Health wise Medical Supplies Company is located at 2400 Second Street, City, ST 12345. The company is a general that uses the calendar year and accrual basis for both book and tax purposes. It engages in the development and sale of specialized surgical tools to hospitals. The employer identification number (EIN) is XX-2018016. The company formed and began business on January 1, 2015. It has no foreign partners or other foreign dealings. The company is neither a tax shelter nor a publicly traded The company has made no distributions other than cash, and no changes in ownership have occurred during the current year. Dr. Bailey is the Tax Matters Partner. The makes no special elections. Table C:9-3 contains book balance sheet information at the beginning and end of the current year, and Table C:9-4 presents a book income statement for the current year. Other information follows:
Information on Formation:
Two individuals formed the on January 1, 2015: Dr. Leisa H. Bailey (1200 First Pike, City, ST 12345) and Dr. Thomas J. Firth (3600 Third Blvd., City, ST 54321). For a 30% interest, Dr. Bailey contributed $600,000 cash. She is an active general partner who manages the company. For a 70% interest, Dr. Firth contributed $1.16 million cash and 1,000 shares of Fast growth, Inc. stock having, at the time of contribution, a $240,000 fair market value (FMV) and a $48,000 adjusted basis. Dr. Firth is an active general partner who designs and develops new products. For book purposes, the company recorded the contribution of stock at fair market value. Inventory and Cost of Goods Sold (Form 1125-A): The company uses the periodic inventory method and prices its inventory using the lower of FIFO cost or market. Only beginning inventory, ending inventory, and purchases should be reflected in Schedule A. No other costs or expenses are allocated to cost of goods sold. Note: the company is exempt from the uniform capitalization (UNICAP) rules because average gross income for the previous year was less than $10 million [Sec. 263A(b)(2)(B)].
Line 9 (a)………Check (ii)
(b)–(d)…………..Not applicable
(e) & (f)…………No
Capital Gains and Losses (Schedule D):
The company sold all 1,000 shares of the Fastgrowth, Inc. on July 2, 2016, for $720,000. Dr. Firth acquired the stock on January 2, 2013, for $48,000 and contributed the stock to the company on January 1, 2015, when its FMV was $240,000.
a Additional Sec. 263A costs of $7,000 for the current year are included in other costs.
b Ending inventory includes the appropriate Sec. 263A costs, and no further adjustment is needed to properly state cost of sales and inventories for tax purposes.
c The reports a $10,000 positive AMT adjustment for property placed in service after 1986. Dapper-Dons acquired and placed in service $40,000 of rehabilitation expenditures for a certified historical property this year. The appropriate MACRS depreciation on the rehabilitation expenditures already is included in the MACRS depreciation total.
d The made all contributions in cash to qualifying charities.
e The purchased the AB stock as an investment two years ago on December 1 for $40,000 and sold it on June 14 of the current year for $58,000.
f The purchased the CD stock as an investment on February 15 of the current year for $100,000 and sold it on August 1 for $73,925.
g The used the land as a parking lot for the business. The purchased the land four years ago on March 17 for $30,000 and sold it on August 15 of the current year for $35,050.
Fixed Assets and Depreciation (Form 4562):
The company acquired the equipment on January 2, 2015, and placed it in service on that date. The equipment, which originally cost $1 million, is MACRS seven-year property. The company did not elect Sec. 179 expensing in the acquisition year and elected out of bonus depreciation. The company claimed the following depreciation on this property:
On March 1, 2016, the company acquired and placed in service additional equipment costing $400,000. The company made the Sec. 179 expensing election for the entire cost of this new equipment. No depreciation or expensing is reported on Schedule A.
Other Information:
- The company paid Dr. Bailey a $100,000 guaranteed payment for her management services.
- The company made a $40,000 cash contribution to Fort Sanders Hospital System on December 1 of the current year.
- During the current year, the company made a $360,000 cash to Dr. Bailey and a $840,000 cash to Dr. Firth.
- The municipal bonds, acquired in 2015, are general revenue bonds, not private-activity bonds. Assume that no expenses of the company are allocable to the tax-exempt interest generated from the municipal bonds.
- Assume qualified production activities income (QPAI) equals $1.6 million. Employer’s W-2 wages allocable to U.S. production activities equal $700,000. The company, being an eligible small pass-through uses the small business simplification overall method for reporting these activities (see discussion for Line 13d of Schedule K and Line 13 of Schedule K-1 in the Form 1065 instructions).
- Use book numbers for Schedule L, Schedule M-2, and Line 1 of Schedule M-1. Also use book numbers for Item L of Schedule K-1, and check the box for Sec. 704(b) book.
- The partners share liabilities, which are recourse, in the same proportion as their ownership percentages.
Required: Prepare the 2016 tax return (Form 1065), including the following additional schedules and forms: Schedule D, Form 4562, and Schedule K-1. Optional: Prepare a schedule for each partner’s basis in his or her interest. At January 1, 2016, Bailey’s basis was $873,180, and Firth’s was $1,845,420.
