TAX PROBLEMS

Tax Return Problem (1065)                                                        chapter 10

Ryan Ross (111-11-1112), Oscar Omega (222-22-2222), Clark Carey (333-33-3333), and Kim Kardigan (444-44-4444) are equal active members in ROCK the Ages LLC. ROCK serves as agents and managers for prominent musicians in the Los Angeles area. The LLC's Federal ID number is 55-5555555. It uses the cash basis and the calendar year and began operations on January 1, 2004. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036. ROCK was the force behind such music icons as Rhiannon, Burgundy Six, Elena Gomez, Tyler Quick, the Moonwalkers, and Conjuring Dragons and has had a very profitable year. The following information was taken from the LLC's income statement for the current year:

Revenues:

Fees and commissions                                                                                                     $4,800,000

Taxable interest income from bank deposits                                                                         1,600 

Tax-exempt interest                                                                                                                    3,200

                Gains and losses on stock sales                                                                                                 4,000

Total revenues                                                                                                     $4,808,800

Expenses:

Advertising and public relations                                                                                       $ 380,000

                Charitable contributions                                                                                                         28,000

Section 179 expense                                                                                                                 20,000

Employee salaries and wages                                                                                            1,000,000

Guaranteed payment, Ryan Ross, office manager                                                           800,000

Guaranteed payment, other members                                                                              600,000

Entertainment, subject to 50% disallowance                                                                    200,000

Travel                                                                                                                                        320,000

Legal and accounting fees                                                                                                  $ 132,000

Office rentals paid                                                                                                                    80,000

Interest expense on operating line of credit                                                                      10,000

Insurance premiums                                                                                                               52,000

Office expense                                                                                                                       200,000

Payroll taxes                                                                                                                            92,000

Utilities                                                                                                                                    54,800

Total expenses                                                                                                   $3,968,800

During the past couple of years, ROCK has taken advantage of bonus depreciation and § 179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, ROCK wrapped up its remodel with the purchase of $20,000 of office furniture for which it will claim a § 179 deduction. (For simplicity, assume that ROCK uses the same cost recovery methods for both tax and financial purposes.) There is no depreciation adjustment for alternative minimum tax purposes.

ROCK invests much of its excess cash in non-dividend-paying growth stocks and tax-exempt securities. During the year, the LLC sold two securities. On June 15, 2015, ROCK purchased 1,000 shares of Tech, Inc., stock for $100,000; it sold those shares on December 15, 2015, for $80,000. On March 15, 2014, ROCK purchased 2,000 shares of BioLabs, Inc., stock for $136,000; it sold those shares for $160,000 on December 15, 2015. These transactions were reported to the IRS on Forms 1099–B; ROCK's basis in these shares was reported.

Net income per books is $840,000. The firm's activities do not constitute “qualified production activities” for purposes of the § 199 deduction. On January 1, 2015, the members' capital accounts equaled $200,000 each. No additional capital contributions were made in 2015. In addition to their guaranteed payments, each member withdrew $250,000 cash during the year. The LLC's balance sheet as of December 31, 2015, is as follows:

                                                                                                            Beginning                       Ending

Cash                                                                                               $ 444,000                            $ ??

Tax-exempt securities                                                                    120,000                            120,000

Marketable securities                                                                    436,000                            300,000

Leasehold improvements, furniture, and equipment              960,000                           980,000

Accumulated depreciation                                                          (960,000)                         (980,000)

Total assets                                                                    $1,000,000                           $ ??

Operating line of credit                                                             $ 200,000                             $ 160,000

Capital, Ross                                                                                  200,000                                ??

Capital, Oleander                                                                         200,000                                ??

Capital, Carey                                                                               200,000                                ??

Capital, Kardigan                                                                         200,000                                 ??

Total liabilities and capital                                         $1,000,000                            $ ??

Assume that all debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC.

The business code for “Agents and Managers for Artists, Athletes, Entertainers, and Other Public Figures” is 711410. The LLC's Form 1065 was prepared by Ryan Ross and sent to the Ogden, UT IRS Service Center. All members are active in LLC operations.

a. Prepare Form 1065, pages 1, 4, and 5, for ROCK the Ages LLC using tax basis information for Schedules L and M–2.

b. If you are using tax return preparation software, prepare Form 4562 and Schedule D.

c. Prepare Schedule K–1 for Ryan Ross, 15520 W. Earlson Street, Pacific Palisades, CA 90272.

Tax Return Problem       (1020 S)              chapter 12

John Parsons (123-45-6781) and George Smith (123-45-6782) are 70% and 30% owners, respectively, of Premium, Inc. (11-1111111), a candy company located at 1005 16th Street, Cut and Shoot, TX 77303. Premium's Selection was made on January 15, 2009, its date of incorporation. The following information was taken from the company's 2015 income statement.

Interest income

$   100,000 

Gross sales receipts

2,410,000 

Beginning inventory

9,607 

Direct labor

(203,102)

Direct materials purchased

(278,143)

Direct other costs

(249,356)

Ending inventory

3,467 

Salaries and wages

(442,103)

Officers' salaries ($75,000 each to Parsons and Smith)

(150,000)

Repairs

(206,106)

Depreciation expense, tax and book

(15,254)

Interest expense

(35,222)

Rent expense (operating)

(40,000)

Taxes

(65,101)

Charitable contributions (cash)

(20,000)

Advertising expenses

(20,000)

Payroll penalties

(15,000)

Other deductions

(59,899)

Book income

704,574 

A comparative balance sheet appears below.

                                                                                                January 1,2015     December 31,2015

Cash                                                                                               $47,840                  $ ?

Account receivable                                                                          93,100              123,104

Inventories                                                                                          9,607               3,467

Prepaid expenses                                                                           8,333                  17,582

Building and equipment                                                               138,203               185,348

Accumulated depreciation                                                (84,235)                     (?)

Land                                                                                                  2,000                  2,000

Total asset                                                                                     $214,848                $844,422

Account payable                                                                             $42,500                $ 72,300                                                                              

Notes payable   (less than 1 year)                                                    4,500                     2,100

Notes payable   (more than 1 year)                                                 26,700                   24,300                                                        

Capital stock                                                                                     30,000                  30,000

Retained earnings                                                                            111,148                     ?

Total liabilities and capital                                                             $214,848                $844,422

Premium's accounting firm provides the following additional information.

Distributions to shareholders

$100,000

Beginning balance, Accumulated adjustments account

$111,148

Using the preceding information, prepare a complete Form 1120S and Schedule K–1s for John Parsons and George Smith, 5607 20th Street, Cut and Shoot, TX 77303. Do not complete the Form 4562. If any information is missing, make realistic assumptions.