2024 – The Rite Way Plumbing Company began business three years ago as of March 1 of the current tax year in

The Rite-Way Plumbing Company began business three years ago as of March 1 of the current tax year in Sarasota. Its business address is 124 Division Lane, Sarasota, FL 33645. Its employer identification number is 69-3456789. Its principal business activity is residential plumbing repairs and maintenance; its business code is 238220. It files its income tax returns on the calendar-year basis.

The business was formed as a limited partnership by two brothers, John Henry (SSN 555-55-5555) and James Henry (SSN 666-66-6666), who work full-time in the business, and their father Tom Henry (SSN 888-88-8888), the limited partner. The brothers each have a 25 percent interest in the income, loss, and cap-ital of the business while their father owns a 50 percent interest in income, loss, and capital, but takes no active interest in the business other than as that of an investor.

At the end of the current year, its operations showed cash gross receipts of $1,240,000 and the following cash expenditure items:

Salaries and wages (excluding John and James) $378,000

Repairs and Maintenance 2,000

Rent 28,000

Taxes and Licenses 38,000

Advertising 3,000

Pension Plans (excluding John and James) 15,000

Health/Dental Insurance 16,000

Material Purchases 220,000

Truck Expense 45,000

Insurance (excluding health/dental) 65,000

Legal/Professional Fees 3,000

Office Expenses 6,000

Utilities/Telephone 8,000

Meals/Entertainment 4,000

Draw—John 75,000

Draw—James 60.000

Total Cash Expenditures $966,000

 

John and James each receive a guaranteed payment of $75,000 in addition to the payment of their health and dental insurance premiums, which are $3,000 each for the current year (included in the $16,000 total for health/dental insurance). The other insurance payments include the $1,500 premiums for $200,000 term life insurance policies each on John and James that name the partnership as beneficiary.

 

Although the company maintains a certain level of plumbing supplies for its business, inventory is not a material income producing factor; thus, material purchases are expensed. The partnership uses the cash method of accounting for revenue and expenses.

 

The company purchased the following items for use solely in the business during the current year: a new truck (weighing over 6,000 pounds) that cost $21,250 (June 21); a new computer system costing $3,200 (August 17); additional new office furniture costing $2,500 (December 4).

 

At the beginning of the current year, the company owned the following items that were all purchased the month the company began business. In that year, the company claimed only basic MACRS depreciation (that is, it elected no bonus depreciation or Section 179 expensing if available) for any of its trucks, equipment, or furniture purchases:

Asset Cost Basis

Trucks $78,000

Plumbing equipment (7-year property) 23,000

Office Furniture 16,000

Computer system 4,000

 

On March 12, it sold one of its old trucks for $6,000 that had cost $17,000 originally. It also was able to sell its old computer system on September 12 for $250. It donated two pieces of its old office furniture to Goodwill Industries. This furniture had cost $1,500 and had a current value of $600.

 

Required

Prepare Form 1065 for the Rite-Way Plumbing Company along with the Schedule K-1s for each of the three partners and any other required forms. The partnership wants to maximize its cost recovery deductions for the current year for tax purposes