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Service Partnership John owns 50%
Information
Form 1065 Page 1
Separate on Sched-K
Sch- K-1
John (50%)
Consulting revenue Transportation Office expense Dividends on IBM stock Interest on IBM Bonds Charitable Contributions Political contributions
125,000 40,000 3,000 4,000 2,000 1,000 6,000
125,000 (40,000) (3,000) 4,000 2,000 (1,000) (6,000) 2,000 1,000 (500) (3,000)
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Separate Separate Separate No Ded.
Ordinary income for partnership and John 82,000 41,000 Ordinary All of John's income, gains, losses or deductions are from the partnership. John does not take a distribution from the partnership. What is John's gross income on his Form 1040? $44,000 How much of John's gross income has a special tax rate? $2,000 How much self-employment income does John report? $41,000 John's beginning basis: $100,000. What is his ending basis? $140,500 2
Gil & Bill are partners in the Gil and Bill Partnership. Gil is a 40% partner
The partnership had book net income of $37,000. Information Ordinary Income Book net income (includes items below) 40,000 40,000 Dividend income 1,000 (1,000) Short-term capital loss (5,000) 5,000 Section 1231 gain 10,000 (10,000) Ordinary income (section 1245 recapture) 4,000 Interest income on corporate bonds 15,000 (15,000) Ordinary Income 19,000 Partnership ORDINARY income reported on Gil's Form 1040? Gil 16,000 (400) 2,000 (4,000) 0 (6,000) $7,600 $7,600 14-5
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Beth invested $10,000 for a 25% interest in XYZ Partnership on 12-31 of Year-1.
In Year-2, XYZ had taxable income of $20,000, and municipal interest of $8,000. XYZ Partnership made a cash distribution to Beth of $8,000. How much income does Beth report for Year-2? $5,000 What is Beth's basis in partnership at the end of Year-2? $9,000 XYZ Partnership Beth Beth's Beginning Basis in her stock 10,000 Investment Change in share of debt (+ or -) Add: Ordinary Income 5,000 Separate Income & gains Tax-free income 2,000 Contributions of Capital Total Additions 7,000 Less: Ordinary Loss Separate Expenses & Losses Non-deductible Expenses Partner Withdrawals (8,000) Total Reductions (8,000) Ending Basis of her stock 9,000 14-5 14-8
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Local Corporation original income tax returns are summarized below.
2008 2009 2010 2011 2012 500,000 500,000 600,000 600,000 (470,000) (475,000) (560,000) (700,000) Taxable Income 30,000 25,000 40,000 (100,000) Local expects to have revenue of 600,000 and expenses of $400,000 in 2012. What is the projected taxable income for 2012? $165,000 Revenue Expense
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Tax Rules for Corporate Income and Expense
Sales Cost of sales Entertainment Expenses Other Operating Expenses Operating net income Capital loss on sale of IBM stock held 2 months Interest received on IBM Bonds Interest received on U.S. Treasury Bonds Interest received on City of Charlotte Bonds Taxable Income
Information
Tax Return
Page
$500,000 (300,000) (20,000) (80,000) 100,000 (8,000) 10,000 10,000 10,000
$500,000 (300,000) (10,000) (80,000) 110,000 14-10 10,000 10,000 $130,000 14-12
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What is the Dividents Received Deduction?
Income from operations Expenses of operations Net Operating Income Dividend income from a 10% owned corporation Taxable income before Dividend Received Deduction Dividend Received Deduction percentage Dividend Received Deduction $500,000 490,000 10,000 90,000 100,000 70% 63,000 Case 1 $900,000 (700,000) 200,000 100,000 300,000 (30,000) 270,000 (70,000) $200,000 $500,000 510,000 (10,000) 90,000 80,000 70% 56,000 Case 2 $900,000 (930,000) (20,000) 100,000 80,000 (8,000) 72,000 (50,400) $21,600 $500,000 530,000 (30,000) 90,000 60,000 70% 63,000
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Corporate Charity. Chris Corporation made charitable contributions of $50,000.
