Practice ProblemTax Return Issues. Adam, Barbara, and Charlotte formed the equal ABC Partnership; Adam and Barbara each contributed cash of $100,000, and Charlotte contributed land worth $130,000 with a basis of $120,000 and subject to a mortgage of $30,000. In the first year (using the cash basis for tax purposes) they had the following for tax purposes:

Sales	$400,000
Purchases of inventory	180,000
Ending inventory	40,000
Depreciation	30,000
Section 179 expense	25,000
Salaries	40,000
Guaranteed payment to Adam	15,000
Purchases of equipment	150,000
Rent expense	20,000
Interest income	5,000
Mortgage interest expense	1,500
Dividends	1,000
Ending accounts receivable	35,000

Depreciation for book purposes was $20,000, and they had a bad debt accrued expense of $4,000 for book purposes, but no actual charge-offs during the year.

What is ABCs ordinary business income (for tax purposes p. 1, line 22, Form 1065) for the year?

What are its separately stated items (those that go on Sch. K)?

Compute total tax net income, including separately stated items, and reconcile it with book net income (the M-1 reconciliation would be the reverse).

What are its beginning and ending balance sheets for book purposes (as would go on Sch. L, Form 1065)?

(Smith)

Smith, Ephraim, Philip Harmelink, James Hasselback. CCH Federal Taxation: Comprehensive Topics, 127th Edition. CCH Inc., 04/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.