SOLE PROPRIETORSHIPS AND FLOW-THROUGH ENTITIES
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Case 1
Angelo Mathews operates a consulting business, AM Enterprises, as a sole proprietorship. He had to transfer $300,000 of stocks and securities into AM Enterprise’s name to show financial viability for the business. During the current year, the business had the following income and expenses from operations:
$
Consulting revenue 350,000
Travel expenses 90,000
Transportation 8,000
Advertising 9,000
Office expense 3,000
Telephone 1,000
Dividend income 5,000
Interest income 6,000
Charitable contribution 4,000
Political contribution 5,000
Requirements
- Determine the Schedule C net income. How are items not included in the Schedule C net income reported?
- Refer to the information in the preceding problem, except that AM and his wife Mary are equal partners in AM Enterprises, which operates as a partnership. How would they report the income and loss items from partnership operations?
- Refer to the information in the problem, except that AM operates AM Enterprises as an S corporation. How would Jerry report the income and loss items from S corporation operations?
Case 2:
Virat and Rohit formed the VR Partnership as equal partners. Each partner contributed cash and property with a115,000 and Virat had a basis of $80,000 and Rohit a basis of $50,000 in their partnership interests. At the end of their first year of operations, they had the following results:
Gross sales $320,000
Cost of goods sold 95,000
Rent expense 38,000
Employees’ salaries 30,000
Utilities 15,000
Charitable contribution 11,000
Section 1231 gain 4,000
Tax-exempt interest income 2,000
Requirements
- What is the net income, excluding separately stated items, that each partner is required to report at the end of the year?
- How is each of the separately stated items treated on the partners’ tax returns?
- What is each partner’s basis at year-end?
- Explain how Virat and Rohit’s initial bases could differ if they both contributed cash and property valued at $80,000.
Case 3
The operating results for Sammy Corporation, an S corporation, for last year were as follows:
Revenues
Gross sales $3,400,000
Tax-exempt bond interest 32,000
Dividend income 28,000
Section 1231 gain (land) 10,000
Expenses
Cost of goods sold $1,900,000
Salaries 800,000
Rent 200,000
Utilities 60,000
Depreciation 40,000
Charitable contribution 12,000
Section 179 expense 20,000
- Determine the corporation’s net income and its separately stated items.
- Determine the corporation’s financial accounting income if the gain on the sale of the land is only
$6,000 and depreciation is $32,000 under financial accounting rules.
Case 4
On March 15, 2013, Sahib formed a business to rent and service vending machines providing healthy snack alternatives and juices to the local middle and high schools. He operates the business as a sole proprietorship from his home, turning the den into an office from which he manages the business. The den contains 400 of the home’s total 1,800 square feet. In addition, he rents additional space in a warehouse complex where he stores his inventory.
When he formed the business, he converted his Ford pick-up truck solely to business use to deliver machines and products to the schools. When converted, the truck had a basis of $18,250 and a fair market value of $12,500. He purchased a small car for his personal use.
During 2015, the business reported the following:
Rental income $ 20,000
Sales of products 288,000
Cost of sales 121,000
Truck expense (excluding depreciation) 14,000
Telephone 600
Rent expense 2,400
Part-time delivery person 25,000
Machine repairs 5,500
Meals and entertainment 4,000
Charitable contributions 10,000
Liability insurance 12,000
In April of 2013, Sahib bought 20 vending machines for $60,000; in April of 2014, he bought 20 more machines for $65,000; in June of the current year, he purchased 10 more vending machines for $35,000. All vending machines have a seven-year life and are depreciated under MACRS. Sahib did not elect Section 179 expensing or bonus depreciation in any year. James’s expenses related to his home are
Rent $24,000 Utilities $600
In December, Sahib sold the original truck for $5,000 and purchased a new truck for $24,000. Determine Sahib’s income or loss from the business. Do not include in this figure items that would not be included on his Schedule C but detail those items separately. Calculate Sahib s’s self-employment taxes assuming he has no other income subject to FICA taxes
Case 5
Rose and Merry decide to form a business. They each plan to contribute $20,000 in exchange for a 50% interest in the business. They will then take out a bank loan for $30,000 to cover the balance of their working capital needs. They expect that the business will make a profit of $64,000 in the first year and that it will not make any cash distribution that year. Excluding the business income, Rose who files as head of household, has $475,000 of other ordinary taxable income. Merry is married and files a joint return, he and his wife have $130,000 of other ordinary taxable income. They want to know how much tax the business will pay and how much additional tax they will personally pay in 2015 if they form the business as a Partnership or C corporation
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