of line 34b.................... 36 ( ) 37 Total estate and trust income or (loss). Combine lines 35 and 36. Enter the result here and include in the total on line 41 below.................... 37 Part IV Income or Loss From Real Estate Mortgage Investment Conduits (REMICs) Residual Holder 38 (a) Name (b) Employer identification number (c) Excess inclusion from Schedules Q, line 2c (see instructions) (d) Taxable income (net loss) from Schedules Q, line 1b 39 Combine columns (d) and (e) only. Enter the result here and include in the total on line 41 below 39 Part V Summary 40 Net farm rental income or (loss) from Form 4835. Also, complete line 42 below...... 40 41 Total income or (loss). Combine lines 26, 32, 37, 39, and 40. Enter the result here and on Form 1040, line 17, or Form 1040NR, line 18 41 42 Reconciliation of farming and fishing income. Enter your gross farming and fishing income reported on Form 4835, line 7; Schedule K-1 (Form 1065), box 14, code B; Schedule K-1 (Form 1120S), box 17, code V; and Schedule K-1 (Form 1041), box 14, code F (see instructions).. 42 43 Reconciliation for real estate professionals. If you were a real estate professional (see instructions), enter the net income or (loss) you reported anywhere on Form 1040 or Form 1040NR from all rental real estate activities in which you materially participated under the passive activity loss rules.. 43 (e) Income from Schedules Q, line 3b Schedule E (Form 1040) 2014 118 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1120S U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. Department of the Treasury Internal Revenue Service For calendar year 2014 or tax year beginning, 2014, ending, 20 A S election effective date B Business activity code number (see instructions) TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state or province, country, and ZIP or foreign postal code OMB No. 1545-0123 14 D Employer identification number E Date incorporated F Total assets (see instructions) C Check if Sch. M-3 attached $ G Is the corporation electing to be an S corporation beginning with this tax year? Yes No If Yes, attach Form 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year......... Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. Income Deductions (see instructions for limitations) Tax and Payments 1 a Gross receipts or sales............... 1a b Returns and allowances.............. 1b c Balance. Subtract line 1b from line 1a................... 1c 2 Cost of goods sold (attach Form 1125-A).................. 2 3 Gross profit. Subtract line 2 from line 1c.................. 3 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797)............ 4 5 Other income (loss) (see instructions attach statement)............. 5 6 Total income (loss). Add lines 3 through 5................ 6 7 Compensation of officers (see instructions attach Form 1125-E).......... 7 8 Salaries and wages (less employment credits)................ 8 9 Repairs and maintenance....................... 9 10 Bad debts........................... 10 11 Rents............................. 11 12 Taxes and licenses......................... 12 13 Interest............................ 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562).... 14 15 Depletion (Do not deduct oil and gas depletion.)............... 15 16 Advertising........................... 16 17 Pension, profit-sharing, etc., plans.................... 17 18 Employee benefit programs...................... 18 19 Other deductions (attach statement)................... 19 20 Total deductions. Add lines 7 through 19................ 20 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 22 a Excess net passive income or LIFO recapture tax (see instructions).. 22a b Tax from Schedule D (Form 1120S)........... 22b c Add lines 22a and 22b (see instructions for additional taxes)............ 22c 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004............ 23b c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Sign Here Paid Preparer Use Only Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below (see instructions)? Yes No Signature of officer Date Title Print/Type preparer s name Preparer's signature Date PTIN Check if self-employed Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) TheTaxReview Preparing S Corporation Returns Appendix 119

APPENDIX Form 1120S (2014) Page 2 Schedule B Other Information (see instructions) 1 Check accounting method: a Cash b Accrual Yes No c Other (specify) 2 See the instructions and enter the: a Business activity b Product or service 3 At any time during the tax year, was any shareholder of the corporation a disregarded entity, a trust, an estate, or a nominee or similar person? If "Yes," attach Schedule B-1, Information on Certain Shareholders of an S Corporation.. 4 At the end of the tax year, did the corporation: a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total stock issued and outstanding of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If Yes, complete (i) through (v) below.................................... (i) Name of Corporation (ii) Employer Identification Number (if any) (iii) Country of Incorporation (iv) Percentage of Stock Owned (v) If Percentage in (iv) is 100%, Enter the Date (if any) a Qualified Subchapter S Subsidiary Election Was Made b Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficial interest of a trust? For rules of constructive ownership, see instructions. If Yes, complete (i) through (v) below....... (i) Name of Entity (ii) Employer Identification Number (if any) (iii) Type of Entity (iv) Country of Organization (v) Maximum Percentage Owned in Profit, Loss, or Capital 5 a At the end of the tax year, did the corporation have any outstanding shares of restricted stock?........ If Yes, complete lines (i) and (ii) below. (i) Total shares of restricted stock......... (ii) Total shares of non-restricted stock........ b At the end of the tax year, did the corporation have any outstanding stock options, warrants, or similar instruments?. If Yes, complete lines (i) and (ii) below. (i) Total shares of stock outstanding at the end of the tax year (ii) Total shares of stock outstanding if all instruments were executed 6 Has this corporation filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provide information on any reportable transaction?........................ 7 Check this box if the corporation issued publicly offered debt instruments with original issue discount.... If checked, the corporation may have to file Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. 8 If the corporation: (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to the basis of the asset (or the basis of any other property) in the hands of a C corporation and (b) has net unrealized built-in gain in excess of the net recognized built-in gain from prior years, enter the net unrealized built-in gain reduced by net recognized built-in gain from prior years (see instructions)............... $ 9 Enter the accumulated earnings and profits of the corporation at the end of the tax year. $ 10 Does the corporation satisfy both of the following conditions? a The corporation s total receipts (see instructions) for the tax year were less than $250,000.......... b The corporation s total assets at the end of the tax year were less than $250,000............ If Yes, the corporation is not required to complete Schedules L and M-1. 11 During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or had the terms modified so as to reduce the principal amount of the debt?................. If Yes, enter the amount of principal reduction $ 12 During the tax year, was a qualified subchapter S subsidiary election terminated or revoked? If Yes, see instructions. 13 a Did the corporation make any payments in 2014 that would require it to file Form(s) 1099?.......... b If Yes, did the corporation file or will it file required Forms 1099?................. Form 1120S (2014) 120 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1120S (2014) Page 3 Schedule K Shareholders Pro Rata Share Items Total amount 1 Ordinary business income (loss) (page 1, line 21).............. 1 2 Net rental real estate income (loss) (attach Form 8825)............ 2 3 a Other gross rental income (loss).......... 3a b Expenses from other rental activities (attach statement).. 3b c Other net rental income (loss). Subtract line 3b from line 3a.......... 3c 4 Interest income........................ 4 5 Dividends: a Ordinary dividends................... 5a b Qualified dividends.......... 5b 6 Royalties.......................... 6 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S))........ 7 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S))........ 8a b Collectibles (28%) gain (loss)........... 8b c Unrecaptured section 1250 gain (attach statement).... 8c 9 Net section 1231 gain (loss) (attach Form 4797).............. 9 10 Other income (loss) (see instructions).. Type 10 11 Section 179 deduction (attach Form 4562)................ 11 12 a Charitable contributions..................... 12a b Investment interest expense.................... 12b c Section 59(e)(2) expenditures (1) Type (2) Amount 12c(2) d Other deductions (see instructions)... Type 12d 13a Low-income housing credit (section 42(j)(5))............... 13a b Low-income housing credit (other).................. 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable).. 13c d Other rental real estate credits (see instructions) Type 13d e Other rental credits (see instructions)... Type 13e f Biofuel producer credit (attach Form 6478)............... 13f g Other credits (see instructions)..... Type 13g 14a Name of country or U.S. possession Income (Loss) Deductions Credits Foreign Transactions Alternative Minimum Tax (AMT) Items Items Affecting Shareholder Basis b Gross income from all sources................... 14b c Gross income sourced at shareholder level............... 14c Foreign gross income sourced at corporate level d Passive category....................... 14d e General category....................... 14e f Other (attach statement)..................... 14f Deductions allocated and apportioned at shareholder level g Interest expense........................ 14g h Other........................... 14h Deductions allocated and apportioned at corporate level to foreign source income i Passive category....................... 14i j General category....................... 14j k Other (attach statement)..................... 14k Other information l Total foreign taxes (check one): Paid Accrued.......... 14l m Reduction in taxes available for credit (attach statement)........... 14m n Other foreign tax information (attach statement) 15 a Post-1986 depreciation adjustment.................. 15a b Adjusted gain or loss...................... 15b c Depletion (other than oil and gas).................. 15c d Oil, gas, and geothermal properties gross income............. 15d e Oil, gas, and geothermal properties deductions.............. 15e f Other AMT items (attach statement).................. 15f 16 a Tax-exempt interest income.................... 16a b Other tax-exempt income..................... 16b c Nondeductible expenses..................... 16c d Distributions (attach statement if required) (see instructions).......... 16d e Repayment of loans from shareholders................. 16e Form 1120S (2014) TheTaxReview Preparing S Corporation Returns Appendix 121

