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CH 14 HW Solutions - Chapter 14 Homework Solutions The...

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Chapter 14 Homework Solutions The following information is to be used for problems 14-17: 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 14. Assume that Wrigley Juice is owned by Calvin as a sole proprietorship. Explain the effect of Wrigley s results on Calvin s tax return. A sole proprietorship is not an entity separate from its owner. Because the results of the sole proprietorship are reported on the owner's return, any item that receives special treatment by an individual must be accounted for separately by the sole proprietor. Items that are not included in Calvin's operating income calculation are the tax-exempt interest, the capital gains and losses, the passive activity loss, and the net operating loss. Wrigley's operating income is $80,000: Sales $ 850,000 Cost of goods sold (480,000) Depreciation (40,000) Section 179 expense (50,000) Other operating expenses (200,000 ) Operating income $ 80,000 Calvin will include the $80,000 of operating income from the sole proprietorship on his individual return. The capital gains and losses must be netted with any other capital gains and losses Calvin has for the year. The passive activity loss is subject to the passive loss rules (losses deductible to the extent of passive income). The net
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operating loss carryforward is deductible for adjusted gross income to the extent of Calvin's business income for the year. The tax- exempt interest is reported on his individual return, but is excluded from gross income. 15. Assume that Wrigley Juice is a partnership owned equally by Vinnie and Chandra. Explain the effect 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. The partnership's operating income is $130,000: Sales $ 850,000 Cost of goods sold (480,000) Depreciation (40,000) Other operating expenses (200,000 ) Operating income $ 130,000 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) $(25,000)
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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
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