It is early January 2015. Your brother-in-law, Sam Sneed, has been working at the accounting firm (Indiana Accounting Associates, LLC â a partnership for tax purposes) for 15 years now in auditing and is excited to report to you that he has been offered a promotion to partner effective as of January 1st, 2015. The managing partner has just taken him to lunch and discussed Samâs increased responsibilities and his targets for billable hours and new clients as a partner. Sam informed you that he will be offered a profits interest. At the time of receipt, the partnerâs liquidation value in the interest received is zero, so Sam has been told he does not have a capital interest and no research is needed on capital interest. He is excited and wants to stay with the partnership for many years.
Sam has been told he will receive a vested profits interest of $50,000 in 2015 which, upon receipt, supposedly may be taxable. You are told to assume that the receipt would be W-2 wages as he was an employee when he received the profits interest if taxable. It will not be treated as a guaranteed payment.
Sam also indicated that there was some chatter in his tax department that the law was unclear on this matter and that he would have to evaluate his tax situation two ways; 1) as if he met a so called safe-harbor; and 2) as if he did not meet the safe-harbor.
Sam asks you for guidance on whether the receipt of the profits interest will be taxable or could it be classified as nontaxable. With any potential tax deductions he may get from the partnership now that he is a partner, Sam is not sure it matters. But he trusts you and wants your advice.
You have your own accounting practice and have prepared his tax returns for many years. You should support the brother-in-law. Why?
It is early January 2015. Your brother-in-law, Sam Sneed, has been working at the accounting firm (Indiana Accounting Associates, LLC â a partnership for tax purposes) for 15 years now in auditing and is excited to report to you that he has been offered a promotion to partner effective as of January 1st, 2015. The managing partner has just taken him to lunch and discussed Samâs increased responsibilities and his targets for billable hours and new clients as a partner. Sam informed you that he will be offered a profits interest. At the time of receipt, the partnerâs liquidation value in the interest received is zero, so Sam has been told he does not have a capital interest and no research is needed on capital interest. He is excited and wants to stay with the partnership for many years.
Sam has been told he will receive a vested profits interest of $50,000 in 2015 which, upon receipt, supposedly may be taxable. You are told to assume that the receipt would be W-2 wages as he was an employee when he received the profits interest if taxable. It will not be treated as a guaranteed payment.
Sam also indicated that there was some chatter in his tax department that the law was unclear on this matter and that he would have to evaluate his tax situation two ways; 1) as if he met a so called safe-harbor; and 2) as if he did not meet the safe-harbor.
Sam asks you for guidance on whether the receipt of the profits interest will be taxable or could it be classified as nontaxable. With any potential tax deductions he may get from the partnership now that he is a partner, Sam is not sure it matters. But he trusts you and wants your advice.
You have your own accounting practice and have prepared his tax returns for many years. You should support the brother-in-law. Why?
Related questions
The Prince-Robbins partnership has the following capital account balances on January 1, 2015:
| Prince, Capital | $ | 130,000 |
| Robbins, Capital | 120,000 | |
| Prince is allocated 80 percent of all profits and losses with the remaining 20 percent assigned to Robbins after interest of 7 percent is given to each partner based on beginning capital balances. |
| On January 2, 2015, Jeffrey invests $73,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 7 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50%), Robbins (30%), and Jeffrey (20%). In 2015, the partnership reports a net income of $23,000. |
| a. | Prepare the journal entry to record Jeffrey entrance into the partnership on January 2, 2015. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Record the entry for goodwill allocation, during the admission of a new partner.
Record the cash received from new partner
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