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:
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
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
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
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:
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 12John 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.
Gross sales receipts
Direct materials purchased
Direct other costs
Salaries and wages
Officers' salaries ($75,000 each to Parsons and Smith)
Depreciation expense, tax and book
Rent expense (operating)
Charitable contributions (cash)
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
Beginning balance, Accumulated adjustments account
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.