Tax 650 Federal Taxation For Assessment Answers
Questions:
A. Prepare the appropriate page of Form 1040 and include the sale of the client’s land on the appropriate tax schedule and form for the recommended business entity.
B. Prepare the appropriate schedules to reflect taxable income based on your calculations and the disposition of asset. Be certain to complete each tax schedule accurately and completely.
Answers:
Partnerships
A partnership is a commercial relationship created by mutual consent between two or more persons for carrying on a business, where each partner contributes some amount of money, property, labour or technical skill, in return for a share in the profit as well as loss of the partnership business. Please understand that a partnership is required to file only an Annual Information Return in which it reports its incomes, expenses, gains and losses, derived from its business operations, but is not required to pay income tax. Each partner pays tax on its share of the profit after reporting the in its individual tax return. Since the partners are not employees, they are not to be issued Form W-2, instead the partnership firm is required to furnish copies of Schedule K-1 (Form 1065) to the partners.
When you become part of a partnership, then as a partner in the partnership, you are required to use the following information for the partnership business and for you as an individual tax payer for filing the tax details to IRS.
Table – 1: Partnership
|
A partnership is liable to file... |
By Using Form... |
|
Annual Return of Income |
1065,U.S. Return of Partnership Income (PDF) |
|
Employment taxes: · Social security and Medicare taxes and income tax withholding · Federal unemployment (FUTA) tax · Depositing employment taxes |
941, Employer's Quarterly Federal Tax Return (PDF) and 943, Employer's Annual Federal Tax Return for Agricultural Employees (for farm employees) (PDF) 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (PDF) |
|
Excise Taxes |
Refer to the Excise Tax Web page |
Table – 2: Individuals as Partners in the Partnership
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A partner (individual) in a partnership is liable for... |
By Using Form... |
|
Income Tax |
1040, U.S. Individual Income Tax Return (PDF) and Schedule E (Form 1040), Supplemental Income and Loss (PDF) |
|
Self-employment tax |
1040, U.S. Individual Income Tax Return(PDF) and Schedule SE (Form 1040), Self-Employment Tax (PDF) |
|
Estimated tax |
1040-ES, Estimated Tax for Individuals(PDF) |
Tax Rates
For Ordinary dividend and short-term capital gains, the Tax Rate is:
For Qualified dividend and long-term capital gains, the Tax Rate is:
- 15% for the 25%–35% brackets; and
- 20% for the 39.6% bracket.
Name of Tax Payer: BOB JONES
Age: 60 years
Marital Status: Single
Occupation: Retired
Proposed Activity:
Plans to start a Used Car business to be located at 210 Ocean View Drive, Pensacola, Florida.
Proposed Income from business: $300,000 per annum
Proposed Business Structure: PARTNERSHIP
Shareholders in the partnership: Bob Jones-60% and Mandy-40%.
Mandy is Bob’s daughter, aged 23 and is single.
Deposit in 401 (k) Fund $690,000
Investments in Stocks and Bonds $5,000,000
Investment in Land $9,000,000
60% Share from Income of Used Cars business: $180,000
Income from Interest: $20,000
Income from Dividend: $6,000
Total Short Term Earnings in the year: $206,000
Block of land purchased in 1966 for $450,000
Block of land sold in Dec-2014 for $9,000,000
Long Term Capital Gain of Bob Jones $8,550,000
Total Reportable Income of Bob Jones: $8,756,000
Bob falls in the 33% tax segment and shall pay the following tax on his short term earnings of $206,000 during the year.
Tax Payable on Short Term Gains
= ($206,000 x 33%) - $16,141.75
= $67,980.00 - $16,141.75
= $51,838.25
The Long Term Gains of $8,550,000 of Bob Jones during the year shall be taxed at 15%.
Tax Payable on Long Term Gains
= $8,550,000 x 15%
= $1,282,500
Hence, the Total Tax Liability of Bob Jones for the Year is $1,334,338.25.
It is not advisable for Bob to transfer the land to the partnership business, as the Long Term Capital Gain of $8,550,000 made from its sale shall be distributed to the partners in the following ratio –
Bob Jones – 60% $5,130.000
Mendy – 40% $3,420,000
As partners of a partnership business are taxed in their individual capacity, these amounts shall be taxed at the hands of Bob and Mendy in the highest tax bracket, which is 39.6%. The tax liability shall be –
Bob Jones: ($5,130,000 x 39.6%) – ($42,954.25) = $1,988,525.75
Mendy: ($3,420,000 x 39.6%) – ($42,954.25) = $1,311,365.75
The combined tax liability in this case is $3,299,891.50, which is nearly 2.57 times more than what Bob Jones will be paying in his individual capacity.
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