chapter14.pptx - CONCEPTS IN FEDERAL TAXATION CHAPTER 14...

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CONCEPTS IN FEDERAL TAXATION CHAPTER 14: CHOICE OF BUSINESS ENTITY: OPERATIONS AND DISTRIBUTIONS
Wrigley Juice has the following income, expense, and loss items for the current year: Sales $850,000 Tax-exempt interest 40,000 Long-term capital gain 85,000 Short-term capital loss 35,000 Passive activity loss 20,000 Cost of goods sold 480,000 Depreciation 40,000 Section 179 expense 50,000 Other operating expenses 200,000 Net operating loss (from preceding year) 24,000 #15
Assume that Wrigley Juice is a partnership owned equally by Vinnie and Chandra . Explain the eff ect of Wrigley’s results on Vinnie’s and Chandra’s tax returns. Income from a partnership is taxed at the partner level. To get the proper tax treatment by the partners, the items that are subject to varying rules must be separately stated . Items that are not included in the partnership’s operating income calculation are the tax-exempt interest, the capital gains and losses, the Section 179 deduction, and the passive activity loss. The net operating loss carryforward would have been distributed to the partners in the preceding year. #15
Sales $ 850,000 Cost of goods sold (480,000) Depreciation (40,000) Other operating expenses (200,000 ) Operating income $ 130,000 The partnership’s operating income is $130,000 #15
Each partner will include their $65,000 share of the partnership operating income on their individual returns. The share of the capital gains and losses must be netted with any other capital gains and losses Vinnie and Chandra have for the year. If they have no other capital gains and losses, the $25,000 ($42,500 - $17,500) of net long-term capital gain is taxed at 15%. The share of the passive activity loss is subject to the passive loss rules (the loss is deductible to the extent of passive income). Each partner can deduct their share of the Section 179 expense, subject to the $25,000 annual limitation. If either partner has a section 179 expense from other sources, the total deduction cannot exceed the annual limit. The tax-exempt interest is reported on each partner’s individual return, but is excluded from gross income. #15
Vinnie and Chandra will each report one-half of the partnership’s operating income and separately stated items on their individual returns: Vinnie Chandra Operating income ($130,000 x 1/2) $65,000 $65,000 Tax-exempt interest ($40,000 x 1/2) $20,000 $20,000 Long-term capital gain ($85,000 x 1/2) $42,500 $42,500 Short-term capital loss ($35,000 x 1/2) $(17,500) $(17,500) Passive activity loss ($20,000 x 1/2) $(10,000) $(10,000) Section 179 expense ($50,000 x 1/2) $(25,000) #15
Wrigley Juice has the following income, expense, and loss items for the current year: Sales $850,000 Tax-exempt interest 40,000 Long-term capital gain 85,000 Short-term capital loss 35,000 Passive activity loss 20,000 Cost of goods sold 480,000 Depreciation 40,000 Section 179 expense 50,000 Other operating expenses 200,000 Net operating loss (from preceding year) 24,000 #16
Assume that Wrigley Juice is a corporation owned by Cora . Explain the eff ect of Wrigley’s results on Cora’s tax return.

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