ACCT 4250/6250 Partnership Return Project

Three friends decide to form a restaurant business. They decide not to incorporate and form a general partnership. Brendan has a 40% capital and profits interest. Jenny has a 20% capital and profits interest. Alice has a 40% capital and profits interest. They named the business Three Amigos. They rented a storefront at 123 Main Street, Toledo, OH, 43617. The business opened on January 1, 2020. The companys tax identification number is 98-4561234.

Partner Information:

Brendan Smith contributed two acres of land. Brendans tax basis was $175,000 and the fair market value at the time of contribution was $320,000. There was also a nonrecourse mortgage of $120,000 attached to the land. Brendan does materially participate in the partnerships operations. He is considered the general partner. His social security number is 456-78-9023. His address is 270 Bancor Street, Toledo, OH, 43617.

Jenny Webb contributed services to the partnership. These services have a fair value of $100,000. Jenny does materially participate in the partnerships operations. Her social security number is 742-10-3658. Her address is 318 Dorr Street, Toledo, OH, 43617.

Alice Barrett contributed $200,000 in cash to the partnership and received. She did not perform any work for the partnership. Her social security number is 123-45-6789. Her address is 456 Central Avenue, Toledo, OH, 43617.

Financial Information:

Income Statement for the period ending 12/31/2020

Revenue $800,000

Cost of Goods Sold $500,000

Gross Profit $300,000

Operating Expenses:

Advertising $60,000

Wages $50,000

Payroll Taxes $3,825

Guaranteed Payment $60,000

Meals $7,000

Rent Expense $25,000

Income from Operations $94,175

Other Income (Expenses):

Interest Income $2,000

Interest Expense ($6,000)

Gain from sale of land $12,825

Net Income $103,000

Balance Sheet immediately after formation

Cash $200,000 Mortgage $120,000

Land $320,000 Capital Brendan $200,000

Total Assets $520,000 Capital Alice $200,000

Total Liabilities and Equity $520,000

Additional Information:

1. None of the partners are foreign citizens. No one has any foreign bank accounts or assets.
2. Three Amigos elected to be a cash-basis company.
3. There was no ending inventory at the end of the year.
4. No payments were made that would require Three Amigos to file 1099s.
5. The partnership is not electing out of centralized audit regime.
6. Interest income is just from their main bank account. There are no other investments generating interest or dividends.
7. Three Amigos decided to raise additional funds by selling a portion of the land contributed by Brendan. The company sold an acre for $56,575. The land qualifies as a Section 1231 asset. The sale did not affect the mortgage.
8. The guaranteed payment was made to Jenny for her services performed during the year. No other partner received a guaranteed payment.
9. Brendan took a $40,000 distribution from the partnership. No other partner took a distribution.
10. For Schedule L, M-1, M-2, and the form K-1 list the beginning of the year as all zeros. Since the partnership did not exist last year there are no beginning values.
11. Ending cash is $306,750. You should have enough information to create the ending balance sheet for the company based on the above information.
12. Form K-1 Box 20 is meant to provide additional information to partners for their personal return. Relevant Codes: Code N is for business interest; Code Z is for wages used to calculate the deduction for qualified business income (QBI).

Requirements:

1. Prepare Form 1065. This includes schedules K, L, M-1, and M-2.
2. Prepare Form K-1 for all three partners.
   1. I suggest calculating the partners outside basis separately before completing this step.