Tax return Project

ACC 410 Partnership Tax Return Project Fall 2020 page 1

ACC 410– Advanced Tax Accounting Fall 2020

Partnership Tax Return Project

OVERVIEW Using the information below, prepare Gold Star HVAC LLC’s 2019 partnership Federal income tax return (Form 1065), including all needed supporting statements, schedules, and forms. Unless otherwise noted, assume Gold Star HVAC follows the policies of making all elections to minimize its current income taxes and, to the extent possible, of conforming procedures for financial and tax accounting. Round amounts to the nearest dollar. If additional information is needed, make realistic assumptions and fill in all required data. While this assignment is not designed to be “tricky,” it may be difficult for many students, and it will most certainly require a significant input of your time. The purpose of this project is twofold. First, your ability to examine the receipts, disbursements, and situation of taxpayers, identify the relevant tax issues, and determine the appropriate tax treatment, as covered explicitly in the text, lectures, and homework, will be gauged. Second, completion of the project will require you to use forms and publications from the Internal Revenue Service to actually prepare the documents the taxpayer would be required to submit. As ACC 410 is largely focused on a more theory-based approach, rather than a practitioner-based approach, most of you have little or no experience completing actual tax forms. Completion of the project will aid in your understanding of the translation of theory and concepts into practice and returns. GUIDELINES AND INSTRUCTIONS Students must individually or in groups of no more than four students complete the final project using resources from http://www.irs.gov, lecture notes, tax texts, etc. As this is a project, and not a homework assignment, I will be providing less guidance in office hours, etc. for students, although I will strive to point everyone in the right direction. Forms downloaded from IRS.gov are in the PDF format and, using Adobe Reader software, students MUST type their answers into the blanks. Students may opt to instead prepare the return using the software provided via Connect on Canvas. For the entire project, students must assume that the taxpayers are interested in the tax- minimizing legal position. IRS forms and instructions are designed to be read, understood, and followed by taxpayers without significant accounting backgrounds. While it may be challenging at first, senior accounting students should be able to read the instructions for each form and figure out how to complete the project. When a statement is required for a line, just attach a Word document printout that states the Form and Line number, and what you put on that line.

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AGAIN, PLEASE USE 2019 NUMBERS AND FORMS TO COMPLETE THIS PROJECT. The only submission required for grading is a complete 2019 U.S. Partnership Income Tax Return, which will consist of the following forms: Form 1065 (and attached schedules) Schedule B-1 Form 4562 Schedule K-1 (quantity 2) To ease in grading, I require that the forms be TYPED and printed, that any line with an entry of -0- be left blank, and negative numbers should be indicated in parentheses. Please round all numbers to the nearest whole dollar and omit “00” in the cents column. You may work in groups of 2-3 students. Please only submit one return for each group. For your final submission, due at the scheduled time of your Final Exam, you MUST include a cover sheet to the entire return with the full names of each group member. Good luck! CHECK FIGURES: Form 1065, Line 22: $245,652 Form 1065 Schedule M-1, Line 5 $349,692 Form 4562, Line 22 $852,823

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Mitchell Ruiz and Sam Mason have been life-long friends. Both Mitchell and Sam started to work for the same national HVAC repair company immediately after graduating from technical college. After nearly a decade of working for that same company, Mitchell and Sam decided to venture out on their own and form their own HVAC company called Gold Star HVAC (GSH). They formed their business entity as a limited liability company (LLC). Mitchell and Sam each own 50% of the company. The company has been successful primarily based upon reputation and the fact that GSH is available 24 hours a day, seven days a week. Although GSH 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, GSH finds itself often as one of the only available choices for middle of the night emergencies. GSH has several employees and, as a result of implementing technology solutions to aid in its call dispatch program, GSH has been able to expand its service area to now include a three- county area instead of just one. Information relating to GSH and its owners is as follows: Name of Company: Gold Star HVAC, LLC Address: 1456 East Buena Vista Blvd. Fresno, CA 93650 (has not changed since inception) Company formed and started: January 1, 2009 Accounting Method: Cash Tax-year end: December 31 Employer Identification Number: 34-7652143 Members’ Information: Mitchell Ruiz 1515 West Indiana Street Fresno, CA 93650 SSN- 585-30-4060 Profit/Loss/Capital membership interest is 50%. Sam Mason 19 West Fuschia Circle Fresno, CA 93650 SSN: 397-19-9119 Profit/Loss/Capital membership interest is 50%.

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Other relevant information:

• GSH is a domestic limited liability company • Mitchell and Sam are not related. • Mitchell and Sam are both U.S. citizens. • Both Mitchell and Sam are managing members. • GSH has not and did not file a Form 8893 or anything similar to it this year or in the past • GSH is not a publicly traded partnership • During the year no debt was cancelled or forgiven in relation to GSH. • GSH is not required to file a Form 8918 • GSH did not have or control a foreign bank account or have authority over any such

financial account • GSH was not the grantor of or a transferor to a foreign trust • GSH has never made a Section 754 election • GSH has never entered into a like-kind exchange or distributed a tenancy-in-common or

other undivided interest in partnership property • GSH has never been required to file Form 8858 • GSH 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 • GSH was not required to file any Form(s) 5471 during the year • Mitchell is the Tax Matters Partner (TMP) • Both Mitchell and Sam are active in the business and work full-time for GSH • The debt owed to First National Bank is a non-recourse obligation and neither Mitchell

nor Sam 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 Mitchell nor Sam personally responsible for its repayment.

• During the year, Mitchell and Sam each contributed $20,000 to the capital of GSH • GSH does not maintain any inventory. GSH purchases supplies and has a policy of

expensing such purchases as paid for tax and book purposes • During the year, Mitchell and Sam each received a $75,000 distribution from each of

their respective capital accounts • GSH’s tax depreciation on assets acquired in tax years prior to 2019 is $409,960 • During the year, GSH 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, 2019 $500,000 o HVAC machinery/equipment-new July 1, 2019 $250,000

GSH did not claim Section 179 expense for any of the current year asset additions but it did claim available bonus depreciation.

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GOLD STAR HVAC Balance Sheet

December 31, 2019 Assets: 1/01/19 12/31/19 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-Mitchell Ruiz 300,000 300,000 Note Payable-Sam Mason 200,000 200,000 Capital Account-MR 415,000 481,411 Capital Account-SM 415,000 481,411 Total Liabilities and Capital: $5,597,318 $5,509,495

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GOLD STAR HVAC Income Statement December 31, 2019

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-SM $ 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 HVAC supplies $ 15,125 Meals (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