APPENDIX Form 1120S (2014) Page 4 Schedule K Shareholders Pro Rata Share Items (continued) Total amount Other Information 17a Investment income....................... 17a b Investment expenses...................... 17b c Dividend distributions paid from accumulated earnings and profits........ 17c d Other items and amounts (attach statement) Reconciliation 18 Income/loss reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14l 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year 1 Cash............. 2a Trade notes and accounts receivable... b Less allowance for bad debts...... 3 Inventories........... 4 U.S. government obligations...... 5 Tax-exempt securities (see instructions).. 6 Other current assets (attach statement)... 7 Loans to shareholders........ 8 Mortgage and real estate loans..... 9 Other investments (attach statement)... 10a Buildings and other depreciable assets... b Less accumulated depreciation..... 11a Depletable assets......... b Less accumulated depletion...... 12 Land (net of any amortization)...... 13a Intangible assets (amortizable only).... b Less accumulated amortization..... 14 Other assets (attach statement)..... 15 Total assets........... Liabilities and Shareholders Equity 16 Accounts payable......... 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement).. 19 Loans from shareholders....... 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement).... 22 Capital stock........... 23 Additional paid-in capital....... 24 Retained earnings......... 25 Adjustments to shareholders equity (attach statement) 26 Less cost of treasury stock...... 27 Total liabilities and shareholders equity.. Assets (a) (b) (c) (d) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Form 1120S (2014) 122 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1120S (2014) Page 5 Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) 1 Net income (loss) per books...... 2 Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14l (itemize): a Depreciation $ b Travel and entertainment $ 5 Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ 6 Deductions included on Schedule K, lines 1 through 12 and 14l, not charged against book income this year (itemize): a Depreciation $ 7 Add lines 5 and 6..... 4 Add lines 1 through 3........ 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) 1 Balance at beginning of tax year..... 2 Ordinary income from page 1, line 21... 3 Other additions.......... 4 Loss from page 1, line 21....... 5 Other reductions.......... 6 Combine lines 1 through 5....... 7 Distributions other than dividend distributions 8 Balance at end of tax year. Subtract line 7 from line 6 (a) Accumulated adjustments account (b) Other adjustments account ( ) ( ) ( ) (c) Shareholders undistributed taxable income previously taxed Form 1120S (2014) TheTaxReview Preparing S Corporation Returns Appendix 123

APPENDIX Schedule K-1 (Form 1120S) Department of the Treasury Internal Revenue Service 14 For calendar year 2014, or tax year beginning, 2014 ending, 20 Shareholder s Share of Income, Deductions, Credits, etc. See back of form and separate instructions. Part I Information About the Corporation 671113 Final K-1 Amended K-1 OMB No. 1545-0123 Part III Shareholder s Share of Current Year Income, Deductions, Credits, and Other Items 1 Ordinary business income (loss) 13 Credits 2 Net rental real estate income (loss) 3 Other net rental income (loss) 4 Interest income A Corporation s employer identification number 5a Ordinary dividends B Corporation s name, address, city, state, and ZIP code 5b Qualified dividends 14 Foreign transactions 6 Royalties 7 Net short-term capital gain (loss) C IRS Center where corporation filed return 8a Net long-term capital gain (loss) Part II Information About the Shareholder 8b Collectibles (28%) gain (loss) D Shareholder s identifying number 8c Unrecaptured section 1250 gain E Shareholder s name, address, city, state, and ZIP code 9 Net section 1231 gain (loss) 10 Other income (loss) 15 Alternative minimum tax (AMT) items F Shareholder s percentage of stock ownership for tax year....... % 11 Section 179 deduction 16 Items affecting shareholder basis 12 Other deductions For IRS Use Only 17 Other information * See attached statement for additional information. For Paperwork Reduction Act Notice, see Instructions for Form 1120S. IRS.gov/form1120s Cat. No. 11520D Schedule K-1 (Form 1120S) 2014 124 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Schedule K-1 (Form 1120S) 2014 Page 2 This list identifies the codes used on Schedule K-1 for all shareholders and provides summarized reporting information for shareholders who file Form 1040. For detailed reporting and filing information, see the separate Shareholder s Instructions for Schedule K-1 and the instructions for your income tax return. Code Report on 1. Ordinary business income (loss). Determine whether the income (loss) is N Credit for employer social passive or nonpassive and enter on your return as follows: security and Medicare taxes Report on O Backup withholding See the Shareholder s Instructions } Passive loss See the Shareholder s Instructions P Other credits Passive income Schedule E, line 28, column (g) 14. Foreign transactions Nonpassive loss Schedule E, line 28, column (h) A Name of country or U.S. } Nonpassive income Schedule E, line 28, column (j) possession 2. Net rental real estate income (loss) See the Shareholder s Instructions B Gross income from all sources Form 1116, Part I 3. Other net rental income (loss) C Gross income sourced at Net income Schedule E, line 28, column (g) shareholder level Net loss See the Shareholder s Instructions Foreign gross income sourced at corporate level 4. Interest income Form 1040, line 8a D Passive category E General category Form 1116, Part I 5a. Ordinary dividends Form 1040, line 9a } F Other 5b. Qualified dividends Form 1040, line 9b Deductions allocated and apportioned at shareholder level G Interest expense Form 1116, Part I H Other Form 1116, Part I Deductions allocated and apportioned at corporate level to foreign source income I Passive category J General category Form 1116, Part I } K Other 6. Royalties Schedule E, line 4 7. Net short-term capital gain (loss) Schedule D, line 5 8a. Net long-term capital gain (loss) Schedule D, line 12 8b. Collectibles (28%) gain (loss) 28% Rate Gain Worksheet, line 4 (Schedule D instructions) 8c. Unrecaptured section 1250 gain See the Shareholder s Instructions 9. Net section 1231 gain (loss) See the Shareholder s Instructions 10. Other income (loss) Code A Other portfolio income (loss) See the Shareholder s Instructions B Involuntary conversions See the Shareholder s Instructions C Sec. 1256 contracts & straddles Form 6781, line 1 D Mining exploration costs recapture See Pub. 535 E Other income (loss) See the Shareholder s Instructions 11. Section 179 deduction See the Shareholder s Instructions 12. Other deductions A Cash contributions (50%) B Cash contributions (30%) C Noncash contributions (50%) D Noncash contributions (30%) E Capital gain property to a 50% organization (30%) F Capital gain property (20%) G Contributions (100%) } See the Shareholder s Instructions H Investment interest expense Form 4952, line 1 I Deductions royalty income Schedule E, line 19 J Section 59(e)(2) expenditures See the Shareholder s Instructions K Deductions portfolio (2% floor) Schedule A, line 23 L Deductions portfolio (other) Schedule A, line 28 M Preproductive period expenses See the Shareholder s Instructions N Commercial revitalization deduction from rental real estate activities See Form 8582 instructions O Reforestation expense deduction See the Shareholder s Instructions P Domestic production activities information See Form 8903 instructions Q Qualified production activities income Form 8903, line 7b R Employer s Form W-2 wages Form 8903, line 17 S Other deductions See the Shareholder s Instructions 13. Credits A Low-income housing credit (section 42(j)(5)) from pre-2008 buildings B Low-income housing credit (other) from pre-2008 buildings C Low-income housing credit (section See the Shareholder s 42(j)(5)) from post-2007 buildings Instructions D Low-income housing credit (other) from post-2007 buildings E Qualified rehabilitation expenditures (rental real estate) F Other rental real estate credits G Other rental credits H Undistributed capital gains credit Form 1040, line 73, box a I Biofuel producer credit } J Work opportunity credit K Disabled access credit See the Shareholder s L Empowerment zone employment Instructions credit activities M Credit for increasing research } Other information L Total foreign taxes paid Form 1116, Part II M Total foreign taxes accrued Form 1116, Part II N Reduction in taxes available for credit Form 1116, line 12 O Foreign trading gross receipts Form 8873 P Extraterritorial income exclusion Form 8873 Q Other foreign transactions See the Shareholder s Instructions 15. Alternative minimum tax (AMT) items A Post-1986 depreciation adjustment } See the B Adjusted gain or loss Shareholder s C Depletion (other than oil & gas) Instructions and D Oil, gas, & geothermal gross income the Instructions for E Oil, gas, & geothermal deductions Form 6251 F Other AMT items 16. Items affecting shareholder basis A Tax-exempt interest income Form 1040, line 8b B Other tax-exempt income } C Nondeductible expenses See the Shareholder s D Distributions Instructions E Repayment of loans from shareholders 17. Other information A Investment income Form 4952, line 4a B Investment expenses Form 4952, line 5 C Qualified rehabilitation expenditures (other than rental real estate) See the Shareholder s Instructions D Basis of energy property See the Shareholder s Instructions E Recapture of low-income housing credit (section 42(j)(5)) Form 8611, line 8 F Recapture of low-income housing credit (other) Form 8611, line 8 G Recapture of investment credit See Form 4255 H Recapture of other credits See the Shareholder s Instructions I Look-back interest completed long-term contracts See Form 8697 J Look-back interest income forecast method See Form 8866 K Dispositions of property with section 179 deductions L Recapture of section 179 deduction M Section 453(l)(3) information N Section 453A(c) information O Section 1260(b) information See the Shareholder s P Interest allocable to production Instructions expenditures Q CCF nonqualified withdrawals R Depletion information oil and gas S Reserved T Section 108(i) information U Net investment income V Other information } TheTaxReview Preparing S Corporation Returns Appendix 125

