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Tax Return Problem 9: Partnership Instructions: Please complete AAA Fast Plumbing's 2019 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: Address: Company formed and started: Accounting Method: Tax-year end: Employer Identification Number: Members' Information: Michael Rodriguez 1515 West Bloomington Street Los Angeles, CA 90001 SSN-585-31-6060 Phone: 555-234-8745 AAA Fast Plumbing Repair, LLC 1456 East Buena Vista Blvd. Devontae Johnson 19 East Violet Circle Los Angeles, CA 90001 SSN: 397-29-9239 Phone: 555-213-0989 Los Angeles, CA 90001 (has not changed since inception) January 1, 2011 Cash December 31 34-1234567 Profit/Loss/Capital membership interest is 50%. 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 average annual gross receipts in excess of $26,000,000. 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 2019. 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 and AAA is not electing out of the centralized partnership audit regime. 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): O Service vans-new (not Luxury Automobiles) $500,000 $250,000 July 1, 2019 July 1, 2019 O Plumbing machinery/equipment-new 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: Cash Tax-exempt Securities Building Less: Acc. Depreciation Equipment Less: Acc. Depreciation Land Total Assets: Liabilities and Capital: Note Payable-First National Bank Note Payable-Michael Rodriguez Note Payable-Devontae Johnson Capital Account-MR Capital Account-DJ Total Liabilities and Capital: 12/31/18 $ 30,000 100,000 4,000,000 (551,282) 2,500,000 (1,481,400) 1,000,000 $5,597,318 $4,267,318 300,000 200,000 415,000 415,000 $5,597,318 12/31/19 $ 45,000 100,000 4,000,000 (653,842) 3,250,000 (2,138,800 1,000,000 $5,602,358 $4,046,673 300,000 200,000 527,842.50 527,842.50 $5,602,358 Income Statement for the year ending December 31, 2019 Item Income: Service Revenue-Cash Service Revenue-Credit Cards Consulting Revenue-Cash Consulting Revenue-Credit Cards Interest Income-First National Bank Municipal Bond Interest Income Total Income: Expenses: Employee Salaries Guaranteed payment-MR Guaranteed payment-DJ Repairs and Maintenance-Trucks Rent Payroll Taxes Licensing Fees Property Taxes Interest Expense Depreciation Office Supplies Employee Training Advertising Plumbing supplies Meals (prior to disallowance) Travel Gasoline Utilities Telephone Total Expenses: Net Income: Amount $ 343,565 $1,922,710 $ 50,950 $ 155,005 $ $ $2,476,270 $ 515,735 $ 50,000 $ 50,000 113,415 $ $ $ $ 1,540 2,500 $ $ $ $ 35,000 41,260 1,750 77,000 235,000 759,960 3,420 5,675 18,850 15,125 13,740 4,210 158,675 24,940 16,830 $2,140,585 $ 335,685