Partnership tax return. Prepare the 2017 partnership tax return, include the additional schedules and forms as needed. Be sure to prepare a Schedule K-1 for each partner. Project information attached.
ACCT 441 – Advanced Tax Partnership Tax Return Wayne Company is located at 90 Fifth Avenue New York City, NY . The company is a general partnership using the calendar year and accrual basis for both book and tax purposes. It engages in the development and sale of specialized self -protection armor. The employer identification number (EIN) is 99 -9999999. The company formed and began business on January 1, 201 6. It has not foreign partners orother foreign dealing s. The company is neither a tax shelter or a publicly traded partnership. The company has made no distribution other than cash and no changes in ownership have occurred during the current year. Diana Banner is the Tax Matters Partner. The partnership m akes no special elections. Information on Partnership Formation: Two individuals formed the partnership on January 1, 201 6: Diana Banner (2500 Island Way, New York City, NY) and Bruce Parker (890 Arachnid Drive, New York City, NY). For a 30% interest, Banner contributed $600,000 cash. She is an active general partner who manages the company. For a 70% interest, Parker contributed $1.16 million cash and 1,000 shares of Metro Corporation stock having a FMV of $240,000 at the time of contribution and a b asis of $48,000 when originally acquired on January 2, 2014 . Parker is an active general partner who de signs and develops new products. For book purposes, the company recorded the contribution of stock at FMV. Inventory and COGS The company uses the perio dic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected in Schedule A. No other costs or expenses are allocated to cost of goods sold. The corpora tion is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous three years was less than $10 million. The following information should also be included on the applicable form: Line 9 (a) Check (ii) (b),(c) , & (d) Not applicable (e) & (f) No Capital Gains and Losses: The company sold all 1,00 shares of Metro Corporation stock on Jul y 2, 2017 for $720,000. Fixed Assets and Depreciation: The company acquired the equipment on January 2, 2016 and placed it in service on that date. The equipment, which originally cost $1 million, is MACRS seven -year property. The company did not elect Sec. 179 expensing in the acquisition year and elected out of bonus depreciation. The company claimed the following depreci ation on this property: Year Book & Reg Tax Deprec. AMT Depreciation 2016 $ 142,900 $ 107,100 2017 244,900 191,300 On March 1, 2017 the company acquired and placed in service additional equipment costing $400,000. The company made the Sec. 179 expensing election for the entire cost of this new equipment. No depreciation or expensing is reported on Schedule A. The balance sheet is follows: January 1, 207 December 31, 2017 Account Debit Credit Debit Credit Cash $ 233,500 $ 143,450 Accounts Receivable 540,000 600,000 Inventory 1,000,000 1,200,000 Investment in corporate stock 240,000 40,000 Investment in municpal bonds 40,000 0 Equipment 1,000,000 1,400,000 Accum. Depreciation – Equipment 142,900 787,800 Accounts payable 100,000 130,000 Notes payable (short -term) 750,000 150,000 Accrued payroll taxes 3,500 5,250 Capital account balances: Diana Banner (30%) 617,130 693,120 Bruce Parker (70%) 1,439,970 1,617,280 Total $ 3,053,500 $ 3 ,053,500 $ 3,383,450 $ 3,383,450 The book income statement is as follows: Sales $ 5,000,000 Returns (250,000) Net sales $ 4,750,000 Beginning inventory $ 1,000,000 Purchases 2,000,000 Ending Inventory (1,200,000) Cost of goods sold $ (1,800,000) Gross profit $ 2,950,000 Expenses: Depreciation $ 644,900 Repairs 32,500 Insurance 35,000 Guaranteed payment (Banner) 100,000 Other salaries 700,000 Travel 20,000 Utilities 60,000 Rent Expense 150,000 Advertising 30,000 Legal and accounting fees 50,000 Charitable contributions 40,000 Payroll taxes 70,000 Business interest expense 36,000 Investment Expenses 3,600 Investment Interst Expense 4,500 Meals and entertainment 15,000 Total expenses $ (1,991,500) Gain on Sale of equipment Interest on municpal bonds 1,600 Net gain on stock sales 480,000 Dividend income 13,200 Net income $ 1,453,300 Other information: • The company paid Banner a $100,000 guaranteed payment for her management services. • The company a $40,000 cash contribution to the Boys and Girls Club on December 1 of the current year. • During the current year, the company made a $360,000 cash distribution to Banner and a $840,000 cash distribution to Parker. • The municipal bonds, acquired in 2016, are general revenue bonds, not private – equity bonds. Assume that no expenses of the company are allocable to the tax – exempt interest generated from the municipal bonds. • Use book umbers for Schedule L, M -2, and Line 1 of Schedule M -1. Also use book numbers for Item L of Sched ule K -1, and check the box for Sec. 704(c) book. • The partners share liabilities, which are recourse, in the same proportion as their ownership percentages. Required: Prepare the 2017 partnership tax return, include the additional schedules and forms as needed. Be sure to prepare a Schedule K -1 for each partner. At January 1, 2017 Banner’s basis was $873,180 and Parker’s was $1,845,420.