APPENDIX 1125-A Cost of Goods Sold Form (Rev. December 2012) Department of the Treasury Internal Revenue Service Name Attach to Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B. Information about Form 1125-A and its instructions is at www.irs.gov/form1125a. OMB No. 1545-2225 Employer identification number 1 Inventory at beginning of year..................... 1 2 Purchases........................... 2 3 Cost of labor.......................... 3 4 Additional section 263A costs (attach schedule)................ 4 5 Other costs (attach schedule)..................... 5 6 Total. Add lines 1 through 5...................... 6 7 Inventory at end of year....................... 7 8 Cost of goods sold. Subtract line 7 from line 6. Enter here and on Form 1120, page 1, line 2 or the appropriate line of your tax return (see instructions)............... 8 9a Check all methods used for valuing closing inventory: (i) Cost (ii) Lower of cost or market (iii) Other (Specify method used and attach explanation.) b Check if there was a writedown of subnormal goods...................... c Check if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970)...... d If the LIFO inventory method was used for this tax year, enter amount of closing inventory computed under LIFO........................... 9d e If property is produced or acquired for resale, do the rules of section 263A apply to the entity (see instructions)?.. Yes No f Was there any change in determining quantities, cost, or valuations between opening and closing inventory? If Yes, attach explanation............................. Yes No Section references are to the Internal Revenue Code unless otherwise noted. General Instructions Purpose of Form Use Form 1125-A to calculate and deduct cost of goods sold for certain entities. Who Must File Filers of Form 1120, 1120-C, 1120-F, 1120S, 1065, or 1065-B, must complete and attach Form 1125-A if the applicable entity reports a deduction for cost of goods sold. Inventories Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1. If inventories are required, you generally must use an accrual method of accounting for sales and purchases of inventory items. Exception for certain taxpayers. If you are a qualifying taxpayer or a qualifying small business taxpayer (defined below), you can adopt or change your accounting method to account for inventoriable items in the same manner as materials and supplies that are not incidental. Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year you paid for the raw materials or merchandise, if you are also using the cash method). If you account for inventoriable items in the same manner as materials and supplies that are not incidental, you can currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See the instructions for lines 2 and 7. For additional guidance on this method of accounting, see Pub. 538, Accounting Periods and Methods. For guidance on adopting or changing to this method of accounting, see Form 3115, Application for Change in Accounting Method, and its instructions. Qualifying taxpayer. A qualifying taxpayer is a taxpayer that, (a) for each prior tax year ending after December 16, 1998, has average annual gross receipts of $1 million or less for the 3 prior tax years and (b) its business is not a tax shelter (as defined in section 448(d)(3)). See Rev. Proc. 2001-10, 2001-2 I.R.B. 272. Qualifying small business taxpayer. A qualifying small business taxpayer is a taxpayer that, (a) for each prior tax year ending on or after December 31, 2000, has average annual gross receipts of $10 million or less for the 3 prior tax years, (b) whose principal business activity is not an ineligible activity, and (c) whose business is not a tax shelter (as defined in section 448 (d)(3)). See Rev. Proc. 2002-28, 2002-18 I.R.B. 815. Uniform capitalization rules. The uniform capitalization rules of section 263A generally require you to capitalize, or include in inventory, certain costs incurred in connection with the following. The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business. Real property or personal property (tangible and intangible) acquired for resale. The production of real property and tangible personal property by a corporation for use in its trade or business or in an activity engaged in for profit. See the discussion on section 263A uniform capitalization rules in the instructions for your tax return before completing Form 1125-A. Also see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263A-4 for rules for property produced in a farming business. For Paperwork Reduction Act Notice, see instructions. Cat. No. 55988R Form 1125-A (Rev. 12-2012) 126 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 2106 Department of the Treasury Internal Revenue Service (99) Your name Employee Business Expenses OMB No. 1545-0074 Attach to Form 1040 or Form 1040NR. Attachment Information about Form 2106 and its separate instructions is available at www.irs.gov/form2106. Sequence No. 129 Occupation in which you incurred expenses Social security number 14 Part I Employee Business Expenses and Reimbursements Step 1 Enter Your Expenses Column A Other Than Meals and Entertainment Column B Meals and Entertainment 1 Vehicle expense from line 22 or line 29. (Rural mail carriers: See instructions.).................. 1 2 Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight travel or commuting to and from work. 2 3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc. Do not include meals and entertainment. 3 4 Business expenses not included on lines 1 through 3. Do not include meals and entertainment.............. 4 5 Meals and entertainment expenses (see instructions)..... 5 6 Total expenses. In Column A, add lines 1 through 4 and enter the result. In Column B, enter the amount from line 5...... 6 Note. If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8. Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1 7 Enter reimbursements received from your employer that were not reported to you in box 1 of Form W-2. Include any reimbursements reported under code L in box 12 of your Form W-2 (see instructions)................... 7 Step 3 Figure Expenses To Deduct on Schedule A (Form 1040 or Form 1040NR) 8 Subtract line 7 from line 6. If zero or less, enter -0-. However, if line 7 is greater than line 6 in Column A, report the excess as income on Form 1040, line 7 (or on Form 1040NR, line 8)....... 8 Note. If both columns of line 8 are zero, you cannot deduct employee business expenses. Stop here and attach Form 2106 to your return. 9 In Column A, enter the amount from line 8. In Column B, multiply line 8 by 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred while away from home on business by 80% (.80) instead of 50%. For details, see instructions.).............. 9 10 Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on Schedule A (Form 1040), line 21 (or on Schedule A (Form 1040NR), line 7). (Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and individuals with disabilities: See the instructions for special rules on where to enter the total.)..... 10 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11700N Form 2106 (2014) TheTaxReview Preparing S Corporation Returns Appendix 127

