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Accounting, Finance, SPSS
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Research Paper
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English (U.S.)
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Topic:

Creating A Partnership Tax Return for Widget Unlimited

Research Paper Instructions:

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:
Sales revenue $820,000
Cost of goods sold $735,000
Operating expenses $65,000
Long-term capital gains $3,300
~1231 gains $1,500
Charitable contributions $700
Political campaign donation $500
Municipal bond interest $450
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✎ EditSign 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.

Research Paper Sample Content Preview:

Partnership Tax Returns
Your Name
Subject and Section
Professor’s Name
May 28, 2022
Partnership Tax Returns
Understanding the fundamentals of creating a tax return is essential for any business leader and financial manager. It allows him to report his organization’s financial performance according to international standards, thereby reducing the risks of penalties and sanctions alike. In this case, the author would like to focus on the case of Henry, Hunter, and Harry would want to prepare a partnership tax return for their newly formed Widget Unlimited (Widget). The following sections will discuss some of the fundamentals of creating partnership tax returns relative to the recommendations and regulations of the GAAP.
Partnership Tax Return Basis
Utilizing a tax basis for Widget’s tax return requires a careful analysis of the nature of their business and the period that they use for it. First, it must be noted that the partners used a tax basis capital account for their business. A Tax Basis Capital Account is generally calculated “by determining the amount of cash allocated to each partner and removing any gain or loss allocated to each partner to arrive at an approximation of their basis” CITATION Whi211 \l 1033 (Whittlesey.com, 2021). While this has been a part of the GAAP for an extended period, Section 704(b) of the Internal Revenue Code (IRC) provides a change for this tax basis effective in 2020. Notably, while a partnership was previously given the discretion to report the capital accounts of each partner in their returns, the amendment made after 2020 added the requirement that each one report their capital account CITATION Whi211 \l 1033 (Whittlesey.com, 2021).
While these changes may have made the reportorial requirements for partnerships more tedious, the author believes that the benefits of the partnerships outweigh their costs. For example, because of the new limitations imposed by Section 465 of the IRC (aka at-risk limitations), partners would only be liable for the amount of the financial and resource contributions, limiting their losses in case of failure CITATION Kag20 \l 1033 (Kagan, 2020). The three partners should also know these changes in this case since understanding the respective stakes in the business relative to their contributions is essential. Additionally, it would also inform them that the basis for reporting these transactions is (1) if the partner is personally liable for an incurred obligation or (2) if the same is a qualifying non-recourse debt. Finally, knowing this basis is essential since they would know that losses incurred by Widget Unlimited may be offset for the said taxable year if they cannot be credited to the current taxable income CITATION Gra201 \l 1033 (GrantThornton.com, 2020).
Adjustment of Partner’s Tax Basis
The partnership’s tax basis should be adjusted depending on the reportorial and regulatory requirements imposed by the IRC.
On the one hand, Section 704(d) of the Internal Revenue Code would provide a general rule that adjustments should be made that “the determination of the adjusted basis of a partnership interest is ordinarily made as of the end of a taxable partnership year.”
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