Jim Johnson has 40% interest in Richards and Johnson, LLP. The partnership has the following activity for the year:
Sales $180,000
Cost of Goods Sold 105,000
Guaranteed Payment to Ron Richards 25,000
Depreciation 11,000
Interest Expense 1,000
Tax-Exempt Income 1,500
Health Insurance Premiums for Jim Johnson 700
Health Insurance Premiums for Ron Richards 700
Calculate Jim’s share of ordinary income from the partnership. Calculate Jim’s share of separately stated items that will appear on his Schedule K-1 from Richards and Johnson, LLP.
To calculate Jim's share of ordinary income from the partnership, you need to calculate the partnership's ordinary income first. Ordinary income is calculated by subtracting the cost of goods sold and operating expenses from the sales revenue.
1. Calculate the partnership's ordinary income:
Ordinary Income = Sales - Cost of Goods Sold - Operating Expenses
= $180,000 - $105,000 - $25,000 - $11,000 - $1,000
= $38,000
2. Calculate Jim's share of the ordinary income:
Jim's Share of Ordinary Income = Jim's Percentage Interest * Ordinary Income
= 40% * $38,000
= $15,200
Next, to calculate Jim's share of separately stated items that will appear on his Schedule K-1, you need to identify the items that are considered separately stated and allocate them based on Jim's percentage interest.
Separately stated items are items that are reported separately on the Schedule K-1 because they have different tax consequences for the partners. These include guaranteed payments, depreciation, interest expense, tax-exempt income, and health insurance premiums.
3. Calculate Jim's share of separately stated items:
Guaranteed Payment: Jim's Share = Jim's Percentage Interest * Guaranteed Payment to Ron Richards
= 40% * $25,000
= $10,000
Depreciation: Jim's Share = Jim's Percentage Interest * Depreciation
= 40% * $11,000
= $4,400
Interest Expense: Jim's Share = Jim's Percentage Interest * Interest Expense
= 40% * $1,000
= $400
Tax-Exempt Income: Jim's Share = Jim's Percentage Interest * Tax-Exempt Income
= 40% * $1,500
= $600
Health Insurance Premiums: Jim's Share = Jim's Percentage Interest * Health Insurance Premiums for Jim Johnson
= 40% * $700
= $280
Jim's Share of Separately Stated Items = Sum of Jim's shares of all separately stated items
= $10,000 + $4,400 + $400 + $600 + $280
= $15,680
Therefore, Jim's share of ordinary income from the partnership is $15,200, and his share of separately stated items that will appear on his Schedule K-1 is $15,680.