Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $400,000 and operating expenses of $220,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $100,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $60,000. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael.
A) Trout pays tax on $0 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
B) Trout pays tax on $280,000 income, Glen's taxable income increases by $60,000, and Michael's taxable income increases by $60,000.
C) Trout pays tax on $0 income, Glen's taxable income increases by $200,000, and Michael's taxable income increases by $200,000.
D) Trout pays tax on $0 income, Glen's taxable income increases by $140,000, and Michael's taxable income increases by $140,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Trout Enterprises, as a partnership, does not pay tax on its income. Instead, the income is passed through to the partners. The partnership's net income is $280,000 ($400,000 gross income - $220,000 expenses + $100,000 capital gain). Glen and Michael, as equal partners, each report half of this income, which is $140,000, on their individual tax returns. The withdrawals do not affect the taxable income.

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