ACTG 6540-001 - Taxation of Business Entities

ACTG 6540-001 - Taxation of Business Entities
Fall 2015
Partnership Tax Return Project
100 Points
Instructions
1. Prepare a 2014 Form 1065 - U.S. Return of Partnership Income - for Double Play
LLC based on the information provided.
2. Prepare the return as if you were preparing it for an actual client. All necessary forms
and schedules should be attached to the return and properly and neatly completed.
Form 1065 (Pages 1 – 5), Schedule D (Capital Gains and Losses), Form 4562
(Depreciation and Amortization), Form 4797 (Sales of Business Property), Form 6252
(Installment Sale Income), and any related forms and schedules are required. Any
other necessary forms or supporting schedules should be properly and neatly
completed and attached to the back of the return. All required attachments (other
deductions, etc.) must be included.
3. Prepare a Schedule K-1 for each of the two partners.
4. Prepare a statement showing the details of each partner’s basis in their partnership
interest as of December 31, 2014 (Item 17).
5. Attach a statement showing the details of your calculation of tax depreciation on each
asset to the back of the return.
6. This project is due on or before the beginning of class on Monday, November 30,
2015. No late returns will be accepted. There are no exceptions.
Information
Beth Davis (SSN: 256-99-0206) and Doris Donaldson (SSN: 423-96-9943) are equal
members of Double Play LLC, a limited liability company electing to be taxed as a
partnership. Double Play is an LLC that sells sporting goods at retail in Murfreesboro,
Tennessee. Pertinent information regarding Double Play is summarized as follows:
1. Double Play’s business address is 400 Collectible Street, Murfreesboro, TN 37132.
Its employer identification number is 65-3453456.
2. Double Play began business operations on January 1, 2011, and uses the accrual
method of accounting. Double Play incurred $17,000 of organization expenses when
it was formed on January 1, 2011. These organization costs were expensed in 2011
for financial accounting purposes. For tax purposes, Double Play properly elected to
expense the maximum amount of organization expenses in 2011, and is amortizing
the remaining expenses as required.
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3. Double Play’s 2014 income statement reflected net income of $292,082. The
following information was taken from the partnership’s 2014 financial statements:
Revenues, Gains & Losses (Book)
Sales Revenue
Dividend Income ($4,600 of the $4,800 was qualified dividend income)
Interest on BBB Corporation Bond
Interest on State of Tennessee Bond
Gain on Sale of Land 2 (Item 10)
Gain on Sale of Old Display Cabinet (Item 6)
Loss on Sale of ABC Corporation Stock (Item 13)
Total Revenues, Gains & Losses
Cash Payments
Purchases
Bad Debt Expense
Rent
Property and Liability Insurance
Utilities
Employee Salaries
Employee Benefits - Health Insurance Premiums Paid for Employees
Employee Benefits – Health Insurance Premiums Paid for Partners (Item 16)
Contribution to Girl Scouts
Meals and Entertainment
Guaranteed Payments (Item 4)
Office Expenses
Accounting Fees
Payroll and Property Taxes
Advertising
Interest on Mortgage on Land 1 and the Building (Item 14)
Interest on Loan used to Land 2 (item 14)
Repairs
Supplies
Distributions to Partners (Item 5)
Payment of Accounts Payable
Purchase of New Display Cabinet (Item 7)
Payment of Loan on Land 2

$ 845,000
4,800
1,400
1,200
150,000
1,000
(5,000)
998,400
$ 410,870
700
24,000
3,200
5,588
60,000
16,000
22,000
4,000
4,600
84,000
3,800
3,910
7,200
4,300
21,000
6,000
2,600
5,000
40,000
56,000
20,000
100,000

*Note: The items listed above are cash payments, not accrual basis expenses.
Noncash Expenses (Book)
Depreciation on Display Cabinets
Depreciation on Building

1,900
6,250

Double Play’s beginning and ending balance sheet information is as follows:

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Assets
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Installment Obligation Receivable
Inventory
Investments (Including $10,000 of
Tennessee bonds owned for the entire
year)
Equipment
Accumulated Depreciation - Equipment
Building
Accumulated Depreciation - Building
Land 1
Land 2
Total assets
Liabilities and Equity
Accounts Payable
Loan Used to Purchase Land 2
Mortgage Payable on Building (Due in
24 months from 12/31/2014)
Capital, Davis
Capital, Donaldson
Total liabilities and equity

January 1, 2014
$67,350
32,000
(2,000)

