Partnership and Corporate Tax Reporting
Problem 1
a. Does any of the partners recognize any gain? If so, how much? Explain.
One partner, Carol will have a gain.
To determine her gain,
FMV*Interest
The total FMV = 200,000 + 100,000
= 300,000
Interest = 10%
Therefore, gain will be;
300,000 * 10%
= $30,000
Her gain will be $30,000, which she recognizes for service exchange. She receives the gain since she has a guaranteed payment.
b. What is the basis for each partner in his or her partnership interest?
Darrel and Sissy will have the same basis of contribution, which will $100,000 and $50,000 respectively while the basis for Carol in her partnership interest will be her gain, which is $ 30,000.
c. What is the basis to the partnership of each asset?
The basis to the partnership of equipment will be the same to the basis of each partner in their partnership interest, which will be $100,000 (equipment) and $50,000 (building).
Problem 2
a. Wayne’s Self-employment Income.
To determine self-employment income,
Add the ordinary income to the guaranteed payment
And subtract the 179 expense from the total
=$86,000 + $24,000
= $110, 000 - $36,000
= $74,000
Therefore, Wayne’s self-employment income will be $74,000.
b. Wayne’s basis at the end of the year.
To compute the ending basis,
Add the guaranteed payment, beginning basis, Long-term capital gain, and the §1231 gain.
And subtract the total of cash Distributions, §179 expense, and Charitable Contribution.
So, the Ending basis
= ($46,000+$24,000+$31,000+$8,600) - (4,000+$36,000+$12,000)
= $57,600
Therefore, Wayne will have 57,600 basis when the year ends.
Problem 3
- How much gain or loss must Karen recognize on the distribution?
In cases of an operating distribution, gains are realized when the partner’s basis are lower than the funds received through distribution. Besides, loss can never be realized in cases of operating distribution.
In the case of Karen, there is no gain or loss as the partnership basis ($24,000) is higher than the money received ($12,000).
- What is Karen’s ending partnership basis?
The beginning basis = $24,000
Cash distribution = $12,000
Equipment basis = $12,000
Therefore,
Ending basis = the beginning basis – (cash distribution + equipment basis)
= 24,000 – (12,000 + 12,000)
= $0
Therefore, 0 will be Karen’s ending partnership basis.
- What is Karen’s basis in the equipment?
The equipment basis will remain the same, which will be $12,000.
Problem 4
What is Carrie’s gain or loss on the sale of her partnership interest?
Amount Realized $206,000
Basis:
Beg. $86,000
2016 Income $44,000
2017 Income $50,000
2018 Income $24,000
Basis $204,000
Capital Gain = the amount realized less Carrie’s basis
Amount Realized 206,000
Partnership Basis $204,000
$2,000
Carrie would have recognize a capital gain of $2,000 from the sale of her partnership interests.
Problem 5
- Contribution of property with a basis of $2,000 and an FMV of $2,800.
The Stock basis available to the stockholders is $2,000
- Contribution of property with a basis of $6,000 and an FMV of $7,600. The stockholder also received $1,000 cash from the corporation as part of the stock transaction.
The stockholders will have a gain of $1,000, which is higher than the total gain of 800 and equal to the property FMV of $1,000 received.
The basis in stock available to the stockholders will thus be;
$6,000 + $1,000 - $1,000
= $6,000
- Contribution of property with a basis of $16,400 and an FMV of $25,000. The stockholder also received property with an FMV of $3,400 from the corporation as part of the stock transaction.
The shareholder will have a gain of $3,400
The basis in stock available to the stockholders will thus be;
$16,400 + $3,400 - $3,400
= $16,400
- Contribution of a building with an FMV of $400,000, a mortgage (assumed by the corporation) of $200,000, and a basis of $250,000.
The shareholder’s basis in the stock will be
The basis- mortgage
= $250,000 – $200,000
= $50,000
The stockholders will receive no gain due to the excess of the mortgage in comparison to the basis (IRS.gov, 2019a).
- Contribution of a building with an FMV of $3,400,000, a mortgage (assumed by the corporation) of $2,000,000, and a basis of $1,270,000.
The stock holders will have a gain that is equal to the excess of the mortgage, which is $730, 000. Thus, the shareholder gain is $730,000
The shareholder’s basis in the stock will be
$1,270,000 + $730,000- $2,000,000
= $0
Problem 6
- Both the charitable contribution and the capital gains are not changed in computation of taxable income (IRS.gov, 2019b). Besides, only 50% of the entertainment and travel expenses are subtracted. 50% of the two expenses should be added to the profit made by books in order to compute the taxable income.
Therefore,
Taxable Income = Income from books + 50% of expenses
= $100,000 + $3,000
= $103,000
- Loses in capital can only be subtracted to the extent of the gains in capital.
Therefore,
The entertainment travel expenses ($6,000) should be added back.
This is computed just like in part a.
In this case, the charitable contribution is 10% of the taxable income before the application of the charitable contribution.
To determine the permitted contribution, the whole contribution should then be added.
= $ 184,000 + $6000 + $3000 + $24000
= $217,000.
Thus, the possible charitable contribution is 10% of 217000
= $21,700.
The taxable income therefore, will include the book income, 5o% of the expenses, the total expenses, and the charitable contribution less the 10% charitable income.
Taxable Income = 184,000 + 3000 + 6000 + 2300
= $195,300
- This is a non-taxable bond, which should be subtracted from the book income to determine the taxable income (IRS.gov, 2018). Also, to compute for the charitable contribution, we need the taxable income.
Therefore,
Taxable Income = 152,000 – 4000 + 4200 (70% of dividends) + 10,000
=$153,800
Therefore, the 10% of charitable contribution
= $15,380
The taxable Income = Book Income – Non-taxable interest income – the adjustment in the charitable contribution – dividend adjustment
= 152000 – 4000 – 5380 -4200
= $138,420
- The taxable Income = Book Income – Non-taxable interest income – dividend adjustment – capital loss carried forward
= 258000 – 4000 – 11200 – 5000
= $237,800
Problem 7
- Corporate E&P of $20,000, shareholder stock basis of $24,000, distribution of $12,000.
Taxable dividend= $12,000
Non-taxable distribution=$0
Thus, capital gain=$0
- Corporate E&P of $15,000, shareholder stock basis of $14,000, distribution of $13,000.
Taxable dividend= $13,000
Non-taxable distribution=$0
Therefore, capital gain=$0
- Corporate E&P of $32,000, shareholder stock basis of $10,000, distribution of $34,000.
Taxable dividend= $32,000
Non-taxable distribution= (34000 – 32000) = $2,000
Therefore, capital gain=$0
- Corporate E&P of $28,000, shareholder stock basis of $22,000, distribution of $52,000.
Taxable dividend= $28,000
Non-taxable distribution=$22,000
Therefore, capital gain=52000 – (28000+22000) = $2,000
References
IRS.gov. (2018, December 13). Publication 551 (12/2018), Basis of Assets. Retrieved from https://www.irs.gov/publications/p551#idm140486306591696
IRS.gov. (2019, December 20). Publication 530 (2018), Tax Information for Homeowners. Retrieved from https://www.irs.gov/publications/p530
IRS.gov. (2019, December 21). Charitable Contribution Deductions. Retrieved January 20, 2020, from https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions