Tax Return Problem
Ryan Ross (111-11-1112), Oscar Omega (222-22-2223), Clark Carey (333-33-3334), and Kim Kardigan (444-44-4445) are equal active members in ROCK the Ages LLC. ROCK serves as agent and manager for prominent musicians in the Los Angeles area. The LLC’s Federal ID number is 55-5555555. It uses the cash basis and the calendar year and began operations on January 1, 2006. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036. ROCK was the force behind such music icons as Rhiannon, Burgundy Six, Elena Gomez, Tyler Quick, Queen Bey, and Bruno Mercury and has had a very profitable year. The following information was taken from the LLC’s income statement for the current year.
During the past couple of years, ROCK has taken advantage of bonus depreciation and § 179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, ROCK wrapped up its remodel with the purchase of $20,000 of office furniture for which it will claim a § 179 deduction. (For simplicity, assume that ROCK uses the same cost recovery methods for both tax and financial purposes.) There is no depreciation adjustment for alternative minimum tax purposes. While the property is fully depreciated, it is not beyond the end of its depreciable life for purposes of the qualified business income deduction.
ROCK invests much of its excess cash in non-dividend-paying growth stocks and tax-exempt securities. During the year, the LLC sold two securities. On June 15, ROCK purchased 1,000 shares of Tech, Inc. stock for $100,000; it sold those shares on December 15 for $80,000. On March 15 of last year, ROCK purchased 2,000 shares of BioLabs, Inc. stock for $136,000; it sold those shares for $160,000 on December 15 of the current year. These transactions were reported to the IRS on Forms 1099–B; ROCK’s basis in these shareswasreported.
Net income per books is $840,000. On January 1, the members’ capital accounts equaled $200,000 each. No additional capital contributions were made this year. In addition to their guaranteed payments, each member withdrew $250,000 cash during the year. The LLC’s balance sheet as of December 31 of this year is as follows.
All debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC. All members are active in LLC operations.
For purposes of QBI calculations, the LLC is not considered an SSTB, and ROCK’s operations constitute an active trade or business. (Note that the § 179 deduction is a business-related expense.) The LLC’s UBIA (unadjusted basis immediately after acquisition) equals the total original cost of all leasehold improvements, or $980,000.
The appropriate business code for the entity is 711410. For the Form 1065, page 5, Analysis of Net Income, put all amounts in cell 2(b)(ii). The LLC’s Form 1065 was prepared by Ryan Ross and sent to the Ogden,
UT IRS Service Center.
Prepare a federal Form 1065, pages 1, 4, and 5, for ROCK using tax-basis information for Schedules L and M–2. Provide any special information the LLC members might need, including net income from self-employment and information for the § 199A calculation. Attach additional statements, if needed. DO NOT prepare any state tax returns. Use the Pro connect software provided to you in Titanium or any other tax preparation software you have.
Prepare Forms 4562, 8949, and Schedule D.
Prepare Schedule K–1 for all LLC members with the address of your choice to each of the LLC members.
Prepare a letter to one of the LLC members explaining what they should do with the information on the K-1 on their individual tax returns.
Prepare write up describing the similarities and differences between a partnership return and corporate tax return 1120 that you prepared. Also discuss the mechanics of the partnership return and any significant you want to communicate to Rock of Ages, LLC. (planning ideas, etc.)