Question

2. James, Stewart, and Kelly are all one-third partners in the capital and profits of Firewall general partnership. In addition to their normal share of the partnership's annual income, James and Stewart receive an annual guaranteed payment of $10,000 to compensate them for additional services they provide. Firewall's income statement for the current year reflects the following revenues and expenses: Sales revenue Interest income Long-term capital gains Cost of goods sold Employee wages Depreciation expense Guaranteed payments Miscellaneous expenses Overall net income $340,000 3,300 1,200 (120,000) (75,000) (28,000) (20,000) (4,500) $97.000 Required: A. Given Firewall's operating results, how much ordinary business income (loss) and what separately stated items (including the partners' self-employment earnings (loss)] will it report on its return for the year? B. How will it allocate these amounts to its partners? C. How much self-employment tax will each partner pay assuming none has any other source of income or loss?

Answer 1

Current scenario of the computation of items that should be included in ordinary income or not:

Particulars	Amount ($)
Sales	70000
Cost of goods sold	-38000
Depreciation	-9000
Supplies expenses	-1000
Employee wages	-14000

From the above table are the items that should be included in the ordinary income of the corporation.

Items to be separately stated items:

Particulars	Amount ($)
Rental income	2000
1245 recapture income	8000
Interest income	2000
Investment int. expense	-1000

From the above table, these are the items that should be separated in the ordinary income of the corporation.