AC750 – Partnership Tax Return Spring, 2017

Instructor: Donna McConville

AC750-HB1

Instructor: Donna McConville

PARTNERSHIP TAX RETURN PROBLEM
Spring 2017

***REQUIREMENTS***

Be sure to read through these instructions carefully and thoroughly.

This partnership tax return problem is due no later than 5:00 p.m. on Tuesday May 2, 2017and MUST be hand delivered (e-mail submissions and drop offs are not acceptable).

You to prepare the 2016 Partnership return for Fancy Door Company, including all the required forms and schedules. Be sure to include all required forms and supporting schedules and calculations with your tax return in a format suitable for filing with the IRS. You MUST include all calculations to support the numbers on your tax return. Failure to do so will severely impact your grade on this project. See the additional information on page 6 for some helpful information in preparing the return.

You can complete this practice set with one other classmate. You only need to turn in one project with both names on it. You are only to work in teams of two. Each member of the team will receive the same grade, so each student MUST participate equally in the preparation of this practice set. You may prepare the return manually, you can use the fillable forms from the IRS website or you can use the tax software available in the ACELAB (Intuit ProSeries). The ProSeries software in the ACELAB cannot be downloaded onto your laptops. You must use the software only in the ACELAB, but you can save your work and go back to it at a later date. If you use the fillable forms from the IRS website, you can insert your numbers onto the forms, but you must do your own calculations. It will not perform calculations, but you can save your work and go back to it at a later time.

All students named on the project will receive the same grade for their project. Be careful is choosing a partner that you can work with that has the same work ethics as you. Otherwise, it may be in your best interests to work on this practice set alone. You have almost three weeks to complete this practice set due to the holiday on 4/18, so you have plenty of time to complete it, even if you do not have a partner.

Sharing information between teams is strictly prohibited and will result in a failed grade for the project and possibly the course. If you do use the ACELAB software or any other software, you are not to get any assistance from anyone on this project. You are required to work on this project with your partner without the assistance of any other person. This purpose of this project is for you to apply what you have learned from class and prepare a partnership tax return and all the required schedules/forms. This project is designed to be a learning experience and you must research some topics on your own with your partner and come to your own assumptions and conclusions.

Please be sure that you carefully read through the information provided in this handout. All the information contained on these pages is relevant and has some bearing on the preparation of your partnership tax return. You WILL have to solve for some unknowns in the preparation of this tax return. Everything will NOT be laid out purposely for you. There may be items in this partnership return that you will have to research on your own that were not covered specifically in class. You may have to make certain assumptions and decisions on your own, based on your research and the information provided, as well as what you have learned in class. Attach an assumption statement, if applicable, to your tax return project (only for major assumptions).

This assignment is worth 10% of your overall grade in the course and is due no later than the beginning of class (5:00 p.m.) on Tuesday,May2, 2017.

Grades will be penalized for poor spelling, grammar, presentation, missing schedules or calculations, etc. Be sure to review your forms and calculations before turning in your tax return. I am not responsible for calculating your answers and there are no excuses due to computer processing errors, such as addition errors. You have to take ownership of your own submissions and do not assume the calculations from the software are correct. You will need to review all calculations before submitting your tax return. This may save you valuable points.

PAY CLOSE ATTENTION TO DETAILS AND BE SURE TO COMPLETE ALL NECESSARY SECTIONS AND QUESTIONS ON THE VARIOUS FORMS. IF YOU DO NOT KNOW IF IT IS REQUIRED, LOOK IT UP IN THE INSTRUCTIONS.

FACTS:

Fancy Door Company is a partnership owned and operated by Donna McCarthy (social security number 123-45-6789), Marguerite Corcoran (social security number 987-65-4321) and Kerry Livingston (social security number 213-45-8852). Fancy Door Company specializes in custom doggy doors. The office is located at 100 Barker Road, Wolfboro, NH 03894. The partnership’s tax identification number is 12-3456781 and it uses a calendar year for tax purposes. The business was started on February 5, 2008 to manufacture and install custom doggy doors in homes and businesses (for guard dogs). The partnership has prospered and sells its products throughout the United States to both homeowners and businesses. Donna, Marguerite and Kerry are all active in the business.

