Please complete the following using the information provided:
• Form 1120 (Schedule M-1) https://www.irs.gov/pub/irs-pdf/f1120.pdf
Go to the IRS Forms and Publications Web site to download the Form 1120 (Schedule M-1). Prepare the Schedule M-1 using the information below.
It has been 3 years since you have seen your client, Tim Smith (SSN: XXX-YY-ZZZZ), and he has made an appointment today to have his tax return prepared. During the appointment, he informed you that he started his self-service car wash a few years ago, and his business is a success. During the conversation, you gather the following information about the business:
- Business Name: The Car Wash
- Business address: 1046 Broadway Street, Huntington Beach, CA 92605
- Business description: Self-Service Car Wash
- Employer identification number: 99-8877665
- Date the business started: January 1, 2008
When you ask for the financial records of the business, he provides you with an income statement that he generated. You also ask for the general ledger so you can see the detail that was recorded in each of his accounts. Mr. Smith informs you that he uses the cash basis of accounting for his business.
December 31, 20XX
|Licenses and fees||$7,260|
|Salaries and wages||$67,460|
|Repairs and maintenance||$20,674|
|Net Income Before Taxes||$26,835|
The general ledger detail provides you with the following information about what is recorded under Miscellaneous expenses.
|Meals and entertainment||$2,074|
|Total miscellaneous expenses||$4,074|
When you ask the client about the lease payment, he tells you that he takes care of his mother and pays for her car lease payment with cash from the business. You confirm with Mr. Smith that his mother is not involved with his business in any way.
The depreciable property is the car wash building that cost $555,000. In your research, you learn that car wash buildings are depreciated over 15 years under the half-year convention using the Modified Accelerated Cost Recovery System (MACRS). This building is in its third year of service.
- $36,204 interest is business mortgage interest!
- Nonbusiness expenses should not be utilized and should not find their way onto tax forms
- There are some expenses in the income statement that should not be utilized in calculating taxable income
- There are a couple items that qualify to be listed on Taxes and Licenses: these can be simply added together
- Telephone is not considered a utility (water and power) but rather an “other expense”
- Meals and entertainment listed are considered business expenses but subject to limitation
- Travel is 100% business travel.
- The building is depreciated using Table A1 of Pub 946 (MACRS) over 15 years. It is now in its 3rd year of service.
Having completed part one, identify in a 800 word document (APA Format), what the differences are if using the Schedule M-3 (
https://www.irs.gov/pub/irs-pdf/i1120sm3.pdf)? As part of this discussion, explain:
- What is the Schedule M-1 and what is its purpose?
- How did you report information on your Schedule M-1? (Describe the components.)
- Describe 2 book or tax differences that may be reported on the Schedule M-1.
- When is the Schedule M-1 to be prepared?
- Who must file a Schedule M-3? How is it filed?
- What is the purpose of the Schedule M-3?
- How is the information reported on the Schedule M-3? (Describe the sections or components.)
- Describe how the Schedule M-3 differs from the Schedule M-1.
- What are temporary differences and permanent differences?