Gross receipts (Operating Revenues) Expenses, not including Contributions Net operating income Dividend income on stock (10% owned Corporations) Net income before DRD & charitable contribution ded. Deduction for charitable contributions Taxable income before Dividends Received Deduction Dividends Received Deduction Taxable income
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Case 3 $900,000 (950,000) (50,000) 100,000 50,000 (5,000) (70,000) 45,000 ($25,000) 14-18
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Rich Corp, an S corp. since its organization (Mr. Rich is 100% owner)
Mr. Rich paid $200,000 for his Rich Corp. stock when the corp. was formed on January 1. Rich Corporation reported the following results in its first year: Ordinary Net Income (Operating Revenue less Operating Expenses) $40,000 Taxexempt bond interest income 19,000 3,000 Shortterm capital loss Contributions made to charity 10,000
No distributions were made. What is Mr. Rich's basis in the stock on December 31?
Beginning Basis Investment Add: Ordinary Income Separate Income or gains Tax-free income Contributions of Capital Total Additions Less: Ordinary Loss Separate Expense or Losses $200,000 $40,000 Mun. Int. $19,000 $59,000 Capital Loss Charity ($3,000) ($10,000) ($13,000) $246,000
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Non-deductible Expenses Tax-Free Withdrawals Total Reductions Ending Stock Basis Note: with a partnership, partner includes share of partnership debt in basis.
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Partnership Distributions. Ann's beginning partnership basis was $10,000. Then, she received a distribution of (1) Cash of $2,000 and (2) Land with a basis of $7,000 to the partnership and a FMV of $9,000.
Give answers for Non-liquidating & Liquidating Distributions Does partnership recognize a gain on distribution? What is Ann's income or gain from this distribution? What is Ann's basis in the land? What is Ann's partnership basis after the distribution? Partner's beginning outside basis in the partnership Less: Cash received. Gain recognized ( if line 2 exceeds line 1) Remaining outside basis [(Line 1 minus Line 2)]. Min. $0 Partnership's inside basis of other property distributed Partner's basis in other property received Partner's remaining basis in partnership [(Line 4 less Line 6)] Nonliquidating Liquidating No No None None $7,000 $8,000 $1,000 N/A $10,000 $10,000 (2,000) (2,000) 0 0 8,000 8,000 7,000 7,000 7,000 8,000 $1,000 $0
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S corporation Distributions. Beth started a new corp. in Year-1.
Beth does not borrow from the Corporation or make loans to the Corporation. January 1 Year 1 Beth invested $25,000 in a new Corp. Corporation elected S Status January 1 Year 1 Corporation had net income for year Year-1 Corporate cash dividend to Beth December 31 Year-1 $25,000 $50,000 $65,000 Beth's Basis $25,000 50,000 75,000 (65,000) $10,000 $50,000 $0
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Beth's Stock Basis computation
Beth invested $25,000 in a new Corp. January 1 Year 1 Corporate net income for year January 1 Year 1 Basis before considering distribution Corporate cash dividend paid to Beth December 31 Year-1 Beth's Basis (Cannot go below zero) How much income does Beth report as a result of corporate operations? How much income does Beth recognize as a result of the dividend? [Basis is increased to $75,000 above. Distribution does not exceed $75,000. Distribution is tax-free because it does not exceed stock basis of $75,000.] If corporation had loss of $50,000 in Year-1, how much could Beth Deduct? 11
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$25,000
Repeat preceding question, except Beth did not elect S status.
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14-29 How much income does she recognize as a result of the $75,000 dividend? $42,500 Assume net income is also taxable income. $50,000 Income tax 15% ($7,500) Net income after tax (Increase in Earnings and Profits) $42,500 Dividend From E & P. What is the basis of her stock after the dividend? Amount paid for stock ( C corporation - no change in basis) $25,000 Dividend distributed $75,000 Earnings and profits $42,500 Dividend in excess of Earnings and Profits ($22,500) Ending Stock basis $2,500 Repeat preceding question. A $65,000 cash LIQUIDATING distribution from this C Corp. 14-29 How would this distribution be reported by Beth? $65,000 Distribution is treated as payment for her stock $25,000 Beth's cost of stock $40,000 Beth's gain on sale of stock
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Repeat preceding question.
Assume the distribution is LAND with FMV of $65,000 and a basis to the corporation of $15,000. What is impact on corporation? Same as if land is sold to a stranger for $65,000. Recognize gain of $50,000 Does the answer change if the corporation is an S corporation? No