APPENDIX Form 3800 Department of the Treasury Internal Revenue Service (99) Name(s) shown on return General Business Credit Information about Form 3800 and its separate instructions is at www.irs.gov/form3800. You must attach all pages of Form 3800, pages 1, 2, and 3, to your tax return. Identifying number OMB No. 1545-0895 14 Attachment Sequence No. 22 Part I Current Year Credit for Credits Not Allowed Against Tentative Minimum Tax (TMT) (See instructions and complete Part(s) III before Parts I and II) 1 General business credit from line 2 of all Parts III with box A checked......... 1 2 Passive activity credits from line 2 of all Parts III with box B checked 2 3 Enter the applicable passive activity credits allowed for 2014 (see instructions)...... 3 4 Carryforward of general business credit to 2014. Enter the amount from line 2 of Part III with box C checked. See instructions for statement to attach............. 4 5 Carryback of general business credit from 2015. Enter the amount from line 2 of Part III with box D checked (see instructions)..................... 5 6 Add lines 1, 3, 4, and 5........................ 6 Part II Allowable Credit 7 Regular tax before credits: Individuals. Enter the sum of the amounts from Form 1040, lines 44 and 46, or the sum of the amounts from Form 1040NR, lines 42 and 44........ Corporations. Enter the amount from Form 1120, Schedule J, Part I, line 2; or the applicable line of your return.................... 7 Estates and trusts. Enter the sum of the amounts from Form 1041, Schedule G, lines 1a and 1b; or the amount from the applicable line of your return.... 8 Alternative minimum tax: Individuals. Enter the amount from Form 6251, line 35........ Corporations. Enter the amount from Form 4626, line 14........ Estates and trusts. Enter the amount from Schedule I (Form 1041), line 56.. }. }.. 8 9 Add lines 7 and 8.......................... 9 10a Foreign tax credit................ 10a b Certain allowable credits (see instructions)........ 10b c Add lines 10a and 10b........................ 10c 11 Net income tax. Subtract line 10c from line 9. If zero, skip lines 12 through 15 and enter -0- on line 16 11 12 Net regular tax. Subtract line 10c from line 7. If zero or less, enter -0-12 13 Enter 25% (.25) of the excess, if any, of line 12 over $25,000 (see instructions).................. 13 14 Tentative minimum tax: } Individuals. Enter the amount from Form 6251, line 33... Corporations. Enter the amount from Form 4626, line 12... 14 Estates and trusts. Enter the amount from Schedule I (Form 1041), line 54............... 15 Enter the greater of line 13 or line 14.................... 15 16 Subtract line 15 from line 11. If zero or less, enter -0-.............. 16 17 Enter the smaller of line 6 or line 16.................... 17 C corporations: See the line 17 instructions if there has been an ownership change, acquisition, or reorganization. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12392F Form 3800 (2014) 128 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 3800 (2014) Page 2 Part II Allowable Credit (Continued) Note. If you are not required to report any amounts on lines 22 or 24 below, skip lines 18 through 25 and enter -0- on line 26. 18 Multiply line 14 by 75% (.75) (see instructions)................. 18 19 Enter the greater of line 13 or line 18.................... 19 20 Subtract line 19 from line 11. If zero or less, enter -0-.............. 20 21 Subtract line 17 from line 20. If zero or less, enter -0-.............. 21 22 Combine the amounts from line 3 of all Parts III with box A, C, or D checked....... 22 23 Passive activity credit from line 3 of all Parts III with box B checked 23 24 Enter the applicable passive activity credit allowed for 2014 (see instructions)...... 24 25 Add lines 22 and 24......................... 25 26 Empowerment zone and renewal community employment credit allowed. Enter the smaller of line 21 or line 25.......................... 26 27 Subtract line 13 from line 11. If zero or less, enter -0-.............. 27 28 Add lines 17 and 26......................... 28 29 Subtract line 28 from line 27. If zero or less, enter -0-.............. 29 30 Enter the general business credit from line 5 of all Parts III with box A checked...... 30 31 Reserved............................. 31 32 Passive activity credits from line 5 of all Parts III with box B checked 32 33 Enter the applicable passive activity credits allowed for 2014 (see instructions)...... 33 34 Carryforward of business credit to 2014. Enter the amount from line 5 of Part III with box C checked and line 6 of Part III with box G checked. See instructions for statement to attach.. 34 35 Carryback of business credit from 2015. Enter the amount from line 5 of Part III with box D checked (see instructions)....................... 35 36 Add lines 30, 33, 34, and 35....................... 36 37 Enter the smaller of line 29 or line 36................... 37 38 Credit allowed for the current year. Add lines 28 and 37. Report the amount from line 38 (if smaller than the sum of Part I, line 6, and Part II, lines 25 and 36, see instructions) as indicated below or on the applicable line of your return: Individuals. Form 1040, line 54, or Form 1040NR, line 51...... Corporations. Form 1120, Schedule J, Part I, line 5c........ Estates and trusts. Form 1041, Schedule G, line 2b........ }.... 38 Form 3800 (2014) TheTaxReview Preparing S Corporation Returns Appendix 129

APPENDIX Form 3800 (2014) Page 3 Name(s) shown on return Identifying number Part III General Business Credits or Eligible Small Business Credits (see instructions) Complete a separate Part III for each box checked below. (see instructions) A General Business Credit From a Non-Passive Activity E Reserved B General Business Credit From a Passive Activity F Reserved C General Business Credit Carryforwards G Eligible Small Business Credit Carryforwards D General Business Credit Carrybacks H Reserved I If you are filing more than one Part III with box A or B checked, complete and attach first an additional Part III combining amounts from all Parts III with box A or B checked. Check here if this is the consolidated Part III.................... (a) Description of credit (b) (c) If claiming the credit Note. On any line where the credit is from more than one source, a separate Part III is needed for each from a pass-through Enter the appropriate pass-through entity. entity, enter the EIN amount 1a Investment (Form 3468, Part II only) (attach Form 3468)....... 1a b Reserved...................... 1b c Increasing research activities (Form 6765)........... 1c d Low-income housing (Form 8586, Part I only).......... 1d e Disabled access (Form 8826) (see instructions for limitation)..... 1e f Renewable electricity, refined coal, and Indian coal production (Form 8835) 1f g Indian employment (Form 8845)............... 1g h Orphan drug (Form 8820)................. 1h i New markets (Form 8874)................. 1i j Small employer pension plan startup costs (Form 8881) (see instructions for limitation) 1j k Employer-provided child care facilities and services (Form 8882) (see instructions for limitation)................. 1k l Biodiesel and renewable diesel fuels (attach Form 8864)....... 1l m Low sulfur diesel fuel production (Form 8896).......... 1m n Distilled spirits (Form 8906)................ 1n o Nonconventional source fuel (Form 8907)........... 1o p Energy efficient home (Form 8908).............. 1p q Energy efficient appliance (Form 8909)............ 1q r Alternative motor vehicle (Form 8910)............. 1r s Alternative fuel vehicle refueling property (Form 8911)....... 1s t Reserved...................... 1t u Mine rescue team training (Form 8923)............ 1u v Agricultural chemicals security (Form 8931) (see instructions for limitation). 1v w Employer differential wage payments (Form 8932)......... 1w x Carbon dioxide sequestration (Form 8933)........... 1x y Qualified plug-in electric drive motor vehicle (Form 8936)...... 1y z Qualified plug-in electric vehicle (carryforward only)........ 1z aa New hire retention (carryforward only)............. 1aa bb General credits from an electing large partnership (Schedule K-1 (Form 1065-B)) 1bb zz Other....................... 1zz 2 Add lines 1a through 1zz and enter here and on the applicable line of Part I 2 3 Enter the amount from Form 8844 here and on the applicable line of Part II. 3 4a Investment (Form 3468, Part III) (attach Form 3468)........ 4a b Work opportunity (Form 5884)............... 4b c Biofuel producer (Form 6478)............... 4c d Low-income housing (Form 8586, Part II)............ 4d e Renewable electricity, refined coal, and Indian coal production (Form 8835) 4e f Employer social security and Medicare taxes paid on certain employee tips (Form 8846) 4f g Qualified railroad track maintenance (Form 8900)......... 4g h Small employer health insurance premiums (Form 8941)....... 4h i Reserved...................... 4i j Reserved...................... 4j z Other....................... 4z 5 Add lines 4a through 4z and enter here and on the applicable line of Part II. 5 6 Add lines 2, 3, and 5 and enter here and on the applicable line of Part II.. 6 Form 3800 (2014) 130 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 4562 Depreciation and Amortization (Including Information on Listed Property) Attach to your tax return. Information about Form 4562 and its separate instructions is at www.irs.gov/form4562. OMB No. 1545-0172 Department of the Treasury Attachment Internal Revenue Service (99) Sequence No. 179 Name(s) shown on return Business or activity to which this form relates Identifying number 14 Part I Election To Expense Certain Property Under Section 179 Note: If you have any listed property, complete Part V before you complete Part I. 1 Maximum amount (see instructions)....................... 1 2 Total cost of section 179 property placed in service (see instructions)........... 2 3 Threshold cost of section 179 property before reduction in limitation (see instructions)...... 3 4 Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0-.......... 4 5 Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions......................... 5 6 (a) Description of property (b) Cost (business use only) (c) Elected cost 7 Listed property. Enter the amount from line 29......... 7 8 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7...... 8 9 Tentative deduction. Enter the smaller of line 5 or line 8................ 9 10 Carryover of disallowed deduction from line 13 of your 2013 Form 4562........... 10 11 Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions) 11 12 Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 11..... 12 13 Carryover of disallowed deduction to 2015. Add lines 9 and 10, less line 12 13 Note: Do not use Part II or Part III below for listed property. Instead, use Part V. Part II Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.) 14 Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions)...................... 14 15 Property subject to section 168(f)(1) election.................... 15 16 Other depreciation (including ACRS)...................... 16 Part III MACRS Depreciation (Do not include listed property.) (See instructions.) Section A 17 MACRS deductions for assets placed in service in tax years beginning before 2014....... 17 18 If you are electing to group any assets placed in service during the tax year into one or more general asset accounts, check here...................... Section B Assets Placed in Service During 2014 Tax Year Using the General Depreciation System (a) Classification of property (b) Month and year (c) Basis for depreciation (d) Recovery placed in (business/investment use period service only see instructions) (e) Convention (f) Method (g) Depreciation deduction 19a 3-year property b 5-year property c 7-year property d 10-year property e 15-year property f 20-year property g 25-year property h Residential rental property i Nonresidential real property 25 yrs. S/L 27.5 yrs. MM S/L 27.5 yrs. MM S/L 39 yrs. MM S/L MM S/L Section C Assets Placed in Service During 2014 Tax Year Using the Alternative Depreciation System 20a Class life b 12-year c 40-year Part IV Summary (See instructions.) S/L 12 yrs. S/L 40 yrs. MM S/L 21 Listed property. Enter amount from line 28.................... 21 22 Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21. Enter here and on the appropriate lines of your return. Partnerships and S corporations see instructions. 22 23 For assets shown above and placed in service during the current year, enter the portion of the basis attributable to section 263A costs....... 23 For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N Form 4562 (2014) TheTaxReview Preparing S Corporation Returns Appendix 131

