Glen and Michael are equal partners in Trout Enterprises,a calendar year partnership.During the year,Trout Enterprises had gross income of $500,000 and operating expenses of $270,000.In addition,the partnership sold land that had been held for investment purposes for a long-term capital gain of $120,000.During the year,Glen withdrew $50,000 from the partnership,and Michael withdrew $75,000.Discuss the impact of this information on the taxable income of Trout,Glen,and Michael.
A)Trout has $0 taxable income, Glen's taxable income increases by $50,000, and Michael's taxable income increases by $75,000.
B)Trout has $230,000 taxable income, Glen's taxable income increases by $50,000, and Michael's taxable income increases by $75,000.
C)Trout has $0 taxable income, Glen's taxable income increases by $175,000, and Michael's taxable income increases by $175,000.
D)Trout has $0 taxable income, Glen's taxable income increases by $115,000, and Michael's taxable income increases by $115,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Trout,a partnership,is not a taxpaying entity.Its profit (loss)and separate items flow through to the partners.The partnership's Form 1065 reports net profit of $230,000 ($500,000 income - $270,000 expenses).The partnership also reports the $120,000 long-term capital gain as a separately stated item on Form 1065.Glen and Michael both receive a Schedule K-1 reporting net profit of $115,000 and separately stated long-term capital gain of $60,000.Each partner reports net profit of $115,000 and long-term capital gain of $60,000 on his own return.The withdrawals do not affect taxable income for the partners but decrease their basis in the partnership.

Glen and Michael Are Equal Partners in Trout Enterprises,a Calendar