Health wise Medical Supplies Company
Health wise Medical Supplies Company is located at 2400 Second Street, El Paso, TX 79908. The company is a S corporation that uses the calendar year and accrual basis for both book and tax purposes. It engages in the development and sale of specialized surgical tools to hospitals. The employer identification number (EIN) is 11-2015013. The company formed and began business on January 1, 2013. It has no foreign partners or other foreign dealings. The company has made no distributions other than cash, and no changes in ownership have occurred during the current year. The S corporation makes no special elections. The book balance sheet information at the beginning and end of 2014 and a book income statement follow at the end.
Information on S-Corporation Formation:
Dr. Leisa H. Bailey (1200 First Pike, El Paso, TX 79909) (SSN 123-45-6789) and Dr. Thomas J. Firth (3600 Third Blvd., El Paso, TX 79910) (SSN 987-65-4321) formed the corporation on January 1, 2013 and the corporation immediately elected S corporation status effective at the beginning of 2013.
Dr. Baily contributed $1,080,000 cash for common stock in the S corporation worth $1,080,000. She also manages the corporation, for which she received a $180,000 salary for the year.
Dr. Firth contributed $2,088,000 cash and 1,000 shares of Fast growth, Inc. stock having, at the time of the contribution, a $432,000 fair market value (FMV) and an $86,400 adjusted basis for common stock in the S corporation worth $2,520,000. For book purposes, the company recorded the contribution of stock at FMV.
Inventory and Cost of Goods Sold:
The company uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected on Form 1125-A. No other costs or expenses are allocated to cost of goods sold. Note: the company is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous year was less than $10 million [§ 263A9b)(2)(B)]. There were no changes in determining inventory during the year.
Capital Gains and Losses:
The company sold all 1,000 shares of the Fast growth, Inc. common stock on July 2, 2014, for $1,296,000. Dr. Firth acquired the stock on January 2, 2011, for $86,400 and contributed the stock to the company on January 1, 2013, when its FMV was $432,000. They received a Form 1099-B from their broker, but without the basis being reported.
Fixed Assets and Depreciation:
The company acquired the equipment on January 2, 2013, and placed it in service on that date. The equipment, which cost $1.8 million, is MACRS seven-year property. The company did not elect § 179 expensing in the acquisition year and elected out of bonus depreciation.
On March 1, 2014, the company acquired and placed in service additional equipment costing $400,000. The company made all appropriate elections to obtain the fastest cost recovery for tax purposes.
Other Information:
The company paid Dr. Baily a $180,000 salary for her management services.
The company made a $54,400 cash contribution to Fort Sanders Hospital System on December 1, 2014.
During the current year, the company made a $648,000 cash distribution to Dr. Baily and a $1,512,000 cash distribution to Dr. Firth.
The municipal bonds, acquired in 2013, are general revenue bonds, not private-activity bonds. Assume that no expenses of the company are allocable to these bonds.
Ignore the impact of the Alternative Minimum Tax (AMT) and the Domestic Production Activities Deduction (U.S.PAD).
Required:
- Prepare the 2014 S corporation tax return for Health wise Medical Supplies Company along with any necessary supporting schedules. Complete Schedule M-2 on Form 1120S even though the company has never been a C corporation. For this purpose, the accumulated adjustments account at the beginning of 2014 is $102,780.
Deliverables:
Excel Spreadsheet:
- The spreadsheet should be designed such that Excel does all mathematical calculations. Use $ and % signs where appropriate.
- Clearly label your work so that it can be reviewed by your manager and understood by your client without verbal explanations.
- Show calculations for the amounts placed on Form 1120S, Page 1, Line 19 and Page 5, Schedule M-2, Lines 3a & 5a.
- Prepare depreciation schedules for each tangible asset showing the year, § 179 expense (if applicable), Bonus depreciation (if applicable), MACRS percentage, MACRS deduction, total depreciation deduction, and accumulated depreciation by year.
- Prepare a schedule for each shareholder's basis in his or her S corporation stock. For this purpose, Dr. Bailey's stock basis at the beginning of 2014 is $1,110,834 and Dr. Firth's is $2,246,346.