APPENDIX Form 4562 (2014) Page 2 Part V Listed Property (Include automobiles, certain other vehicles, certain aircraft, certain computers, and property used for entertainment, recreation, or amusement.) Note: For any vehicle for which you are using the standard mileage rate or deducting lease expense, complete only 24a, 24b, columns (a) through (c) of Section A, all of Section B, and Section C if applicable. Section A Depreciation and Other Information (Caution: See the instructions for limits for passenger automobiles.) 24a Do you have evidence to support the business/investment use claimed? Yes No 24b If Yes, is the evidence written? Yes No (c) (e) (a) (b) (f) (g) (h) (i) Business/ (d) Basis for depreciation Type of property (list Date placed Recovery Method/ Depreciation Elected section 179 investment use Cost or other basis (business/investment vehicles first) in service period Convention deduction cost percentage use only) 25 Special depreciation allowance for qualified listed property placed in service during the tax year and used more than 50% in a qualified business use (see instructions). 25 26 Property used more than 50% in a qualified business use: % % % 27 Property used 50% or less in a qualified business use: % S/L % S/L % S/L 28 Add amounts in column (h), lines 25 through 27. Enter here and on line 21, page 1. 28 29 Add amounts in column (i), line 26. Enter here and on line 7, page 1............ 29 Section B Information on Use of Vehicles Complete this section for vehicles used by a sole proprietor, partner, or other more than 5% owner, or related person. If you provided vehicles to your employees, first answer the questions in Section C to see if you meet an exception to completing this section for those vehicles. 30 Total business/investment miles driven during the year (do not include commuting miles). 31 Total commuting miles driven during the year 32 Total other personal (noncommuting) miles driven......... 33 Total miles driven during the year. Add lines 30 through 32....... 34 Was the vehicle available for personal use during off-duty hours?..... 35 Was the vehicle used primarily by a more than 5% owner or related person?.. (a) Vehicle 1 (b) Vehicle 2 (c) Vehicle 3 (d) Vehicle 4 (e) Vehicle 5 (f) Vehicle 6 Yes No Yes No Yes No Yes No Yes No Yes No 36 Is another vehicle available for personal use? Section C Questions for Employers Who Provide Vehicles for Use by Their Employees Answer these questions to determine if you meet an exception to completing Section B for vehicles used by employees who are not more than 5% owners or related persons (see instructions). 37 Do you maintain a written policy statement that prohibits all personal use of vehicles, including commuting, by Yes No your employees?................................ 38 Do you maintain a written policy statement that prohibits personal use of vehicles, except commuting, by your employees? See the instructions for vehicles used by corporate officers, directors, or 1% or more owners.. 39 Do you treat all use of vehicles by employees as personal use?................ 40 Do you provide more than five vehicles to your employees, obtain information from your employees about the use of the vehicles, and retain the information received?................... 41 Do you meet the requirements concerning qualified automobile demonstration use? (See instructions.)... Note: If your answer to 37, 38, 39, 40, or 41 is Yes, do not complete Section B for the covered vehicles. Part VI Amortization (a) Description of costs (b) Date amortization begins (c) Amortizable amount 42 Amortization of costs that begins during your 2014 tax year (see instructions): (d) Code section (e) Amortization period or percentage (f) Amortization for this year 43 Amortization of costs that began before your 2014 tax year............. 43 44 Total. Add amounts in column (f). See the instructions for where to report........ 44 Form 4562 (2014) 132 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1120S U.S. Income Tax Return for an S Corporation Do not file this form unless the corporation has filed or is attaching Form 2553 to elect to be an S corporation. Information about Form 1120S and its separate instructions is at www.irs.gov/form1120s. Department of the Treasury Internal Revenue Service For calendar year 2014 or tax year beginning, 2014, ending, 20 A S election effective date B Business activity code number (see instructions) TYPE OR PRINT Name Number, street, and room or suite no. If a P.O. box, see instructions. City or town, state or province, country, and ZIP or foreign postal code OMB No. 1545-0123 14 D Employer identification number E Date incorporated F Total assets (see instructions) C Check if Sch. M-3 attached $ G Is the corporation electing to be an S corporation beginning with this tax year? X Yes No If Yes, attach Form 2553 if not already filed H Check if: (1) Final return (2) Name change (3) Address change (4) Amended return (5) S election termination or revocation I Enter the number of shareholders who were shareholders during any part of the tax year......... 2 Caution. Include only trade or business income and expenses on lines 1a through 21. See the instructions for more information. Income Deductions (see instructions for limitations) Tax and Payments 4/1/14 444200 1 a Gross receipts or sales............... 1a b Returns and allowances.............. 1b c Balance. Subtract line 1b from line 1a................... 1c 2 Cost of goods sold (attach Form 1125-A).................. 2 3 Gross profit. Subtract line 2 from line 1c.................. 3 4 Net gain (loss) from Form 4797, line 17 (attach Form 4797)............ 4 5 Other income (loss) (see instructions attach statement)............. 5 6 Total income (loss). Add lines 3 through 5................ 6 7 Compensation of officers (see instructions attach Form 1125-E).......... 7 8 Salaries and wages (less employment credits)................ 8 9 Repairs and maintenance....................... 9 10 Bad debts........................... 10 11 Rents............................. 11 12 Taxes and licenses......................... 12 13 Interest............................ 13 14 Depreciation not claimed on Form 1125-A or elsewhere on return (attach Form 4562).... 14 15 Depletion (Do not deduct oil and gas depletion.)............... 15 16 Advertising........................... 16 17 Pension, profit-sharing, etc., plans.................... 17 18 Employee benefit programs...................... 18 19 Other deductions (attach statement)................... 19 20 Total deductions. Add lines 7 through 19................ 20 21 Ordinary business income (loss). Subtract line 20 from line 6........... 21 22 a Excess net passive income or LIFO recapture tax (see instructions).. 22a b Tax from Schedule D (Form 1120S)........... 22b c Add lines 22a and 22b (see instructions for additional taxes)............ 22c 23 a 2014 estimated tax payments and 2013 overpayment credited to 2014 23a b Tax deposited with Form 7004............ 23b c Credit for federal tax paid on fuels (attach Form 4136)..... 23c d Add lines 23a through 23c...................... 23d 24 Estimated tax penalty (see instructions). Check if Form 2220 is attached...... 24 25 Amount owed. If line 23d is smaller than the total of lines 22c and 24, enter amount owed.. 25 26 Overpayment. If line 23d is larger than the total of lines 22c and 24, enter amount overpaid.. 26 27 Enter amount from line 26 Credited to 2015 estimated tax Refunded 27 Sign Here Paid Preparer Use Only Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. May the IRS discuss this return with the preparer shown below Nate Greener Pastures, Inc. 123 Prairie Point Farmdale, MN 55555 Signature of officer Date Title Print/Type preparer s name Preparer's signature Date 4/1 12/31 14 427,950 31-2345678 4/1/14 153,825 (see instructions)? 427,950 64,925 363,025 363,025 105,600 76,280 9,000 18,211 916 1,937 3,000 25,667 31,200 17,935 289,746 73,279 PTIN Check if self-employed Firm s name Firm's EIN Firm's address Phone no. For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11510H Form 1120S (2014) X Yes 0 0 No TheTaxReview Preparing S Corporation Returns Appendix 133

