FORMING A PARTNERSHIP & PARTNERSHIP RETURN (FORM 1065)

For the current year, a partnership has sales revenue of $500,000, cost of goods sold of $300,000, capital gains of $60,000, salary expenses of $120,000, and charitable contributions of $30,000. If there are two equal partners, what does each report on their separate income tax returns for the current year? 1) Partnership income of $40,000, capital gains of $30,000, and charitable contributions of $15,000 2) Partnership income of $25,000 and capital gain of $30,000 3) Partnership income of $55,000 4) Partnership income of $70,000 and charitable contributions of $15,000

Answer: Partnership income of $40,000, capital gains of $30,000, and charitable contributions of $15,000

John owns 100% of a residential contracting business. Capital is a material income-producing factor. John's services to the business during the year were worth $30,000. John's son, Alex is interested in eventually working in his father's business. On January 1, Alex receives a gift of 20% of his father's interest in the business. Alex performed no services for the business during the year. If the resulting partnership had a profit of $100,000 for the current tax year, how much of the partnership profit should be allocated to Alex?

Answer: $14,000 Alex's share of the partnership profits is $14,000. The total partnership profit must first be reduced by the reasonable compensation of John for services rendered of $30,000. Alex's share is then 20% of the reduced profits or $14,000 ($100,000 - $30,000 = $70,000 × 20%)

The L&J Auto Parts Store operated as an accrual based partnership and filed a Form 1065. In addition to receipts from parts sales of $250,000, they had the following other items of income and expenses for the current year: Salaries $(50,000) Insurance $(5,000) Charitable Contributions $(5,000) Licenses $(5,000) Rental Income $25,000 Guaranteed payments to partners $(75,000) What is the correct Ordinary Income or Loss that L&J should report on Form 1065 for the current year? $85,000 $115,000 $100,000 $150,000

Answer: 115,000 Charitable contributions and rental income are not considered by the partnership in determining Ordinary Income or Loss of the partnership. These items instead flow through to the partners separately on Schedule K-1. Ordinary Income equals $115,000 ($250,000 sales less ordinary expenses of $135,000). Guaranteed payments to partners are deductible by the partnership and reported to the partner on Schedule K-1.

Kasemi is a single taxpayer who has $4,000 in long-term capital gains, $7,000 in short-term capital gains, and $2,000 in short-term capital losses. He is also a 50 percent partner in the OK partnership which had a long-term capital loss this year of $20,000. Kasemi is currently preparing his tax return for the year. Which of the following statements is correct? He can deduct a capital loss for the year on his tax return of $1,000. He can deduct a capital loss for the year on his tax return of $3,000. He can deduct a capital loss for the year on his tax return of $3,000 but must also report a short-term capital gain of $5,000. He must report a net short-term capital gain of $1,000.

Answer: He can deduct a capital loss for the year on his tax return of $1,000. Capital gains and losses pass through from a partnership directly to the tax return of the individual partners. Therefore, 50 percent of the partnership long-term capital loss passes through to Kasemi (or $10,000). After that, his long-term capital items net to a $6,000 loss ($10,000 loss and $4,000 gain). His short-term capital items net to a $5,000 gain ($7,000 gain and $2,000 loss). The long-term loss and short-term gain are then netted to arrive at a $1,000 loss ($6,000 loss and $5,000 gain). That amount is below the $3,000 maximum and can be deducted

The Haynes and Jackson Partnership pays rent for its retail store in Year One of $42,000. How is this expense reported for federal income tax purposes? 1). Each partner deducts his or her portion of the expense on their individual tax returns as a business expense (Schedule C). 2). The partnership deducts the rent in arriving at the ordinary partnership business income for the period. 3). Each partner deducts his or her portion of the expense in their individual tax returns as a miscellaneous itemized deduction. 4). The partnership capitalizes the cost of the rent so that it does not affect the ordinary partnership business income

Answer: The partnership deducts the rent in arriving at the ordinary partnership business income for the period For tax purposes, a number of items earned or incurred by a partnership (such as charitable contributions and capital gains) are passed directly through to the individual partners. Those items appear on the appropriate spots on those partners' individual tax returns. All other revenues and expenses are netted together to get a single figure as the ordinary partnership business income. That single figure is then allocated to the individual partners who report their share on their own returns as partnership ordinary or loss. Rent expense is not an item that is passed through to the partners directly and, therefore, it is included in the computation of ordinary partnership business income.

The Up and Down Partnership has several revenues and expenses this year. Sales of inventory amounted to $600,000, cost of goods sold and other operating expenses were $410,000, dividend revenue was $8,000, long-term capital gains were $9,000, and charitable contributions amounted to $11,000. For income tax purposes, what is the ordinary business income for this partnership that should be allocated to the various partners? 1). $190,000 2). $199,000 3). $198,000 4). $207,000

Answers: $190,000 For a partnership, a number of revenues and expenses are separated and passed through directly the income tax returns of the individual partners. Remaining items are lumped together to determine ordinary income. Dividend revenue, capital gains and losses, and charitable contributions are all pass-through items. That leaves sales of $600,000 and cost of goods sold and operating expenses of $410,000 for an ordinary income figure of $190,000.

Shizaam Bakery operates as a calendar year partnership. Shizaam's two partners, Kalla and Henry share profits and losses 60% and 40%, respectively. For the tax year ended December 31, Shizaam had the following income and expenses: Gross sales $270,000 Cost of goods sold $80,000 Interest income from bank $2,500 Employee wages $50,000 Short-term capital loss $5,000 Compute the partnership's ordinary income and flow-through amounts to partners. 1). Kalla ordinary income $85,500 and short-term capital loss $3,000; Henry ordinary income $57,000 and short-term capital loss $2,000 2). Kalla ordinary income $82,500; Henry ordinary income $55,000 3). Kalla ordinary income $81,000, interest income 1,500 and short-term capital loss $3,000; Henry ordinary income $54,000, interest income 1,000 and short-term capital loss $2,000 4). Kalla ordinary income $84,000, interest income $1,500 and short-term capital loss $3,000; Henry ordinary income $56,000, interest income $1,000 and short term capital loss $2,000

Answers: Kalla ordinary income $84,000, interest income $1,500 and short-term capital loss $3,000; Henry ordinary income $56,000, interest income $1,000 and short term capital loss $2,000 The interest and short-term capital loss items are separately stated to partners and not part of ordinary income. Ordinary income for the partnership is $140,000 ($270,000 gross sales - $80,000 cost of goods sold - $50,000 employee wages), of which Kalla's share is $84,000 (60% of $140,000). You don't need any additional information to answer this question as D is the only possible answer. Kalla's share of interest income is $1,500 (60% of $2,500) and her share of the capital loss is $3,000 (60% of $5,000).