Read about A & J Gift and Coffee Houses partners and determine what additional information is needed from the partners for you to advise them on their tax planning.

Background

Aliyah Franklin and Jayden Jones have both had businesses on the same city block for years. Ms. Franklin owns and operates a gift shop and Mr. Jones owns and operates a coffee shop. They are planning to form a partnership called A & J Gift and Coffee House in 2022. They both plan to contribute assets that are used in their respective businesses to start the partnership. These assets have increased substantially in value. Ms. Franklin also plans to contribute some cash to help with the liquidity of the partnership.

While these assets that they plan to contribute on formation will help the partnership begin its operations, the partnership will need additional assets to continue to operate. The partners plan to borrow money to help acquire these assets, but they are wondering what the implications of borrowing this money will be. They have come to us, as their tax advisors, for an explanation of the implications.

Write a memo to A & J Gift and Coffee Houses partners with an explanation of the tax issues they should consider and the related tax implications when borrowing the money to help acquire additional assets. In the memo, include your determination of what additional information you would need from the partners to fully determine the tax implications.

Read about The Custom Cabinets Company before preparing the tax workpapers for the partners.

Background

On January 1, 2022, Demi Lee and Quinn Brown formed The Custom Cabinets Company. Demi contributed cash of $240,000 to the partnership in return for a 60% interest in capital and profits. Quinn contributed machinery with a basis of $90,000 and a fair market value (FMV) of $160,000 to the partnership in return for a 40% interest in capital and profits. Quinn depreciated the machinery using the straight-line method. There were five years remaining in the original eight years of useful life of the machinery when Quinn contributed it to the partnership.

The partnership had operating income for 2022 of $40,000.

Prepare the tax workpapers using an Excel document for The Custom Cabinets Companys partners in which you include the following information:

Part A: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method. Also determine the effects on the capital accounts of each partner.

Part B: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method with curative allocations. Also determine the effects on the capital accounts of each partner.

Part C: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the remedial method. Also determine the effects on the capital accounts of each partner. In addition to determining the effects for 2022, determine the basis and return effects in Year 7 under the remedial method.

Part D: Demi believes that there will be a substantial increase in her marginal tax rate in the future (over the next 3-5 years). Given this expectation, what method would Demi prefer that the partnership use to account for the ceiling effect? Explain your answer.

In preparation of the tax workpapers for your clients, read through the background for Custom Bikes in order to determine allocations for the different liabilities.

Background

John Jonathan and Tom Thompson decide to form a partnership called Custom Bikes on January 1, 2022. John contributes cash for a 40% interest in capital and profits. Tom contributes equipment with a basis of $10,000 and an FMV of $30,000 for the other 60% interest in capital and profits.

On January 1, 2022, the partnership bought machinery for use in its business by spending $20,000 cash and incurring a non-recourse liability of $40,000. The loan agreement stipulates that no payments need to be made until the seventh year. In addition, the machinery will be depreciated over five years (using straight-line depreciation and beginning with a full year of depreciation in 2022). Since the cash that John contributed is being used to purchase this property, the partners have agreed to split the depreciation equally (50% to each partner).

Based on this information, prepare the tax workpapers using an Excel document, in which you determine and report each partners basis at the end of Year 1 (2022). Be sure to indicate the adjustments that would be made to each partners basis at the end of Year 4 (2025).

While the Custom Bikes partners had non-recourse liabilities, read about the recourse liabilities of the Three Pigs BBQs partners in preparation for the creation of tax workpapers using an Excel document.

Background

During 2022, Mark Markson, Cara Carlos, and Doug Davis decided to form a partnership called Three Pigs BBQ. Mark was only willing to join the partnership as a limited partner. In return for gaining the limited liability, Mark agreed to take a smaller share of the profits to compensate the other two partners. This allocation agreement meets the substantial economic effect criterion of the regulations. In addition, the partnership agreement stipulated that Cara and Doug are required to restore any deficit balances in their capital accounts.

In forming the partnership, Mark contributed cash of $25,000 in return for a 25% interest in capital and a 15% interest in profits. Cara contributed land used in business, with an FMV of $50,000 and an adjusted basis of $40,000. In return, she received a 50% interest in capital and a 55% interest in profits. Finally, Doug contributed machinery used in his business with an FMV of $25,000 and a basis of $22,000. In return, he received the remaining 25% interest in capital and a 30% interest in profits.

After forming, the partnership purchased equipment using $20,000 of the cash contributed by Mark and incurring a recourse liability of $80,000.

Using this information, prepare the tax workpapers using an Excel document in which you determine and report each partners basis in their partnership interest at the end of this first year.

Tax planning for contributed property is not without complication. Read about the partners of Randolph Real Estate and prepare a memo that advises them on their tax planning.

Background

Your clients, Kevin Garcia and Isaiah Smith, formed a partnership called Randolph Real Estate in 2018. Kevin contributed two pieces of land to the partnership that were used in the partnerships operations:

Parcel A: At the time of contribution, the parcel had an FMV of $100,000 and a basis of $70,000. This parcel was land that Kevin held for investment prior to contributing it to the partnership. The current FMV of the land is $125,000.

Parcel B: At the time of contribution, the parcel had an FMV of $140,000 and a basis of $95,000. This parcel was land that Kevin held as a dealer in real estate prior to contributing it to the partnership. The current FMV of the land is $160,000.

The partnership is considering restructuring its operations, and the partners believe that they may not need both parcels of land any longer, so they are considering having the partnership sell one of the parcels. But they arent sure if they should sell the land now or wait two years. Assume that the partnership agreement specifies that the partners allocate gains on all assets 50%/50%.

In your memo to the Randolph Real Estate partners, provide an explanation of the tax implications to the partners if the partnership sells each parcel. Include an analysis of what would happen if they sell each parcel today, or two years from now.

1. A & J Gift and Coffee House Memo: to 1 page, single spaced Word document
2. The Custom Cabinets Company Tax Workpaper: The series of calculations for each part in Excel
3. Custom Bikes Tax Workpaper: The series of calculations for each part in Excel
4. Three Pigs BBQ Tax Workpaper: The series of calculations for each part in Excel
5. Randolph Real Estate Memo: to 1 page, single spaced Word document