APPENDIX Form 1120S (2014) Page 3 Schedule K Shareholders Pro Rata Share Items Total amount 1 Ordinary business income (loss) (page 1, line 21).............. 1 73,279 2 Net rental real estate income (loss) (attach Form 8825)............ 2 3 a Other gross rental income (loss).......... 3a b Expenses from other rental activities (attach statement).. 3b c Other net rental income (loss). Subtract line 3b from line 3a.......... 3c 4 Interest income........................ 4 566 5 Dividends: a Ordinary dividends................... 5a b Qualified dividends.......... 5b 6 Royalties.......................... 6 7 Net short-term capital gain (loss) (attach Schedule D (Form 1120S))........ 7 8 a Net long-term capital gain (loss) (attach Schedule D (Form 1120S))........ 8a b Collectibles (28%) gain (loss)........... 8b c Unrecaptured section 1250 gain (attach statement).... 8c 9 Net section 1231 gain (loss) (attach Form 4797).............. 9 10 Other income (loss) (see instructions).. Type 10 11 Section 179 deduction (attach Form 4562)................ 11 23,600 12 a Charitable contributions..................... 12a b Investment interest expense.................... 12b c Section 59(e)(2) expenditures (1) Type (2) Amount 12c(2) d Other deductions (see instructions)... Type 12d 13a Low-income housing credit (section 42(j)(5))............... 13a b Low-income housing credit (other).................. 13b c Qualified rehabilitation expenditures (rental real estate) (attach Form 3468, if applicable).. 13c d Other rental real estate credits (see instructions) Type 13d e Other rental credits (see instructions)... Type 13e f Biofuel producer credit (attach Form 6478)............... 13f g Other credits (see instructions)..... Type P Small Business Health 13g 9,000 14a Name of country or U.S. possession Care Tax Credit b Gross income from all sources................... 14b c Gross income sourced at shareholder level............... 14c Foreign gross income sourced at corporate level d Passive category....................... 14d e General category....................... 14e f Other (attach statement)..................... 14f Deductions allocated and apportioned at shareholder level g Interest expense........................ 14g h Other........................... 14h Deductions allocated and apportioned at corporate level to foreign source income i Passive category....................... 14i j General category....................... 14j k Other (attach statement)..................... 14k Other information l Total foreign taxes (check one): Paid Accrued.......... 14l m Reduction in taxes available for credit (attach statement)........... 14m n Other foreign tax information (attach statement) 15 a Post-1986 depreciation adjustment.................. 15a 485 b Adjusted gain or loss...................... 15b c Depletion (other than oil and gas).................. 15c d Oil, gas, and geothermal properties gross income............. 15d e Oil, gas, and geothermal properties deductions.............. 15e f Other AMT items (attach statement).................. 15f Income (Loss) Deductions Credits Foreign Transactions Alternative Minimum Tax (AMT) Items Items Affecting Shareholder Basis 16 a Tax-exempt interest income.................... 16a b Other tax-exempt income..................... 16b c Nondeductible expenses..................... 16c d Distributions (attach statement if required) (see instructions).......... 16d e Repayment of loans from shareholders................. 16e 9,550 10,000 Form 1120S (2014) 134 Appendix TheTaxReview Preparing S Corporation Returns

APPENDIX Form 1120S (2014) Page 4 Schedule K Shareholders Pro Rata Share Items (continued) Total amount Other Information 17a Investment income....................... 17a b Investment expenses...................... 17b c Dividend distributions paid from accumulated earnings and profits........ 17c d Other items and amounts (attach statement) 566 Reconciliation 18 Income/loss reconciliation. Combine the amounts on lines 1 through 10 in the far right column. From the result, subtract the sum of the amounts on lines 11 through 12d and 14l 18 Schedule L Balance Sheets per Books Beginning of tax year End of tax year 1 Cash............. 2a Trade notes and accounts receivable... b Less allowance for bad debts...... 3 Inventories........... 4 U.S. government obligations...... 5 Tax-exempt securities (see instructions).. 6 Other current assets (attach statement)... 7 Loans to shareholders........ 8 Mortgage and real estate loans..... 9 Other investments (attach statement)... 10a Buildings and other depreciable assets... b Less accumulated depreciation..... 11a Depletable assets......... b Less accumulated depletion...... 12 Land (net of any amortization)...... 13a Intangible assets (amortizable only).... b Less accumulated amortization..... 14 Other assets (attach statement)..... 15 Total assets........... Liabilities and Shareholders Equity 16 Accounts payable......... 17 Mortgages, notes, bonds payable in less than 1 year 18 Other current liabilities (attach statement).. 19 Loans from shareholders....... 20 Mortgages, notes, bonds payable in 1 year or more 21 Other liabilities (attach statement).... 22 Capital stock........... 23 Additional paid-in capital....... 24 Retained earnings......... 25 Adjustments to shareholders equity (attach statement) 26 Less cost of treasury stock...... 27 Total liabilities and shareholders equity.. Assets (a) (b) (c) (d) ( ) ( ) 40,115 25,537 ( ) ( ) ( ) ( ) ( ) ( ) 50,245 130,147 9,100 14,578 153,825 2,671 20,459 100,000 30,695 ( ) ( ) 153,825 Form 1120S (2014) TheTaxReview Preparing S Corporation Returns Appendix 135

