Creating a Partnership Tax Return

Week 8 Assignment – Creating a Partnership Tax Return

Overview

You
are a senior tax accountant in the firm, Ernest & Rainhouse. Joe, a
new junior accountant, has just completed an interview with a new
client Harry, who is a general partner of Widget Unlimited. Harry is
seeking to have Ernest & Rainhouse prepare Widget Unlimited’s
Partnership Tax Return. Joe has never prepared a Partnership Tax Return
and seeks your help in doing so. Additionally, there are a couple of
questions Harry asks that Joe needs your assistance in answering. You
are to read the scenario below and then follow the instructions.

Scenario

Henry,
Hunter, and Harry formed a partnership (Widget Unlimited) on January 1,
2020. Henry and Hunter each contributed $200,000 and Harry transferred a
building he had purchased two years earlier to the partnership. The
building had a tax basis of $150,000 and was appraised at $300,000. The
building was also encumbered with a $100,000 mortgage. The partners plan
to use the building to manufacture, distribute, and sell green and
purple widgets.

Harry will work full time operating the business
for which he will receive guaranteed payments (not included in expenses)
of $5,000 per month. Henry and Hunter will devote less than twelve days
a year to the business. At the end of 2020, Widgets Unlimited had made
$6,000 in mortgage principal payments. The partnership agreement
specifies that Henry, Hunter, and Harry will share in income/loss in the
ratio of 3:3:4.

For the first year of operation, the partnership records disclose the following information:

Instructions

Write a 3-5 page paper in which you do the following:

• Using the information provided, create a Form 1065: U.S. Return of Partnership Income 2020 for Widgets Unlimited, preparing a Schedule K for Henry, Hunter, and Harry.
• Refer
  to the completed Form 1065 schedule of Henry, Hunter, and Harry’s
  adjusted tax basis immediately after partnership formation and at the
  end of the first year of operation. Explain in what situations Henry,
  Hunter, and Harry would need to know the tax basis in their
  partnerships. Explain how often a partner’s tax basis in his partnership
  needs to be adjusted. Justify your answer with relevant tax code
  citation.
• The tax code specifically enumerates several common
  separately stated items. Explain which items would be separately stated
  for partners Henry, Hunter, and Harry. Explain why each should be
  separately stated, citing relevant tax code for at least three of your
  identified separately stated items.
• Assume Widgets Unlimited
  initial year of operation resulted in a loss. Explain in what order are
  the loss limitation rules applied to limit partner’s losses from
  partnerships.
• Explain how Henry, Hunter, and Harry would
  determine whether they are passive participants in Widgets Unlimited
  when applying the passive activity loss limitation rules.
• Use at
  least two quality sources to support your writing. Choose sources that
  are credible, relevant, and appropriate. Cite each source listed on your
  source page at least one time within your assignment. For help with
  research, writing, and citation, access the library or review library guides.
• Produce
  writing that is clear and well organized and applies appropriate SWS
  style. Writing contains accurate grammar, mechanics, and spelling.

This
course requires the use of Strayer Writing Standards. For assistance
and information, please refer to the Strayer Writing Standards link in
the left-hand menu of your course. Check with your professor for any
additional instructions.

The specific course learning outcomes associated with this assignment:

• Create a partnership tax return informed by applicable tax rules and treatments for a specific client.