Question

The company FPA has the following income, expense, and loss items for the current year.

Sales $850,000
Tax-exempt interest $40,000
Long-term capital gain $85,000
Short-term capital loss $35,000
Passive activity loss $20,000
Cost of goods sold $480,000
Depreciation $40,000
Section 179 expense $50,000
Other operating expenses $200,000
Net operating loss (from previous year) $24,000

Prepare a calculation of taxable income for the following scenarios and indicate the tax form(s) to report the business activity: Partnership equally owned by Vinnie and Chandra

Answer 1

Income from a partnership is taxed at the partner level. To get the proper tax treatment by the partners, the items that are subject to varying rules must be separately stated. Items that are not included in the partnership's operating income calculation are the tax-exempt interest, the capital gains and losses, the Section 179 deduction, and the passive activity loss.

The net operating loss carryforward would have been distributed to the partners in the preceding year. The partnership's operating income is $130,000:

Sales $ 850,000

Cost of goods sold (480,000)

Depreciation (40,000)

Other operating expenses (200,000)

Operating income $ 130,000

Vinnie and Chandra will each report one-half of the partnership's operating income and separately stated items on their individual returns

: Vinnie Chandra Operating income ($130,000 x 1/2) = $ 65,000

Tax-exempt interest ($40,000 x 1/2) = $ 20,000

Long-term capital gain ($85,000 x 1/2)= $ 42,500

Short-term capital loss ($35,000 x 1/2) = $(17,500) $

Passive activity loss ($20,000 x 1/2) = $(10,000)

Section 179 expense ($50,000 x 1/2) =$(25,000)

Each partner will include their $65,000 share of the partnership operating income on their individual returns. The share of the capital gains and losses must be netted with any other capital gains and losses Vinnie and Chandra have for the year.