December 31, 2014

97,000
40,000

$71,682
31,500
(2,200)
260,000
87,600
34,000

16,000
(1,600)
250,000
(18,750)
50,000
150,000
$680,000

20,000
(1,500)
250,000
(25,000)
50,000
0
$776,082

January 1, 2014

December 31, 2014

$88,000
100,000
216,000

$ 32,000
0
216,000

138.000
138,000
$680,000

264,041
264,041
$776,082

Additional information:
4. Both Beth and Doris are managing members of the LLC and materially participate in
the business. Beth serves as manager of the store and received a guaranteed payment
of $64,000. Doris works mainly on weekends and received a guaranteed payment of
$20,000.
5. Beth and Doris each withdrew $20,000 as a distribution (draw) of operating profits.
6. Double Play sold a display cabinet (old display cabinet) on March 31, 2014 for
$15,000. The display cabinet was purchased on January 1, 2013 for $16,000 and
placed in service the same day. The display cabinet is 7-year MACRS property.
Double Play did not make a section 179 election on the old display cabinet in 2013
and elected out of bonus deprecation. For book purposes, Double Play depreciates
the display cabinet on a straight-line basis over 10 years (calculating depreciation to
the nearest full month for partial years).
7. Double Play purchased a new display cabinet (new display cabinet) for $20,000 on
March 31, 2014. The new display cabinet, which is 7-year MACRS property, was
placed in service on the date it was purchased. Double Play does not want to make a
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section 179 election on any of the $20,000 cost of the new display cabinet, but wants
to take advantage of additional first-year (bonus) depreciation. For book purposes,
Double Play depreciates the display cabinet on a straight-line basis over 10 years
(calculating depreciation to the nearest full month for partial years).
8. The display cabinets are categorized as equipment on the balance sheet, and are the
only equipment owned by the partnership. Double Play rents all other equipment
(cash registers, etc.) used in the business.
9. The land (Land 1) and building used as the store was purchased and placed in service
on January 1, 2011 for $300,000. $250,000 of the purchase price was allocated to the
building and $50,000 to the land. For book purposes, Double Play depreciates the
building on a straight-line basis over 40 years (calculating depreciation to the nearest
full month for partial years).
10. Double Play purchased additional land (Land 2) on July 1, 2011 for $150,000. The
land was purchased as an investment. Land 2 was sold on December 31, 2014 for
$300,000. Double Play received a $40,000 down payment on December 31, 2014,
and the buyer agreed to pay the remaining $260,000 balance (plus a reasonable rate of
interest) on an installment basis over 10 years. The first payment on the loan is due
December 31, 2015 (next year). Double Play did not elect out of the installment
method of accounting for tax purposes. Double Play recognized the entire $150,000
gain in 2014 for financial accounting purposes.
11. Double Play uses the allowance method of accounting for bad debts for financial
accounting purposes. It began 2014 with a $2,000 credit balance in the allowance
account. During 2014 it wrote off a $500 accounts receivable as uncollectible. On
the basis of partnership’s year-end accounts receivable, the independent auditors
determined that a $700 addition to the bad debt allowance was necessary. As a result,
the year-end balance in the allowance is $2,200.
12. Double Play uses the cost method for valuing inventory. It is not subject to the
provisions of §263A and did not change its inventory accounting method during the
year. There is no cost of labor, additional section 263A costs, or other costs (except
purchases) included in cost of goods sold. Double Play classifies all employee
salaries as an ordinary expense (instead of part of cost of goods sold). 2014
purchases totaled $410,870.
13. Double Play sold 100 shares of ABC Corporation stock on October 30, 2014 for
$1,000. Double Play purchased the ABC Corporation stock on February 2, 2013 for
$6,000. The sale of this stock was properly reported on Form 1099-B.

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14. Double Play paid $27,000 of interest in 2014. The $27,000 consists of $21,000 of
interest paid on the mortgage on the Land 1 and the building, and $6,000 of interest
paid on the loan used to purchase Land 2 (item 10).
15. Both Beth and Doris personally guaranteed the mortgage on the land and building,
and the loan used to purchase land 2 (Item 14). The partners are considered “active”
for purposes of the passive loss rules. Double Play accounts for partner capital
accounts on a book (GAAP) basis.
16. Double Play’s employee benefit expense of $38,000 consists of health insurance
premiums that the LLC paid to cover Beth, Doris, and other employees. The health
insurance premiums paid for Beth and Doris were $11,000 each ($22,000 of the
$38,000).
17. Assume that both Beth and Doris have a basis in their partnership (LLC) interest of
$340,000 as of the beginning of the year (January 1, 2014).
18. None of the partners sold any portion of their interests in the partnership during 2014.
The partnership had no foreign operations, no foreign bank accounts, and no interest
in any foreign trusts or other partnerships. The partnership is not publicly traded and
is not a statutory tax shelter. The partnership is not subject to the consolidated audit
procedures and does not have a tax matters partner. Beth Davis lives at 642
Blueberry Boulevard, Murfreesboro, TN 37132. Doris Donaldson lives at 965
Sunset Street, Murfreesboro, TN 37132.

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