Question
Igor Schmitt (876-88-8765), Zoey Taos (764-77-7564), Peter Angelo (548-55-5432) and Pippi Rodriguez (445-44-4321) are equal and active members in STAR Advertising, LLC.STAR's business is to
Igor Schmitt (876-88-8765), Zoey Taos (764-77-7564), Peter Angelo (548-55-5432) and Pippi Rodriguez (445-44-4321) are equal and active members in STAR Advertising, LLC.STAR's business is to create, develop and implement marketing and advertising campaigns for its small business clients. STAR's business is located in Las Vegas, Nevada.The majority of its clients are in the gaming and related businesses.STAR's federal ID number is 987-65-4321.It uses the accrual basis method of accounting for financial statement and tax reporting purposes.STAR is a calendar-year taxpayer.It began business operations on June 30, 2006.Under the Check-The-Box Treasury Regulations STAR files as a partnership for federal income tax purposes. Its current address is 6102 Desert Street, Suite 700, Las Vegas, NV89001.
STAR had a profitable year in 2019 as a result of the significant increase in tourism in Las Vegas.The following is STAR's book income statement for 2019:
Revenues
Fees and commissions$4,512,000
Taxable interest income from bank deposits1,400
Tax-exempt interest2,200
Net gains on sales of stocks11,300
Total Revenues$4,526,900
Expenses
Employee salaries and wages$1,090,000
Advertising and public relations 425,000
Charitable contributions (cash to United Way)20,000
Depreciation expense165,000
Guaranteed payment (services), Igor Schmitt, office manager600,000
Guaranteed payment (services), other members375,000
Meals - subject to 50% disallowance165,000
Entertainment35,000
Travel320,000
Legal and Professional (including accounting fees)132,000
Office rents (building) 120,000
Interest expense - line-of-credit for operations12,000
Insurance premiums (property/casualty)48,000
Office expense150,000
Payroll taxes92,000
Utilities49,800
Total Expenses$3,798,800
Net income $728,100
The beginning and ending balance sheets for the 2019 calendar year for STAR are as follows:
BeginningBSEnding
Cash $556,000$693100
Accounts receivables350,000+200000 550,000
Tax-exempt securities140,000+20000 160,000
Marketable securities456,000-76000 380,000
Leasehold improvements, furniture
& equipment960,000+80000 1,040,000
Accumulated depreciation(560,000)+165000 (725,000)
Total Assets$1,902,000$2098000
Accounts payables $250,000+18000$268,000
Line-of-credit for operations220,000(40000) 180,000
Deferred revenue372,000+66000 438,000
Capital - Igor Schmitt265,000 (144000) + 182025303025
Capital - Zoey Taos265,000303025
Capital - Peter Angelo265,000 303025
Capital - Pippi Rodriguez265,000 303025
Total Liabilities & Capital$1,902,000 $2098100
Depreciation
In prior years, STAR has taken advantage of bonus depreciation and Sec. 179 deductions and fully remodeled the premises and upgraded its leasehold improvements.Thus, all assets placed-in-services prior to January 1, 2019 are fully depreciated for income tax purpose.This year, STAR wrapped up its remodeling with the purchase of $80,000 (placed-in-service on June 1, 2019) of office furniture and equipment. STAR would like to claim a Sec. 179 deduction for tax purposes on the additions. There is no depreciation adjustment for alternative minimum tax purposes.
STAR uses various methods to compute its book depreciation.
Sales of Stocks and Securities Sold 2 Securities:
Bought 2/20/19120000 -> 12/28/19 Sold 80300 = 39700 S/P Cap Loss
Bought 3/18/19110000 -> 9/15/19Sold 161000 = 51000 L/P cap gain
11300 Net L/P cap gain
STAR 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 February 20, 2019, STAR purchased 400 shares of Slot-Tech Corporation stock for $120,000.It then sold those shares on December 28, 2019 for $80,300.On March 15, 2014, STAR purchased 1,200 shares of Research, Inc. stock for $110,000.It sold the Research shares for $161,000 on September 15, 2019.These transactions were reported on Forms 1099-B;
STAR's basis in these shares was reported on the form. (Sold shares compute gain or loss)
Deferred Revenuep. 4-12
Beginning in 2018, STAR expanded its business to offer international advertising services. It offers the advertising services to international gaming companies.Under the contract terms, STAR receives payment for the services up-front.It then is obligated to provide the services to the contracting client over the period of the contract.STAR entered into the following international service contracts in 2018 and 2019: (prepaid service income)
1. Customer: Galaxy Exploration, Inc.8/18-12/18201920202021
2. Contract date: August 1, 20186000014400014400084000
3. Contract duration: 36 months
4. Prepaid revenue: $432,000
12000 mo
1. Customer: Smith Gaming, LLC10/18-12/18201920202021
2. Contract date: October 1, 2019
3. Contract duration:24 months--------3000012000090000
4. Prepaid revenue: $240,000
10000 mo
For financial statement purposes, STAR recognizes the revenue from these pre-paid service contracts on a monthly basis over the life of the contracts.For tax purposes, STAR elected to follow the one-year deferral treatment in IRC 451(c).
^^ talked in previous chap. Will have book/tax diff.
See the attached tax return workpaper to assist you in determining the tax implications of the pre-paid service contracts.
Guaranteed Payments and Capital Accounts
A guaranteed payment in the amount of $600,000 was paid to Igor Schmitt in exchange for services he provided to STAR.The other three members each received a guaranteed payment of $125,000 also for services provided to STAR.In addition, each member withdrew $12,000 in cash per month as distributions (draws) of operating profits. 144/4R
Capital accounts are maintained using GAAP.
Sec. 163(j) Interest Expense Limitation and the Qualified Business Income Deduction
STAR's gross receipts for the three previous tax years were:
2018:$4,600,000
2017:$4,400,000
2016:$4,000,000
You do not need to input additional information relating to the computation of the 20% Qualified Business Income deduction under Sec. 199A.
Line-of-Credit for Operations
The line-of-credit for operations was guaranteed by all the members (recourse).All other liabilities were not guaranteed by the members (nonrecourse).The members share equally in all liabilities; the same as their profit, loss and capital interests.
Miscellaneous
All members are material participants in the business activities of STAR.None of the members sold any portion of their interests in STAR in 2020.There were no distributions of noncash property or interest in the LLC.None of the members contributed cash or other property to the LLC during the year.The LLC never has participated in a like-kind exchange.All members are U.S. citizens who are unrelated to one another.The LLC does not own more than 20% (directly or indirectly) of any other entity.STAR had no foreign operations, and no legal interest in any foreign trusts.STAR is not publicly traded.
The IRS's business activity and code are "Advertising and Related Services," 541800. Igor is the Designated Partner Representative.STAR files its tax return in Ogden, Utah, IRS Service Center.Igor's home address is 520 W. Moon Glow Street, Henderson, NV89055.The home addresses for the other members are:
Zoey Taos, 123 First Street, Las Vegas, NV. 89002
Peter Angelo, 456 Second Street, Las Vegas, NV89002
Pippi Rodriguez, 789 Third Street, Henderson, NV. 89045
1.Prepare the following tax return forms, schedules and supporting schedules and attachments where requested, for STAR for the year ended December 31, 2019:
a.Book-to-Tax Reconciliation (Excel worksheet attached)
b.Form 1065, pages 1-5.
c.Schedule D
d.Form 4562
e.Schedule K-1 for Igor Schmitt
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started