Christy Albright and Dan Ralls formed the Charter Company on 11/30/2012, and chose a tax year ending on 11/30. Charter was formed to operate a restaurant (In the Charter Building at 7848 Pesca Dr., San Francisco, CA 94123) and rent out some space in the restaurant building. Charter elected to be taxed as a partnership, and the income statement for the year ending 11/30/2017 is as follows:
| Sales |
$400,000 |
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| COGS |
-150,000 |
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| Tax-exempt interest |
6,000 |
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| Interest income |
4,000 |
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| Dividend income from domestic corporations |
5,000 |
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| Nonqualified dividend income from foreign corporations |
3,000 |
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| Gain on sale of equipment |
10,000 |
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| Depreciation |
-30,000 |
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| Repairs and maintenance |
-7,000 |
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| Rent expense |
-12,000 |
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| Salaries to nonpartners |
-60,000 |
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| Salaries to partners |
-30,000 |
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| Income from real estate rentals |
100,000 |
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| Expenses from real estate rentals (includes $10,000 of book depreciation) |
-80,000 |
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| Gain on sale of stock (held |
20,000 |
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| Health Department fines |
-2,000 |
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| Investment interest expense |
-1,000 |
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| ————————————————————————————————– | |||||
| Subtotal |
$176,000 |
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Charter chooses the accrual method of accounting. The equipment sold was an imported oven that had been fully depreciated. It originally cost $4,000 on 5/3/2010 and was sold for $10,000 on 6/9/2017.
The tax depreciation amount for the year was $20,000, not including $14,000 of Section 179 expense that Charter chose to take on some equipment they purchased, and not including the $10,000 per year depreciation of the rental real estate, which is included in the $80,000 of costs above. (Note: according to the Form 4562 instructions, the depreciation from the rental activity would not need to be disclosed on Form 4562)
All of the $30,000 of guaranteed payments goes to Christy. Assume that 40% of the investment interest expense is nondeductible because it relates to the tax-exempt interest. The stock sold was 1000 shares of Alter Corporation, purchased on 1/20/2017 for $25,000 and sold on 4/10/2017 for $45,000.
Christy owns 60% of the partnership, and is an active partner. Christy is the Tax Matters Partner. Dan owns 40%, but is a passive, limited partner. During the year Christy was distributed $60,000 and Dan was distributed $40,000. The balance sheet of the partnership is as follows:
|
Beginning |
Ending |
||||
| Cash |
$10,000 |
$77,000 |
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| Accounts Receivable |
10,000 |
20,000 |
|||
| Inventory |
15,000 |
10,000 |
|||
| Tax-exempt securities |
100,000 |
100,000 |
|||
| Equipment |
90,000 |
140,000 |
|||
| Accumulated depreciation |
-50,000 |
-66,000 |
|||
| Real estate |
700,000 |
700,000 |
|||
| Accumulated depreciation |
-40,000 |
-60,000 |
|||
| Total assets |
835,000 |
921,000 |
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| Accounts payable |
10,000 |
20,000 |
|||
| Mortgages |
500,000 |
500,000 |
|||
| Capital – Christy |
195,000 |
240,600 |
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| Capital – Dan |
130,000 |
160,400 |
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| —————————————————————————————————- | |||||
| Total liabilities and capital |
$835,000 |
$921,000 |
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All of the $54,000 of equipment purchased this year was restaurant equipment, and was 7-year property eligible for the Section 179 deduction. Aside from the equipment expensed under Section 179, all of the new equipment was depreciated under MACRS. There is no AMT adjustment for depreciation except for the adjustment due to the current year purchases (the net adjustment for prior year purchases was zero). All of the mortgage debt is qualified nonrecourse debt, and none of it is payable in the next year.
Fill out a Form 1065 and all other appropriate forms for Charter and the related Schedules K-1 for Christy and Dan. The necessary addresses and TINs are as follows:
Christy Albright
5050 Winding Way
San Francisco, CA 94123
SS# 056-36-4498
Dan Ralls
3656 Pleasant Ridge
Lincoln, NE 68501
SS# 547-86-1154
Charter Company
7848 Pesca Dr.
San Francisco, CA 94123
EIN 85-4409231
