Tax Return Problem 9: Partnership Instructions: Please complete AAA Fast Plumbings 2014 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, as a result, AAA finds itself often as one of the only available choices for middle of the night emergencies. AAA has several employees and, as a result 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, 2008 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 Profit/Loss/Capital membership interest is 50%. Devontae Johnson 19 East Violet Circle Los Angeles, CA 90001 SSN: 397-29-9239 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. 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. 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 into 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 Tax Matters Partner (TMP). 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, with neither Michael nor Devontae personally responsible for its repayment. 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) July 1, 2014 $500,000 o Plumbing machinery/equipment-new July 1, 2014 $250,000 AAA did not claim Section 179 expense for any of the current year asset additions but it did claim available bonus depreciation. Financial Statements: Balance Sheet Assets: 1/01/14 12/31/14 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) (2,231,663) Land 1,000,000 1,000,000 Total Assets: $5,597,318 $5,509,495 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 415,000 481,411 Capital Account-DJ 415,000 481,411 Total Liabilities and Capital: $5,597,318 $5,509,495 Income Statement for the year ending December 31, 2014 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 $ 852,823 Office Supplies $ 3,420 Employee Training $ 5,675 Advertising $ 18,850 Plumbing supplies $ 15,125 Meals and Entertainment (prior to disallowance) $ 13,740 Travel $ 4,210 Gasoline $ 158,675 Utilities $ 24,940 Telephone $ 16,830 Total Expenses: $2,233,448 Net Income: $ 242,822 partnerships tax