Question

Question:

During years 1 and 2, Smith and Parker were equal partners in the ABC Partnership, a computer technology business involving web site design and computer hardware repair. At start-up of the ABC Partnership on January 1, Year 1, Smith and Parker each contributed $50,000 in cash.

During Year 1, Smith and Parker each contributed an additional $15,000 and received distributions of $2,000 each.

ABC Partnership reports the following items during year 1:

Item	Year 1
Ordinary income from trade or business activities as reported on Schedule K of the partnership return for allocation to the partners	46,000
Interest income	1,400
Life insurance premiums paid on lives of partners (partnership is beneficiary)	800
Penalties paid for late payment of payroll taxes	200
Guaranteed payment to Parker	10,000
Purchase of land for investment	6,000

Using the table below to determine Smith’s tax basis in the partnership interest at the end of year 1. Not all entries may be needed for the determination. For any item not needed, enter a zero(0). Decreases in tax basis should be shown as negative values.

Item	Year 1
Smith’s beginning tax basis
Ordinary income from trade or business activities
Interest income
Life insurance premiums paid on lives of partners (partnership is beneficiary)
Penalties paid for late payment of payroll taxes
Guaranteed payment to Parker
Additional capital contributions
Distributions
Purchase of land for investment
Smith’s tax basis at end of year

Answer 1

1.Smiths' beginning tax basis	$50,000
2.Ordinary income from trade or business activities	$23,000=46k*50%
3.Interest income	$700=1,400*50%
4.Life insurance premiums paid on lives of partners （partnership is beneficiary）	（$400）=800*50%
5.Penalties paid for late payment of payroll taxes	（$100）=200*50%
6.Guaranteed payment to Parker	$0
7.Additional capital contributions	$15,000
8.Distributions	（$2,000）
9.Purchase of land for investment	$0
10.Smiths' tax basis at end of year	$86,200

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