Haw-Keya-Moto, a general partnership, was formed by Haw, Keya, and Moto respectively, $220,000 cash for Haw and Keya. Moto contributed an acre of land with a tax basis of $140,000 and an appraisal value of $360,000. The land had a $140,000 mortgage (non-recourse) for which no one was personally liable. Profits and losses are to be split equally. At the end of the first year, Haw-Keya-Moto paid a $14,000 payment principal on the mortgage. In the first year of operations, the partnership reported the following events:
| Sales Revenues |
940,000 |
| Cost of Goods |
820,000 |
| Operating Expenses |
140,000 |
| Long Term Capital Gains |
4,800 |
| Section 1231 Gains |
1,800 |
| Charitable Contribution |
600 |
| Municipal Bond Interests |
600 |
| Salaries Paid |
6,000 |
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Requirements:
Calculate and report the adjusted basis of each partner’s interest in the partnership immediately after the formation of Haw-Keya-Moto. In a Word document, explain the determination made.
| a) Adjusted Basis for Each Partner's Interest | |||
| Moto | Keya | Haw | |
| Basis in Contributed Land |
$140,000 |
||
| Cash Contributed |
$110,000 |
$110,000 |
|
| Debt Allocated to Partners |
$46,666.67 |
$46,666.67 |
$46,666.67 |
| Relief from Non-Recourse Mortgage |
($140,000) |
||
| Gains Recognized |
$0 |
$0 |
$0 |
| Partners' Initial Tax Basis |
$46,667 |
$156,667 |
$156,667 |
List and explain items for partnership ordinary income calculation, gains, losses, and deductions the partners must show on their individual (Form 1040) returns in relation to the partnership’s first year of operations.
From the determination made in parts, a) and b), prepare page 1 and Schedule K to be included in the partnership informational tax return (Form 1065) and prepare Schedule K-1 for Keya using ProConnect and/or fillable forms.
| Description | Total | Moto | Keya | Haw |
| Ordinary Business Loss | $ (13,999) | $ (4,666) | $ (4,666) | $ (4,666) |
| Separately Stated Items on Schedule K-1: | ||||
| Long-Term Capital Gains | $ 4,800 | $ 1,600 | $ 1,600 | $ 1,600 |
| Section 1231 Gains | $ 1,800 | $ 600 | $ 600 | $ 600 |
| Municipal Bond Interest | $ 600 | $ 200 | $ 200 | $ 200 |
| Charitable Contributions | $ 600 | $ 200 | $ 200 | $ 200 |
| Mortgage Reduction |
$14,000.00 |
$4,666.67 |
$4,666.67 |
$4,666.67 |
| Self-Employment Loss | $ (7,999) | $ (4,666) | $ 1,334 | $ (4,666) |
| Guaranteed Payment |
$6,000 |
$0 |
$ 6,000 |
$0 |
Form 1065 -Schedule-K:
Each partner’s adjusted basis in the partnership:
| Moto | Keya | Haw | |
| Adjusted Basis | $ 42,000 | $ 152,000 | $ 152,000 |
