Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions: (1)guaranteed payments (salaries)to partners: Matt, $35,000; and Joel, $25,000; and (2)charitable contributions, $6,000. The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the above information, what amount should be reported as ordinary income on the partnership return?
A)$60,000
B)$80,000
C)$86,000
D)$140,000

Question

Quizplus · Accepted Answer

The guaranteed payments are deductible expenses for the partnership, so they reduce the book income to $80,000 - $35,000 - $25,000 = $20,000. However, since the guaranteed payments are taxable income for the partners, they must be added back to determine the partnership's total income for tax purposes. Thus, the taxable income of the partnership is $20,000 + $35,000 + $25,000 + $6,000 = $86,000.

Matt and Joel Are Equal Partners in the MJ Partnership