TAX RETURN PROJECT ACCY 171 FALL 2017 1 Part 1 Facts: Amad Aarons and Bob Brooks are equal partners in A&B, a general partnership started on April 1, 2014. A&Bs EIN is 12-3456789. A&Bs address is 1 Main Street, Sacramento, CA 95816. A&B is a calendar-year, accrual-method partnership. The principal business activity and product/service is Sporting Goods Store, and the business code is 451110. A&Bs net income per books in 2016 was $312,000. The following items come from A&Bs 2016 income statement (book, not tax, income and expenses): Gross receipts: $815,000 (this includes $10,000 in prepaid services received in 2015 but included in book income in 2016 - discussed below) Refunds: $15,000 Cost of Goods Sold $240,000 Employee Salaries: $130,000 (not paid to partners) Payroll Taxes: $9,000 Rent: $24,000 Advertising: $45,000 Meals & Entertainment $30,000 (all subject to 50% limit) Bad Debt Allowance: $10,000 (none of which represents wholly or partially worthless debt) For tax purposes, A&Bs beginning inventory value was $150,000, 2016 inventory purchases were $250,000, and ending inventory value was $160,000. Inventory was valued using the cost method, and LIFO was not adopted or used in 2016. 263A does not apply. On January 1, 2015, A&B received a prepayment for services totaling $30,000. The services were performed 1/3 in 2015, 1/3 in 2016 and 1/3 will be performed in 2017. For book purposes, the income was recognized as follows: $10,000 in 2015, $10,000 in 2016 and $10,000 in 2017. Assignment: 1. Please prepare the following for A&B using the Forms and Schedules provided on the course website: A. Form 1065 (Page 1 & Schedule M-1 only; include your name as the paid preparer, but leave the return unsigned); and B. Form 1125-A. Leave all other Schedules on the Form 1065 blank. Do not use commercial tax preparation software to prepare your tax return. 2. Draft a brief memorandum explaining why A&Bs book income is not the same as taxable income. Explain all 3 book/tax differences, and identify whether each is a temporary or permanent difference.