Partnership tax return. Prepare the 2017 partnership tax return, include the additional schedules and forms as needed. Be sure to prepare a Schedule K-1 for each partner. Project information attached.
1. Self-employment earnings As I explained the capital gain from the stock sale wouldn’t be exactly a 30/70 split between Bruce and Diana, the self-employment earnings lines are going to be a bit different, too. See my other post about Sch. K if you don’t know exactly what I’m referring to. Line 14a on Sch. K should be the net earnings excluding the guaranteed payments. This is because guaranteed payments for general partners (which Diana is) are subject to self-employment tax. You’re adding them back, because it’s not deductible for self-employment tax purposes. However, it’s only applicable to Diana. That means Diana’s share is the ordinary business income multiplied by 30%, plus the guaranteed payments. Bruce’s share is simply the ordinary business income multiplied by 70% (same as line 1 on his K-1). Line 14c is a bit more complicated. For Bruce, it’s just the gross profit minus the guaranteed payment, multiplied by his percentage. For Diana, you do the same, but then you add back the guaranteed payment at the end. Remember, lines of the K-1s should add up to the number on Schedule K. Definitely finish Sch. K first and let me know if you have questions on that before doing the K-1s. Finally, if you’re using the software, you’ll need to enter the gross income as “gross nonfarm income” under “Self-Employment” on the “Other Schedule K Items” screen. 2. Resource loans On the K-1s, you’ll have to include the recourse liabilities each partner is subject to. This includes all liabilities in the problem, so accounts payable, notes payable, and accrued payroll taxes. 3. Schedule K and K-1 Be sure to fill out the Schedule K entirely Lines 1-13d are all of the separately stated items Line 14a is the amount subject to self-employment between Bruce and Diana – this is the ordinary business income, excluding guaranteed payments Line 14c is the partnership’s gross profit Lines 17a-20b are informational, so numbers from above may be here, too. Not all of these lines will be filled, but read the line descriptions to see if something applies. Then, the K-1s become very straight-forward. The lines on Schedule K correspond directly to the K-1s – you just have to divvy up the amounts according to Bruce and Diana’s percentages. 4. Depriciation It’s not stated explicitly except for a column table, but I wanted to make it clear that the company used the same calculations for book depreciation and regular tax depreciation. There is no book-tax difference. 5. Investment Income/Expenses From what I’ve seen so far, most of you know that investment income is separately stated income (it’s on Schedule K and the K-1s and is not in the ordinary business income). Therefore, the related expenses (invesment expense and investment interest expense) are also separately stated. Be sure to look for the proper K-1 codes. If you’re using the software, there’s a dedicated line for investment interest expenses, but the investment expense will go on the “Other Deductions” line under “Section 59(e)(2)” Election Expenses” with code K. The investment expense will also need to be entered at the bottom of that screen under “Other Information” where it says “Investment Expenses [adjust]” 6. Corporate Stock Sale Between 341 and 441, there’s been a lot of discussion of “basis.” Basically, basis is created when you pay for something (this why you see on Schedule D “cost or other basis”). In this case, it’s the $48,000 Bruce originally paid for the stock. (Calculating basis can be much more complicated, but that’s not for this project.) For tax purposes, basis is increased when you pay tax on something (again, it’s more complicated in some situations, but that’s a general rule of thumb to use here). Although the company recorded the stock at its fair market value at the date of Bruce’s contribution, this was not income at the time to Bruce, so he did not pay tax on it. The “tax basis,” then, is still $48,000. This means two things: 1. The entire gain of $720,000 – $48,000 should be reported on Schedule D 2. $192,000 ($240,000 – $48,000) is “pre-contribution gain” to Bruce. This is the increase of value of the stock when he owned it personally. Therefore, of the total gain (number 1), $192,000 is only allocable to Bruce. The rest of the gain (which occurred while the partnership held the stock) is allocable to Bruce and Diana according their percentages. Also, because the book value was $240,000, the $192,000 pre-contribution gain is not accounted for on the books, so it belongs on a reconciliation of book-to-tax income. 7. Balance Sheet Correction!!! There is a typo on the ending balances of the balance sheet – the corporate stock and municipal bonds should be switched, because the corporate stock was all sold and none of the bonds were. 8. P-ship Return – Analysis of Net Income As you work on the partnership return, you may notice the “Analysis of Net Income (Loss)” on the top of page 5 of Form 1065. Line 1 tells you exactly how to get this number. This is essentially what the taxable income of the partnership would be if nothing was stated separately. This should match line 9 of the M-1, because book income doesn’t differentiate between partnership income and separately stated partner (Sch. K) items. This also means that the M-1 can have items that are related to items on page 1 and Schedule K. If you have questions, let me know! Update: Line 2 is asking what kind of entities the partners are. It’s a partnership return, but the partners themselves could be corporations, partnerships, individuals, etc. 9. Check figures: These are all on Form 1065 Page 1 line 8 – $2,950,000 Page 1 line 22 – $1,414,100 Page 5 Analysis of Net Income line 1 and M-1 line 9 – $1,751,200