Tax Return Problem 2: Partnership

Instructions:

Complete AAA Fast Plumbing's 2018 tax return based upon the facts presented below. If required information is missing, use reasonable assumptions to fill in the gaps. Ignore all AMT calculations and AMT related reporting items.

Michael Rodriguez and Devontae Johnson have been life-long friends. Both Michael and Devontae started to work for the same national plumbing repair company immediately after graduating from technical college. After nearly a decade of working for that same company, Michael and Devontae decided to venture out on their own and form their own plumbing company called AAA Fast Plumbing Repair (AAA). They formed AAA as a limited liability company (LLC). Michael and Devontae each own 50% of the company. The company has been successful primarily based upon reputation and the fact that AAA is available 24 hours a day, seven days a week. Although AAA charges a premium for after normal business hour calls, most of its competitors will not perform services past 9 p.m. and, thus, AAA finds itself often as one of the only available choices for middle of the night emergencies.

AAA has several employees and because of implementing technology solutions to aid in its call dispatch program, AAA has been able to expand its service area to now include a three-county area instead of just one.

Information relating to AAA and its owners is as follows:

Name of Company: AAA Fast Plumbing Repair, LLC

Address: 1456 East Buena Vista Blvd.

Los Angeles, CA 90001 (has not changed since inception)

Company formed and started: January 1, 2010

Accounting Method: Cash

Tax-year end: December 31

Employer Identification Number: 34-1234567

Members' Information:

Michael Rodriguez

1515 West Bloomington Street

Los Angeles, CA 90001

SSN- 585-31-6060

Phone: 555-234-8745

Profit/Loss/Capital membership interest is 50%.

Devontae Johnson

19 East Violet Circle

Los Angeles, CA 90001

SSN: 397-29-9239

Phone: 555-213-0989

Profit/Loss/Capital membership interest is 50%.

Other information:

• AAA is a domestic limited liability company
• Michael and Devontae are not related.
• Michael and Devontae are both U.S. citizens.
• Both Michael and Devontae are managing members and use the GAAP-basis to track their capital accounts
• AAA has never had annual gross receipts in excess of $25,000,000.
• AAA has not and did not file a Form 8893 or anything similar to it this year or in the past.
• AAA is not a publicly traded partnership.
• During the year, no debt was cancelled or forgiven in relation to AAA.
• All of AAA's activities constitute a qualified trade or business, and the salaries and wages expense represents W-2 wages paid by AAA in 2018.
• The total unadjusted basis for all assets placed in service for the prior 10 years matches the book value of all assets reported on the balance sheet.
• AAA is not required to file a Form 8918.
• AAA did not have or control a foreign bank account or have authority over any such financial account.
• AAA was not the grantor of or a transferor to a foreign trust.
• AAA has never made a Section 754 election.
• AAA has never entered a like-kind exchange or distributed a tenancy-in-common or other undivided interest in partnership property.
• AAA has never been required to file Form 8858.
• AAA was required to file Form(s) 1099 related to certain payments it made during the year and those forms were filed on a timely basis.
• AAA was not required to file any Form(s) 5471 during the year.
• Michael is the Partnership Representative.
• Both Michael and Devontae are active in the business and work full-time for AAA.
• The debt owed to First National Bank is a non-recourse obligation and neither Michael nor Devontae have guaranteed its repayment (see balance sheet below). This debt is not directly tied to any specific asset but is rather a debt secured against all of the assets of the company.
• During the year, Michael and Devontae each contributed $20,000 to the capital of AAA
• AAA does not maintain any inventory. AAA purchases supplies and has a policy of expensing such purchases as paid for tax and book purposes consistent with existing tax law.
• AAA uses MACRS depreciation for both tax and book purposes.
• During the year, Michael and Devontae each received a $75,000 distribution from AAA.
• During the year, AAA acquired the following assets (all assets were placed in service on the acquisition dates as indicated below):
• Service vans-new (not Luxury Automobiles) July 1, 2018 $500,000
• Plumbing machinery/equipment-new July 1, 2018 $250,000
• AAA did not claim Section 179 expense for any of the current year asset additions and has opted out of bonus depreciation for 3 and 5- year recovery period assets.

Financial Statements:

Balance Sheet

Assets: 12/31/17 12/31/18

Cash $ 30,000 $ 45,000

Tax-exempt Securities 100,000 100,000

Building 4,000,000 4,000,000

Less: Acc. Depreciation (551,282) (653,842)

Equipment 2,500,000 3,250,000

Less: Acc. Depreciation (1,481,400) (2,138,800

Land 1,000,000 1,000,000

Total Assets: $5,597,318 $5,602,358

Liabilities and Capital:

Note Payable-First National Bank $4,267,318 $4,046,673

Note Payable-Michael Rodriguez 300,000 300,000

Note Payable-Devontae Johnson 200,000 200,000

Capital Account-MR 415,000 527,842.50

Capital Account-DJ 415,000 527,842.50

Total Liabilities and Capital: $5,597,318 $5,602,358

Income Statement for the year ending December 31, 2018

Item Amount

Income:

Service Revenue-Cash $ 343,565

Service Revenue-Credit Cards $1,922,710

Consulting Revenue-Cash $ 50,950

Consulting Revenue-Credit Cards $ 155,005

Interest Income-First National Bank $ 1,540

Municipal Bond Interest Income $ 2,500

Total Income: $2,476,270

Expenses:

Employee Salaries $ 515,735

Guaranteed payment-MR $ 50,000

Guaranteed payment-DJ $ 50,000

Repairs and Maintenance-Trucks $ 113,415

Rent $ 35,000

Payroll Taxes $ 41,260

Licensing Fees $ 1,750

Property Taxes $ 77,000

Interest Expense $ 235,000

Depreciation $ 759,960

Office Supplies $ 3,420

Employee Training $ 5,675

Advertising $ 18,850

Plumbing supplies $ 15,125

Meals (prior to disallowance) $ 13,740

Travel $ 4,210

Gasoline $ 158,675

Utilities $ 24,940

Telephone $ 16,830

Total Expenses: $2,140,585

Net Income: $ 335,685