APPENDIX Form 1120S (2014) Page 5 Schedule M-1 Reconciliation of Income (Loss) per Books With Income (Loss) per Return Note. The corporation may be required to file Schedule M-3 (see instructions) 1 Net income (loss) per books...... 2 Income included on Schedule K, lines 1, 2, 3c, 4, 5a, 6, 7, 8a, 9, and 10, not recorded on books this year (itemize) 3 Expenses recorded on books this year not included on Schedule K, lines 1 through 12 and 14l (itemize): a Depreciation $ b Travel and entertainment $ 550 Salaries and Wages 9,000 5 Income recorded on books this year not included on Schedule K, lines 1 through 10 (itemize): a Tax-exempt interest $ 6 Deductions included on Schedule K, lines 1 through 12 and 14l, not charged against book income this year (itemize): a Depreciation $ 7 Add lines 5 and 6..... 4 Add lines 1 through 3........ 50,245 8 Income (loss) (Schedule K, line 18). Line 4 less line 7 50,245 Schedule M-2 Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders Undistributed Taxable Income Previously Taxed (see instructions) 1 Balance at beginning of tax year..... 2 Ordinary income from page 1, line 21... 3 Other additions..... Interest..... 4 Loss from page 1, line 21....... 5 Other reductions.......... 6 Combine lines 1 through 5....... 7 Distributions other than dividend distributions 8 Balance at end of tax year. Subtract line 7 from line 6 40,695 9,550 (a) Accumulated adjustments account 0 73,279 566 (b) Other adjustments account ( ) ( ) ( ) 33,150 40,695 10,000 30,695 (c) Shareholders undistributed taxable income previously taxed Form 1120S (2014) 136 Appendix TheTaxReview Preparing S Corporation Returns

Final Exam Circle the correct answer. Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. Do not mail. CPE/CE 1) Which of the following statements about the fundamentals of S corporation taxation is true? a) The shareholder s share of ordinary income or loss is taxed to the S corporation based on the shareholder s percentage of stock ownership. b) An S corporation provides more limited liability than a C corporation. c) Individuals can avoid at-risk and passive loss limitations by forming an S corporation. d) The same general rules that apply to recognition of income and deductions for sole proprietorships also apply to S corporations. 2) Which of the following characteristics allows a corporation to elect to be an S corporation? a) One of the shareholders is an IRA. b) The corporation has two classes of stock c) All shareholders are U.S. citizens or residents. d) A single-member LLC taxed as a corporation is a shareholder. 3) Stella acquired a 50% ownership in an S corporation by making a capital contributing of $10,000. In 2014, the S corporation had the following activity: Ordinary income of $15,000, Nondeductible expenses of $2,000, and Distributions of $5,000. What is Stella s basis in her S corporation stock at the end of 2014? a) $10,000 b) $14,000 c) $15,000 d) $18,000 4) In which of the following situations will an S corporation shareholder recognize a taxable distribution? a) The distribution is greater than AAA and the S corporation has earnings and profits. b) The distribution is less than the accumulated adjustments account. c) The S corporation does not have earnings and profits and the distribution is greater than AAA but less than the balance in the other adjustments account. d) The S corporation does not have earnings and profits and the distribution is greater than AAA but less than the shareholders basis in the stock. DO NOT MAIL Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. TheTaxReview Preparing S Corporation Returns Final Exam 137

DO NOT MAIL Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. 5) Which of the following statements is correct for a corporation electing S corporation status or an S corporation terminating its status as an S corporation? a) All shareholders must consent to an S corporation election. b) There is no late election relief if the corporation fails to timely file for S corporation status. c) Once the S election is in place, a new shareholder must formally consent to the S election. d) The election may be revoked with consent of 45% of the S corporation shareholders. 6) Nate and Tyler formed a corporation called Greener Pastures, Inc. and elected S corporation status. Which of the following is one of the steps Nate and Tyler made in the formation? a) Greener Pastures, Inc. elected to use a fiscal year beginning on April 1, 2014 and ending March 31, 2015. b) Greener Pastures, Inc. will pay any employee-shareholder expenses. c) Greener Pastures, Inc. filed Form 2553 to elect S corporation status. d) Greener Pastures, Inc. will use the accrual method of accounting. 7) Which of the following revenue sources is considered when determining reasonable compensation for a shareholder-employee? a) Gross receipts from the services of the shareholder. b) Gross receipts from non-shareholder employees. c) Gross receipts generated by corporate capital. d) Gross receipts generated by corporate equipment. 8) Start-up costs for an S corporation include which of the following costs? a) Training wages for employees who will work for the business. b) Legal fees incident to incorporation. c) Issuing and selling stock. d) Transferring assets to the S corporation. 9) When may a shareholder deduct expenses paid on behalf of an S corporation? a) The shareholder-employee incurred expenses for business use of the home attributable to rent paid by the S corporation. b) The shareholder-employee voluntarily paid expenses of the S corporation. c) The S corporation adopted a resolution requiring the shareholder pay corporate expenses as necessary and that they would not be reimbursed by the corporation. d) The shareholder-employee has a right to reimbursement for expenses but does not submit any expenses for reimbursement from the corporation 138 Final Exam TheTaxReview Preparing S Corporation Returns

10) Brenda and Beth created an S corporation on May 1 to make and sell custom quilts. The same day they purchase a quilting machine, an asset with a sevenyear recovery period for $20,000. They elect out of the special bonus depreciation method and do not claim the Section 179 deduction. Using the 200DB depreciation method, what is the first short tax year depreciation on this asset? a) $1,429 b) $1,905 c) $2,858 d) $3,810 11) A fiscal tax year is which of the following? a) 12 consecutive months beginning January 1 and ending December 31. b) Any tax year that is less than 12 months. c) A tax year ending on the 15th of any month. d) 12 consecutive months ending on the last day of any month except December. 12) On which line of Form 1120S, page 1, are SIMPLE plan employee elective deferrals entered? a) Line 7, Compensation of officers. b) Line 8, Salaries and wages. c) Line 17, Retirement plans, etc. d) Line 18, Employee benefit programs. 13) With regard to filling out Form 1120S, U.S. Income Tax Return for an S Corporation, which of the following is reported on page 1? a) Sale of depreciable property on which the Section 179 deduction was claimed. b) Depreciation claimed on assets used in a trade or business activity. c) Tax-exempt interest income. d) Section 179 deduction. 14) Which of the following is a separately stated item which passes through to a shareholder on Schedule K-1? a) 200% DB depreciation. b) Cost of goods sold. c) Rent paid by the S corporation. d) Charitable contributions. 15) Which of the following statements about transferring items from a shareholder s Schedule K-1 to his or her Form 1040 is true? a) Ordinary business income from line 1, Schedule K-1 is reported directly on to line 17, Form 1040. b) Employee-shareholder expenses are reported on Schedule K-1 and Part II, Schedule E (1040). c) Limits on the allowable Section 179 expense apply to the shareholder separately from the S corporation. d) All items of income from Schedule K-1 are subject to self-employment tax. DO NOT MAIL Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. TheTaxReview Preparing S Corporation Returns Final Exam 139

16) Which of the following list of assets is in the correct allocation order when using the residual method in completing Form 8594 to allocate the sale price of a business? a) Government securities Equipment Goodwill Inventory. b) Certificate of deposit Savings account Patent Goodwill. c) Inventory Furniture Copyright Going concern. d) Checking account Foreign currency Equipment Inventory. DO NOT MAIL Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. 17) Kelly is negotiating the sale of her business to Allison. Allison will likely want to allocate as much of the purchase price as possible to which of the following asset categories? a) Land. b) Buildings and equipment. c) Goodwill. d) Inventory. 18) When an S corporation liquidates, which of the following is true? a) Suspended losses due to basis limitation are recognized. b) Taxable gain or loss flows through to the shareholders. c) Suspended passive activity losses are not allowed. d) Losses suspended due to at-risk limitations are lost. 19) How is an installment note taxed to an S corporation when it distributes the note in liquidation? a) The S corporation does not recognize gain. b) The S corporation recognizes ordinary income. c) The S corporation recognizes capital gain. d) The S corporation recognizes deferred income. 20) Which of the following statements about a shareholder reporting the sale of an S corporation business on his or her Form 1040 is true? a) The interest income portion of each installment payment is reported on Form 6252. b) The gross proceeds from the liquidation of stock is reported directly on line 13, Form 1040. c) The principal portion of each installment payment is reported on Form 6252. d) The gross proceeds from the liquidation of stock is reported on Form 6252. 140 Final Exam TheTaxReview Preparing S Corporation Returns

