Advanced Business Taxation
Tax Return Project
Required
You have just acquired a new client, The Whitehouse Advertising Agency, LLC ("Whitehouse"). You will need to prepare a federal partnership return for a limited liability company for the tax year ended December 31, 2014. In connection with the preparation of this return, you will also be required to prepare a detailed set of tax return workpapers which support the amounts you have reported on the return.
Workpapers
As indicated above, your project must include a detailed set of tax return workpapers. The set should include a multi-column "lead schedule" which reports (1) the book (i.e. financial accounting) amounts, (2) any reclasses required for tax purposes, (3) the M-1s, and (4) the resulting tax amounts. All numbers reported on the lead schedule which require any calculation, analysis, explanation, or which are not otherwise obvious on their face, should be referenced back to a detail schedule in the workpapers.
In the end, your workpapers and return should stand on their own-- I should be able to go right from the workpapers to the return (and vice versa) without having to make any assumptions as to what you did.
As you prepare the return, you may be required to make certain assumptions. As long as these assumptions are reasonable and clearly stated in your workpapers, they will be acceptable.
Your grade will be based upon your tax treatment of the various items of income and expense, proper completion of the appropriate forms, and the quality and efficiency of your workpapers in terms of my ability to easily follow your work. You are, of course, encouraged to prepare your workpapers on a computer spreadsheet program. The tax return itself may be prepared on the 2014 Form 1065 TaxACT Software which may be downloaded from MyAccountingLab. However, in order to gain an appreciation of how the forms "work," you might consider preparing the forms manually and then "check" your work using the tax preparation software. Regardless of whether you prepare the forms manually or on software, you must prepare the required set of tax return workpapers.
The Company
The Whitehouse Advertising Agency, Inc. is a limited liability company (formed in Maine) which is owned equally by its two members: John Whitehouse (S.S. # 104-56-2894) and his daughter, Mary Henderson (S.S. #345-82-6758). Both members materially participate in the company's business. The company was organized on January 8, 2011. Other company information includes the following:
Address: 210 State Street
Portland, ME 04101
Taxpayer Identification Number (TIN): 01-1507869
Tax Year-End: December 31st
Accounting Method: Accrual (for book and tax purposes)
Tax Matters Person: John Whitehouse
Fixed Assets
Lucky you! Whitehouse has a bookkeeper, Florence, who maintains all of the fixed asset records. Florence has provided you with the following information:
2014 Depreciation Expense
Book $11,782
Regular tax (MACRS) $18,352
AMT $15,351
During 2014, Whitehouse purchased $5,000 of new office furniture and $27,000 of new office equipment including new copiers, phones, and a fax machine. These purchases were all made and the various assets were all placed into service during the second quarter of 2014. The old copiers were sold to area businesses. Information regarding these sales is as follows:
Copier 1
Copier 1 was sold on November 1, 2014, for $3,500. The copier was originally purchased and placed into service on October 1, 2012. The cost of the copier at that time was $10,000. Florence has calculated the following amounts of depreciation on this copier through the date of the sale: Books $2,085
Regular tax $6,160
AMT $4,943
Copier 2
Copier 2 was sold on December 2, 2014, for $4,500. The copier was originally purchased and placed into service on February 1, 2013. The cost of the copier at that time was $5,000. Florence has calculated the following amounts of depreciation on this copier through the date of the sale: Books $875
Regular tax $1,800
AMT $1,388
Sale of Land
Whitehouse also sold a parcel of land located in Scarborough which was originally contributed to the LLC by John Whitehouse when the LLC was formed on January 8, 2011 (the formation met the requirements of Sec. 721). John had originally purchased the land on March 30, 2001 for $30,000. When he contributed the land to the LLC it was worth $25,000. The land has always been held as investment property-both in John's hands and the LLC's. Whitehouse sold the parcel for $24,000 in a cash sale on August 17, 2014.
Interest Expense
All of the current year's interest expense has been incurred in connection with the company's business activities (i.e. lines of credit, acquisition of fixed assets, etc.). All of the interest expense has been paid or is payable to local banks except for $1,500 which is payable to John Whitehouse. John had advanced the LLC $10,000 (evidenced by a promissory note) on January 1, 2014, so that the company could pay its 2013 accrued bonuses. The promissory note requires payment of principal and all accrued interest on June 30, 2015.
Salaries and Wages
In accordance with its operating agreement, the LLC made guaranteed payments to the members in the following amounts:
John Whitehouse $125,000
Mary Henderson $100,000
Whitehouse accrues salaries and bonuses payable at year-end. All of the compensation accrued at December 31, 2013, and December 31, 2014, was paid on or before March 15, 2014, and March 15, 2015, respectively.
Insurance
Insurance expense includes $2,100 of premiums for property and casualty insurance and $6,900 of premiums for life insurance policies on the lives of the two members. The proceeds of the insurance will fund a buyout from the estate of the first member to die. The LLC is the beneficiary of the policies. The policies were just acquired this year so there is no build-up in cash surrender value.
Meals and Entertainment
All but $2,000 of the expense represents taking clients and potential clients to lunch and dinner where business was discussed. All such events have been properly documented. The remaining $2,000 is the annual dues paid to the Cumberland Club. The club was used 100% for business purposes (to take clients to lunch/dinner as mentioned above).
Charitable Contributions
All contributions were made in cash to qualifying charities.
Investment Expenses
All of the investment expenses represent amounts paid to investment advisors (brokers) for transaction and custodial fees related to the stock, T- Bills and muni bonds held by Whitehouse.
Distributions
Whitehouse made cash distributions of $50,000 to each of the members on December 28, 2014.
Attachment:- Whitehouse-Financial-Statements.xls