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, 2016. It has not foreign partners orother foreign dealings. 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 makes no special elections.
Information on Partnership Formation:
Two individuals formed the partnership on January 1, 2016: 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 basis of $48,000 when originally acquired on January 2, 2014. Parker is an active general partner who designs and develops new products. For book purposes, the company recorded the contribution of stock at FMV.
Inventory and COGS
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 in Schedule A. No other costs or expenses are allocated to cost of goods sold. The corporation 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 July 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 depreciation on this property:
Year Book & Reg Tax Deprec. AMT Depreciation
- $ 142,900 $ 107,100
- 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 privateequity bonds. Assume that no expenses of the company are allocable to the taxexempt 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 Schedule 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