On January 1, 2006, the Branson Company (EIN 22-2222222) and Porto Engineering, Inc. (EIN 33-3333333), formed Branto, LLC (an equally owned joint venture). During its first four years, the LLC worked with the U.S. Department of Homeland Security and the National Transportation Safety Board to design and develop a specific device for airport passenger screening. Porto provides engineering expertise, and Branson provides high-tech manufacturing, selling, and distribution expertise. Early in 2011, the two governmental agencies recommended the product. In 2012, Branto's screening device was being successfully marketed, sold, delivered, and installed in airports around the United States.

The LLC uses the accrual method of accounting and the calendar year for reporting purposes. Its current address is 3750 Airport Boulevard, Seattle, WA, 98124. The following information was taken from the trial balance supporting the LLC's GAAP-basis (audited) financial statements for the 2012 calendar year:

The beginning and ending GAAP-basis balance sheets for the LLC were as follows at December 31, 2012:

The LLC uses the lower of cost or market method for valuing inventory. Branto is subject to § 263A; for simplicity, assume that § 263A costs are reflected in the same manner for book and tax purposes. Branto did not change its inventory accounting method during the year.
There were no write-downs of inventory items, and Branto does not use the LIFO method. The LLC claimed $2,499,270 of depreciation expense for tax purposes (book depreciation is $1,275,000). All tax depreciation expense should be reported on Schedule A. The LLC placed $3 million of assets in service during the current year; this exceeds the threshold for eligibility for a § 179 deduction. Tax depreciation amounts reflect bonus depreciation deductions (and these assets are not subject to AMT adjustments). Depreciation for assets placed in service in prior years creates an adjustment of ($276,900) for AMT purposes. (This is a negative amount-book depreciation for these assets is greater than tax depreciation.)
All borrowings were used exclusively for business operations; consequently, none of the interest expense is considered investment interest expense. The LLC members were required to guarantee the debt related to the operating line of credit. The accounts payable, accrued warranty claim liabilities, and mortgage were not guaranteed by the members. The mortgage relates to the real property and is considered qualified nonrecourse financing.
The partners share equally in all LLC liabilities, because all initial contributions and all ongoing allocations and distributions are pro rata.
The LLC's activities are eligible for the domestic production activities deduction (DPAD). For simplicity, assume that the LLC's qualified production activities income (QPAI) is $9.5 million. The LLC's production-related W-2 wages are $10 million.
No guaranteed payments were paid to either of the LLC members. Instead, the members each withdrew $3.4 million of cash during the year. The LLC has never made a distribution to the partners of noncash property. The LLC has not made a § 754 election and had no transactions during the current year that would warrant such an election. None of the members sold any portion of their interests in the LLC during the year.
Both LLC members are U.S. Subchapter C corporations. The LLC's operations are entirely restricted to the United States, and all sales were to U.S. businesses. The LLC had no foreign operations, no foreign bank accounts, and no interest in any foreign trusts or other LLCs.
None of the members contributed cash or other property to the LLC during the year.
Both members are classified as "corporations" and "LLC member-managers" on Schedule K-1. The capital account analysis on Schedule K-1 is prepared on a tax basis. On the Analysis of Income (Loss), the IRS's instructions indicate that the amounts for any LLC members should be reported on the line for limited partners.
The IRS's business code for "Other specialty trade contractors" is 238900. The LLC files its tax return in Ogden, Utah. Branson Company is located at 3750 Airport Boulevard, Seattle, WA 98124 (the same as the LLC's address). Porto Engineering, Inc., is located at 42100 Highway 980 West, Tacoma, WA 98401. The LLC member corporations are each owned by several unrelated individual taxpayers. Branson Company is the tax matters partner.
The capital account reconciliation on the partners' Schedules K-1 is prepared on a GAAP basis, as is the LLC's Schedule L. The LLC is required to file Schedule M-3, Form 8916-A (Supplemental Attachment to Schedule M-3), and Schedule C with its Form 1065.

Instructions:

Prepare pages 1-5 of Form 1065 for Branto, LLC. Do not prepare Form 4562. Leave any items blank where insufficient information has been provided. Prepare supporting schedules as necessary if adequate information is provided. You may assume that the answer to each "yes/no" question on page 3 is "no" unless discussed above.
Prepare ScheduleM-3 andForm8916-A (page 1). Do not prepare Schedule C. You will find four book-tax differences (two temporary differences and two permanent differences).
Prepare Schedule K-1 for 50% LLC member Branson Company.

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Revenues Sales revenues Interest income $40,000,000 50,000 $40,050,000 Total revenues Amounts related to cost of goods sold: Beginning inventory Materials purch ases Labor Additional S 263A costs Other costs: Various items s 2,000,000 8,000,000 9,000,000 2,700,000 1,275,000 3,000,000) $19,975,000 Book depreciation Less: Ending inventory Total amount of work in progress Other costs not related to production: 1,000,000 300,000 100,000 200,000 1,200,000 800,000 300,000 300,000 600,000 2,000,000 2,500,000 800,000 Warranty expense (increase to reserves; not fixed and determinable) 300,000 $10,400,000 Net income per books and GAAP-basis audited financial statements$ 9,675,000 Salaries and wages Taxes and licenses Charitable contributions Interest expense Meals and entertainment (subject to 50% disallowance) Travel expenses Employee benefit programs Insurance (including key employee life insurance of $100,000) Legal and professional fees Office expenses Sales and promotion expenses Utilities Total other costs Beginning Ending Cash Accounts receivable Inventories U.S. government obligations Land Buildings and equipment Accumulated depreciation $975,000 1,825,000 620,000 2,600,000 2,000,000 3,000,000 1,000,000 600,000 12,000,000 15,000,000 (6,375,000) (7,650,000) 0, 820,000 $16,375,000 1,000,000 600,000 Total assets Accounts payable Other current liabilities: $420,000 $800,000 Operating line of credit (guaranteed by LLC members) Warranty reserves (not guaranteed by 1,000,000 2,000,000 members) 200,000 Mortgage notes on building Capital, Branson Company Capital, Porto Engineering, Inc. 500,000 5,000,000 6,000,000 2,100,000 3,537,500 2,100,000 3,537,500 10,820,000 16,375,000 Total liabilities and capital