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 income 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. Page 1 of Form 1065 & Schedule M-1 (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. Note: in preparing the Schedule M-1, partnerships are taxed different than C Corps, so the M-1 uses slightly different terminology than the C Corp. M-1 completed in class; however, the same general concepts apply. For our purposes, included on Schedule K means included on the tax return. Also, partnerships do not have a book/tax difference resulting from federal income tax expense because partnerships are not taxed at the business entity level. Do not use commercial tax preparation software to prepare your tax return. 2. Draft a brief memorandum (3-4 paragraphs) explaining why A&Bs net income per books is not the same as income per return. Explain all 3 book/tax differences, and identify whether each is a temporary or permanent difference. Your Forms and memorandum must be uploaded to Canvas prior to noon on October 5, 2017. Forms must be uploaded in pdf format, and memorandum must be uploaded in doc or docx format. 2 Tax Return Project Grading Rubric Part 1 Properly Calculating Total Income (Loss) and Deductions ___/ 6 points Did you properly identify gross receipts or sales for tax purposes? Did you properly calculate cost of goods sold and complete Form 1125-A? Did you properly identify and calculate the deductible expenses for tax purposes? Did you include a statement listing the other deductions? Reconciliation of Income (Loss) Per Books with Income (Loss) Per Return ___ / 5 points Did you properly identify and calculate the book/tax differences that need to be reconciled? Did you properly categorize the book/tax differences (include on proper lines)? Did you include the necessary statements or itemization? Memorandum ___ / 6 points Does the memo address the required items? Is the information provided in the memo accurate and thorough? Is the information clearly communicated in a concise manner? Overall Professionalism ___ / 3 points Overall professionalism of the return and memo (e.g. legible, professional format, no spelling/grammatical errors, etc.) Notes: Total Score ___/20