INSTRUCTIONS Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at www.thetaxbook.com. It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to www.thetaxbook.com. 2) Click on Login to Education Center, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The email address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an email address, or have not provided one, please call our toll-free number at 1-866-919-5277 to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at 1-866-919-5277. 5) Select the Preparing S Corporation Returns Exam and click the Take Exam button. 6) You will be taken to the Final Exam. First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit Answers when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print. DO NOT MAIL Go to www.thetaxbook.com and click on Login to Education Center to take the Final Exam. TheTaxReview Preparing S Corporation Returns Final Exam 141

142 Final Exam TheTaxReview Preparing S Corporation Returns

Index A AAA, 15 Accounting method, 29 Accounting periods, 47 Accumulated adjustments account, 1, 15 Advertising, 56 Amortization, 35 Asset acquisition statement, 83, 92 At-risk basis, 12 B Bad debts, 55 Balance sheets per books, 57 Basis, 9 Basis adjustments, 10 Basis restorations, 12 Business assets, 80 Business never starts, 36 Buyer s classification, 85 C Calendar tax year, 47 Capital contributions, 28 Capital expenses, 33 Capital gains and losses, 102 Cash flow, 91 C corporation, 3 Chapter 1 basics of S corporation tax return preparation, 1 Chapter 2 S corporation scenario day one through end of year, 27 Chapter 3 comprehensive S corporation example preparing form 1120S, 47 Chapter 4 sale of a S corporation, 79 Classes of assets, 81 Compensation of officers, 50, 55 Complete liquidation, 87 Comprehensive example, 3 Consideration, 79, 81 Corporate liquidations, 81 Cost of goods sold, 53 Course completion instructions, ii Course overview, i CPE/CE credit hours, i D Deductible part of self-employment tax, 68 Deductions, 35, 55 Deemed dividends, 17 Depletion, 56 Depreciation, 56 Depreciation in a short tax year, 40 Depreciation recapture, 79 Direct loans, 12 Distributions, 15, 29 E Earnings and profits, 15 Electing small business trust, 5 Electing to amortize, 35 Electing to be an S corporation, 19 Election by a small business corporation, 19 Election to close books, 22 Eligible shareholders, 5 Employee benefit programs, 51, 56 Employee benefits, 32 Employee business expense, 37 Employees, 29 Employee-shareholder expenses, 28 Employee-shareholders of corporations, 3 E&P, 15 ESBT, 5 Examination instructions, ii Expiration date, i F Final exam, 137 Final examination instructions, ii, 141 Fiscal tax year, 48 Form 966, 88 Form 1040, 68 Form 1120S, 47, 95 Form 2553, 19 Form 3800, 72 Form 4562, 71, 92 Form 4797, 97 Form 6252, 103 Form 8082, 48 Form 8594, 81, 83, 92 Fringe benefits, 3, 31 G Goodwill, 79 Grantor trust, 6 Gross receipts, 53 H Half-year convention, 39 Health savings account, 47 Health savings account deduction, 68 I Inadvertent termination, 21 Income, 53 Income or loss, 67 Income statement, 90 Incorporation agreement, 28 Ineligible shareholders, 5 Installment note, 89 Installment sale income, 103 Interest, 56 Inventory, 29 CPE/CE L Learning objective 1-A self-quiz, 4 Learning objective 1-B self-quiz, 8 Learning objective 1-C self-quiz, 14 Learning objective 1-D self-quiz, 18 Learning objective 1-E self-quiz, 22 Learning objective 2-A self-quiz, 29 Learning objective 2-B self-quiz, 33 Learning objective 2-C self-quiz, 36 Learning objective 2-D self-quiz, 38 Learning objective 2-E self-quiz, 43 Learning objective 3-A self-quiz, 49 Learning objective 3-B self-quiz, 52 Learning objective 3-C self-quiz, 60 Learning objective 3-D self-quiz, 66 Learning objective 3-E self-quiz, 75 Learning objective 4-A self-quiz, 84 Learning objective 4-B self-quiz, 86 Learning objective 4-C self-quiz, 89 Learning objective 4-D self-quiz, 93 Learning objective 4-E self-quiz, 104 Learning objectives, iii Line-by-line explanations, 53 Liquidation, 92 Loan basis, 9 Loan guarantees, 12 Loans, 12 Loans as a second class of stock, 7 Loss limitations, 88 M maintenance, 55 Making the election, 35 Mid-month convention, 39 Mid-quarter convention, 40 N NASBA, i National Association of State Boards of Accountancy, i TheTaxReview Preparing S Corporation Returns Index 143

INDEX O OAA, 15, 16 One-class-of-stock rule, 7 Open account debt, 1, 13 Ordering rules, 16 Ordinary business income, 2, 60 Organizational costs, 27, 33 Other adjustments account, 15, 16 Other deductions, 57 Overview, i P Partnership, 2 Passing grade, i Passive investment violation, 21 Pass-through entities fiscal year, 67 Payment for services, 30 Pension, profit-sharing, etc., 51 Pension, profit-sharing, etc. plans, 56 Post-termination expenses, 88 Post termination transition period, 15, 17 Prerequisites, i Program content, i Pro-rata allocation, 60 PTTP, 15, 17 Publication date, i Q QSST, 5 QSub, 1, 6 Qualified subchapter S subsidiary, 1, 6 Qualified subchapter S trust, 5 R Reasonable compensation, 30 Recommended participants, i Record retention, i Reimbursable expenses, 37 Relief for late S corporation elections, 19 Rent, 55 Repairs, 55 Repayment of reduced basis debt, 13 Required tax year for S corporations, 48 Residual method, 81 Retained earnings, 58 Revenue Procedure 2013-30, 19 S Salaries, 55 Salaries and wages, 50 Salary comparisons, 31 Sale of assets, 86 Sale of business example, 89 Sale of S corporation, 79, 93 Sale of stock, 86 Schedule C, 2 Schedule D, 102 Schedule E, 67 Schedule K, 62 Schedule K-1, 64 Schedule K-1 (Form 1120S), 65, 99 Schedule K-1 missing or erroneous, 48 Schedule L, 57 Schedule M-1, 58 Schedule M-2, 66 S corporation, 1, 3 S corporation example, 47 S corporation formation, 1 S corporation liquidation, 87 S corporation qualifications, 5 S corporation scenario, 27 S corporation taxation, 3 S corporation termination year, 21 Section 179, 40, 41, 43 Section 179 deduction, 4 Self-employed health insurance, 31 Self-employed health insurance deduction, 68 Self-employed SEP, SIMPLE, and qualified plans, 68 Seller s classification, 85 Separately stated items, 47, 61 Shareholder basis, 9 Shareholder consent, 19 Shareholder employees, 49 Shareholder revocation, 20 Shareholder s use of home, 38 Short tax year, 27, 39, 47, 48 Short tax year conventions, 39 SIMPLE plan, 32 Small business health care credit, 49 Sole proprietorship, 2 Special bonus depreciation, 42 Special disclosure, 61 Start-up costs, 27, 34 Stock basis, 9 Straight debt safe harbor, 8 T Taxes and licenses, 51, 56 Tax year, 28 Termination of S corporation status, 20 Testamentary trust, 6 Trade or business, 79, 80 W Wages, 55 144 Index TheTaxReview Preparing S Corporation Returns

Course Evaluation 2015 Preparing S Corporation Returns Self-Study CPE/CE CPE/CE Please comment on all the following evaluation points for this program and assign a number grade, using a 1 5 scale, with 5 as the highest. Grade (1 5) 1) Were the stated learning objectives met? Comments: 2) Were the prerequisite requirements appropriate? Comments: 3) Were program materials accurate? Comments: 4) Were program materials relevant? Comments: 5) Did the program materials contribute to the achievement of the learning objectives? Comments: 6) Was the time allotted to the learning activity appropriate? Comments: 7) Was the use of the online test-taking satisfactory? Comments: 8) Did the online grading system work well? Comments: 9) Was the study guide appropriate and complete with regard to assisting with learning the material? Comments: 10) Did the layout and overall visual presentation make the study guide easy to read and understand? Comments: Other feedback or suggestions: Please mail to: Tax Materials, Inc. 15105 Minnetonka Ind. Rd., Ste 221, Minnetonka, MN 55345 Thank you for helping us improve our CPE/CE course offerings! TheTaxReview Preparing S Corporation Returns Course Evaluation 145