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Please follow the instructions below. OverviewYou are a senior tax accountant in the firm, Ernest & Rainhouse. Joe, a new junior accountant, has just completed an interview with a new client Harry,...

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Please follow the instructions below.


You are a senior tax accountant in the firm, Ernest & Rainhouse. Joe, a new junior accountant, has just completed an interview with a new client Harry, who is a general partner of Widget Unlimited. Harry is seeking to have Ernest & Rainhouse prepare Widget Unlimited's Partnership Tax Return. Joe has never prepared a Partnership Tax Return and seeks your help in doing so. Additionally, there are a couple of questions Harry asks that Joe needs your assistance in answering. You are to read the scenario below and then follow the instructions.


Henry, Hunter, and Harry formed a partnership (Widget Unlimited) on January 1, 2020. Henry and Hunter each contributed $200,000 and Harry transferred a building he had purchased two years earlier to the partnership. The building had a tax basis of $150,000 and was appraised at $300,000. The building was also encumbered with a $100,000 mortgage. The partners plan to use the building to manufacture, distribute, and sell green and purple widgets.

Harry will work full-time operating the business for which he will receive guaranteed payments (not included in expenses) of $5,000 per month. Henry and Hunter will devote less than twelve days a year to the business. At the end of 2020, Widgets Unlimited had made $6,000 in mortgage principal payments. The partnership agreement specifies that Henry, Hunter, and Harry will share in income/loss in the ratio of 3:3:4.

For the first year of operation, the partnership records disclose the following information:

First-year disclosures
Sales revenue $820,000
Cost of goods sold $735,000
Operating expenses $65,000
Long-term capital gains $3,300
~1231 gains $1,500
Charitable contributions $700
Political campaign donation $500
Municipal bond interest $450


Write a 3-5 page paper in which you do the following:

  • Using the information provided, create aForm 1065: U.S. Return of Partnership Income 2020for Widgets Unlimited, preparing a Schedule K for Henry, Hunter, and Harry.

  • Refer to the completed Form 1065 schedule of Henry, Hunter, and Harry's adjusted tax basis immediately after partnership formation and at the end of the first year of operation. Explain in what situations Henry, Hunter, and Harry would need to know the tax basis in their partnerships. Explain how often a partner's tax basis in his partnership needs to be adjusted. Justify your answer with relevant tax code citations.

  • The tax code specifically enumerates several common separately stated items. Explain which items would be separately stated for partners Henry, Hunter, and Harry. Explain why each should be separately stated, citing relevant tax codes for at least three of your identified separately stated items.

  • Assume Widgets Unlimited initial year of operation resulted in a loss. Explain in what order are the loss limitation rules applied to limit a partner's losses from partnerships.

  • Explain how Henry, Hunter, and Harry would determine whether they are passive participants in Widgets Unlimited when applying the passive activity loss limitation rules.

  • Use at least two quality sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment. For help with research, writing, and citation, access thelibraryor reviewlibrary guides.

  • Produce writing that is clear and well organized and applies appropriate SWS style. Writing contains accurate grammar, mechanics, and spelling.

Answered Same Day Feb 19, 2024


Sandeep answered on Feb 20 2024
12 Votes
A partnership is a formal entity recognized by the IRS, comprised of two or more individuals or entities joining forces for business endeavours. Partnerships can include individuals, other businesses, or trusts. To formalize their a
angement, partners should establish a partnership agreement outlining their roles and responsibilities. Additionally, each year, the partnership must submit a Form 1065, known as the U.S. Return of Partnership Income, to the IRS.
In a partnership, each partner's tax basis comprises their contributions, share of liabilities, and any allocated revenues. However, the partnership's tax basis decreases when it distributes profits to partners. For example, in Troy's case, a partner's tax basis capital account balance reflects the cash and tax basis of properties contributed, adjusted by taxable distributions, changes in losses, and cash received to settle liabilities.
There are two essential types of tax basis in partnerships: Inside Basis and Outside Basis. The inside basis pertains to the partnership's overall tax basis, while the outside basis concerns the tax basis for each individual partner. When a partner obtains interests in the partnership, they are assigned a tax basis reflecting their investment.
The partner's basis in a business depends on various factors, including how they acquired their interest, such as through purchase, contribution, or exchange of services. This basis can fluctuate over time, either increasing or decreasing.
An increase in basis occurs when partners contribute additional assets, purchase more interests, or when their share of partnership liabilities rises. Additionally, when taxable or tax-exempt income is allocated to the partner, it can also boost their basis.
Conversely, basis decreases when distributions are made, the partner's adjusted basis is sold or transfe
ed, or when their share of liabilities, losses, or deductions decreases. Non-deductible expenses and cash withdrawals also contribute to a decrease in basis.
Understanding the tax basis of their company is crucial for Ha
y, Henry, and Hunter both collectively as a partnership and individually as partners.
Separately stated items attributed to Ha
y, Henry, and Hunter include 1231 gains, charitable contributions, and long-term capital gains. These items are passed through to the owners without impacting the entity's income directly.
A 1231 gain represents the disparity between the tax basis of Section 1231 property and its selling price. If the property is sold for...

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