Background information:

Ellen & Portia are Registered Domestic Partners (since Jan 1st, 2018) and are both going to file as single for 2019 on the federal return and jointly for the California state return.

My professor has us doing a tax research project, it says this:

3.Ellen & Portia operate Herbal Medical Store, LLC in Los Angeles, California. The company sells and distributes CBD marijuana products for medical purposes which are legal in California as follows:

Medical patients and their designated primary caregivers may legally possess and cultivate (but not distribute or sell) marijuana under California Health and Safety Code Section 11362.5 - Proposition 215.

Federal law classifies marijuana as a class one drug that is illegal to possess, cultivate, distribute or sell. Assume CBD is legal under Federal law.

2019 was their first year of business operations. All of their patients have signed statements indicating that they are their designated primary caregiver. They also have on file physician's recommendations for all marijuana that was provided to their patients.

Tax information for 2019 is as follows:

Revenues$200,000

Cost of Goods Sold (i.e. Marijuana)<120,000>

Gross Profit$80,000

Less: Selling & Administration Expenses

1.Rent$40,000

2.Inspection & filing fees10,000

3.Salaries20,000

4.Consulting fees to Inspectors 5,000

5.Political Contributions to

local politicians 15,000

Total Expenses<90,000>

Net Income $ <10,000>

The Herbal Medical Store, LLC will file it's initial LLC tax return as a partnership and will issue IRS Forms K-1 to both Ellen & Portia for of the profits/losses and other distributive items.

Tax Issue #3 - Federal Tax filings for Herbal Medical Store, LLC

Issue A - What filing options do Ellen & Portia have regarding the LLC's initial tax filing for Federal purposes?

Issue B - What items of income & expense should be reported by Herbal Medical Store, LLC on its initial Federal Tax Return for 2019?

Issue C - What advice would you give Herbal Medical Store, LLC for future filings, if any?