Partnership tax return. Prepare the 2017 partnership tax return, include the additional schedules and forms as needed. Be sure to prepare a Schedule K-1 for each partner. Project information attached.

1. Self-employment earnings

As I explained the capital gain from the stock sale wouldn't be exactly a 30/70 split between Bruce and Diana, the self-employment earnings lines are going to be a bit different, too. See my other post about Sch. K if you don't know exactly what I'm referring to.

Line 14a on Sch. K should be the net earnings excluding the guaranteed payments. This is because guaranteed payments for general partners (which Diana is) are subject to self-employment tax. You're adding them back, because it's not deductible for self-employment tax purposes. However, it's only applicable to Diana. That means Diana's share is the ordinary business income multiplied by 30%, plus the guaranteed payments. Bruce's share is simply the ordinary business income multiplied by 70% (same as line 1 on his K-1).

Line 14c is a bit more complicated. For Bruce, it's just the gross profit minus the guaranteed payment, multiplied by his percentage. For Diana, you do the same, but then you add back the guaranteed payment at the end.

Remember, lines of the K-1s should add up to the number on Schedule K. Definitely finish Sch. K first and let me know if you have questions on that before doing the K-1s.

Finally, if you're using the software, you'll need to enter the gross income as "gross nonfarm income" under "Self-Employment" on the "Other Schedule K Items" screen.

2. Resource loans

On the K-1s, you'll have to include the recourse liabilities each partner is subject to. This includes all liabilities in the problem, so accounts payable, notes payable, and accrued payroll taxes.

3. Schedule K and K-1

Be sure to fill out the Schedule K entirely

Lines 1-13d are all of the separately stated items

Line 14a is the amount subject to self-employment between Bruce and Diana - this is the ordinary business income, excluding guaranteed payments

Line 14c is the partnership's gross profit

Lines 17a-20b are informational, so numbers from above may be here, too. Not all of these lines will be filled, but read the line descriptions to see if something applies.

Then, the K-1s become very straight-forward. The lines on Schedule K correspond directly to the K-1s - you just have to divvy up the amounts according to Bruce and Diana's percentages.

4. Depriciation

It's not stated explicitly except for a column table, but I wanted to make it clear that the company used the same calculations for book depreciation and regular tax depreciation. There is no book-tax difference.

5. Investment Income/Expenses

From what I've seen so far, most of you know that investment income is separately stated income (it's on Schedule K and the K-1s and is not in the ordinary business income).

Therefore, the related expenses (invesment expense and investment interest expense) are also separately stated. Be sure to look for the proper K-1 codes.

If you're using the software, there's a dedicated line for investment interest expenses, but the investment expense will go on the "Other Deductions" line under "Section 59(e)(2)" Election Expenses" with code K. The investment expense will also need to be entered at the bottom of that screen under "Other Information" where it says "Investment Expenses [adjust]"

6. Corporate Stock Sale

Between 341 and 441, there's been a lot of discussion of "basis." Basically, basis is created when you pay for something (this why you see on Schedule D "cost or other basis"). In this case, it's the $48,000 Bruce originally paid for the stock. (Calculating basis can be much more complicated, but that's not for this project.)

For tax purposes, basis is increased when you pay tax on something (again, it's more complicated in some situations, but that's a general rule of thumb to use here). Although the company recorded the stock at its fair market value at the date of Bruce's contribution, this was not income at the time to Bruce, so he did not pay tax on it. The "tax basis," then, is still $48,000.

This means two things:

1. The entire gain of $720,000 - $48,000 should be reported on Schedule D

2. $192,000 ($240,000 - $48,000) is "pre-contribution gain" to Bruce. This is the increase of value of the stock when he owned it personally.

Therefore, of the total gain (number 1), $192,000 is only allocable to Bruce. The rest of the gain (which occurred while the partnership held the stock) is allocable to Bruce and Diana according their percentages.

Also, because the book value was $240,000, the $192,000 pre-contribution gain is not accounted for on the books, so it belongs on a reconciliation of book-to-tax income.

7. Balance Sheet Correction!!!

There is a typo on the ending balances of the balance sheet - the corporate stock and municipal bonds should be switched, because the corporate stock was all sold and none of the bonds were.

8. P-ship Return - Analysis of Net Income

As you work on the partnership return, you may notice the "Analysis of Net Income (Loss)" on the top of page 5 of Form 1065.

Line 1 tells you exactly how to get this number. This is essentially what the taxable income of the partnership would be if nothing was stated separately. This should match line 9 of the M-1, because book income doesn't differentiate between partnership income and separately stated partner (Sch. K) items.

This also means that the M-1 can have items that are related to items on page 1 and Schedule K. If you have questions, let me know!

Update: Line 2 is asking what kind of entities the partners are. It's a partnership return, but the partners themselves could be corporations, partnerships, individuals, etc.

9. Check figures:

These are all on Form 1065

Page 1 line 8 - $2,950,000

Page 1 line 22 - $1,414,100

Page 5 Analysis of Net Income line 1 and M-1 line 9 - $1,751,200