Donna is a 60 percent general partner, Marguerite is a 25 percent general partner and Kerry is a 15 percent general partner. Marguerite deals with the tax matters for the partnership. All three ladies devote 100% of their time to the business. Donna lives at 30 Windy Ridge, Conway, NH 03818, Marguerite lives at 44 Gusty Lane, Wolfboro, NH 03894 and Kerry lives at 10 Dancers Way, Lincoln, NH 03251.

The partnership files its tax return on the accrual method of accounting. Inventory has been consistently valued at the lower of cost or market method of accounting. The inventory capitalization rules of IRC Section 263A do not apply due to the “small business exception.”

The income statement and balance sheet for the current year, prepared by the accounting firm of

Smart & Smarter, CPAs, appears on the next two pages.

Fancy Door Company

Income Statement

For the Year Ending December 31, 2016

Sales / $1,364,639
Cost of goods sold / (585,690)
Gross Profit / 778,949
Operating expenses:
Salaries & wages / 287,641
Guaranteed payments / 50,000
Rent expense (storage facility) / 72,000
Interest expense / 26,433
Advertising expense / 5,000
Contributions / 6,000
Depreciation expense(Books-see schedule) / 22,582
Repairs and maintenance / 8,450
Meals and entertainment / 1,524
Office supplies / 4,069
Shipping / 2,650
Insurance / 8,400
Auto expenses / 22,403
Utilities / 11,231
Fines and penalties / 500
Payroll taxes / 19,354
Dues and subscriptions / 550
Total operating expenses / 548,787
Net income from operations / 230,162
Other income and expenses:
Dividend income / 28,085
Interest income / 4,085
Interest expense related to investments
(see information) / (8,304)
Net loss on sale of business assets
(Books –seeschedule) / (3,713)
Net loss on sale of investments(see information) / (7,414)
Net Income / $242,901

Fancy Door Company

Balance Sheet

December 31, 2016

Assets / 12/31/15 / 12/31/16
Current Assets
Cash and cash equivalents / $177,279 / $192,546
Accounts Receivable / 5,823 / 11,219
Inventory / 74,316 / 99,394
Total current assets / 257,418 / 303,159
Depreciable assets / 389,260 / 345,900
Less: accumulated depreciation / (91,763) / (69,948)
Total depreciable assets (net) / 297,497 / 275,952
Land / 75,000 / 75,000
Total Assets / $629,915 / $654,111
Liabilities and Capital
Current Liabilities
Accounts payable / $42,268 / $37,863
Accrued expenses / 5,689 / 7,414
Total current liabilities / 47,957 / 45,277
Notes payable, long-term / 258,537 / 302,737
Capital
Donna McCarthy / 174,053 / 169,794
Marguerite Corcoran / 80,855 / 76,580
Kerry Livingston / 68,513 / 59,723
Total Capital / 323,421 / 306,097
Total Liabilities and Capital / $629,915 / $654,111

Statement of Partners’ Capital

Donna / Marguerite / Kerry / Total
Capital, 1/1/16 / $174,053 / $80,855 / $68,513 / 323,421
Net Income / 145,741 / 60,725 / 36,435 / 242,901
Partners’ Withdrawals (cash) / (150,000) / (65,000) / (45,225) / (260,225)
Capital, 12/31/16 / $169,794 / $76,580 / $59,723 / 306,097

Fancy Door Company’s Fixed Asset Schedule for Book purposesis as follows:

Asset / Convention / Date Acquired / Cost / A/D / Deprn. 2016 (Books) / A/D 12/31/16 (Books)
Land (used in the business) / N/A / 01/23/12 / 75,000
Building / MM / 01/23/12 / 275,000 / 27,921 / 7,051 / 34,972
Computer Equipment / HY / 2/5/12 / 6,500 / 4,550 / 1,300 / 5,850
Vehicle (under 6,000 lbs.) / HY / 7/1/12 / 29,600 / 20,720 / 5,920 / 26,640
Equipment / MQ / 11/1/12 / 54,300 / 27,150 / 3 ,879 / 31,029
Computer Equipment / HY / 12/1/12 / 8,460 / 5,922 / 846 / 6,768
Furniture & Fixtures / HY / 2/5/13 / 15,400 / 5,500 / 1,100 / 6,600
Furniture & Fixtures / 12/1/16 / 13,800 / 0 / 986 / 986
Equipment / 4/1/16 / 21,000 / 0 / 1,500 / 1,500
Totals / 499,060 / 91,763 / 22,582 / 114,345
Asset / Convention / Date Acquired / Date Sold / Proceeds from Sale / Cost / A/D 12/31/16 / Gain/(Loss) (Books)
Equipment / MQ / 11/1/12 / 11/30/16 / $19,000 / $54,300 / 31,029 / (4,271)
Computer Equipment / HY / 12/1/12 / 8/2/16 / $850 / $8,460 / 6,768 / (842)
Furniture & Fixtures / HY / 2/5/13 / 7/9/16 / $10,200 / $15,400 / 6,600 / 1,400
Total / (3,713)

Note:

Assume straight-line depreciation for book purposes (half year depreciation in the year of acquisition and half year depreciation in year of disposition) as calculated above and assume MACRS for tax purposes. Use the class lives you learned in class when calculating depreciation and gains and losses for tax purposes. Youare to calculate accumulated tax depreciation, as well as depreciation for 2016 for tax purposes. Assume §179 and Bonus Depreciation was not taken on any assetsplaced in service prior to 2016. Assume Fancy Door Company wishes to maximum its’ tax depreciation for assets placed in service during 2016.

Be sure to include your depreciation schedules for tax purposes, including your calculations for accumulated and current tax depreciation, as well as gains and losses on the sale of assets for tax purposes.

Additional information:

  1. Assume the dividends received are qualifying dividends.
  2. Interest income includes $2,258 received on a City of Chicago, Illinois General Obligation bond.
  3. On April 15, 2016 a loss of $9,414 was suffered on the sale of 115 shares of common stock of Ruff, Inc. The stock was purchased on November 22, 2009 for $11,563, has been held for investment purposes. Assume the stock was publicly traded. Assume the sale was reported on Form 1099-B and the basis was not reported to the IRS.
  4. On September 11, 2016, a $2,000 gain resulted on the sale of 200 shares of common stock of Newton, Inc. The stock was purchased on July 1, 2016 for $4,600 and has been held for investment purposes. Assume the stock was publicly traded. Assume the sale was reported on Form 1099-B and the basis was not reported to the IRS.
  5. Assume for purposes of this tax return that the only expense in cost of goods sold is purchases.
  6. All liabilities of the partnership are recourse loans.
  7. Guaranteed payments are as follows: Marguerite $15,000 and Kerry $35,000.
  8. The contributions are all made to qualified charities and none of them are to political groups.
  9. Investment interest expense breakdown (Total = $8,304):
  10. Loan to buy City of Chicago, Illinois bonds - $1,988
  11. Loan to buy Newton, Inc. stock - $2,858
  12. Loan to buy Ruff, Inc. stock - $3,458
  13. Ignore AMT and the Domestic Production Activities deduction from this practice set.
  14. You are not responsible for calculating net earnings (loss) from self-employment.
  15. Be sure to spend some time reading through the IRS instructions for preparing a partnership return and all the required forms to file a complete and accurate return. The focus of this project is to assess your ability of interpreting and calculating depreciation and gains/losses for tax purposes, as well as the preparation of a complete partnership return.
  16. Attach an assumption page if you make any MAJOR assumptions. Please do not attach an assumption page for minor assumptions you made (i.e. those items that do not have relevance to the calculations or reporting of income/deductions).
  17. In preparation of your Form 1065 and Schedule K-1’s, it may be helpful to create an excel spreadsheet to calculate ordinary income and separately stated items. This will make it easier for you to prepare the tax forms, as the calculations will all be done. This will save you some time on the actual tax forms. If you do prepare an excel spreadsheet, be sure to include it in your practice set.
  18. If you believe anything is missing or unclear, feel free to contact me. I do ask that you think about your question(s) before e-mailing me, as you probably will be able to answer it yourself when performing some research. If you can answer it based on the given information, this will be my answer to your question, so please exhaust all possibilities before e-mailing me.

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