Discuss tax planning opportunities utilizing a partnership structure. Instructions Read Section 10.6 “Tax Planning” in Chapter 10. If you were going to start a business with a few of your closest friends (or family), would you choose to form a partnership? Why or why not?

Discuss tax planning opportunities utilizing a partnership structure. Instructions Read Section 10.6 “Tax Planning” in Chapter 10. If you were going to start a business with a few of your closest friends (or family), would you choose to form a partnership? Why or why not?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Overview
Discuss tax planning opportunities utilizing a partnership structure.

Instructions
Read Section 10.6 “Tax Planning” in Chapter 10. If you were going to start a business with a few of your closest friends (or family), would you choose to form a partnership? Why or why not?

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Watts and Lyon are forming a partnership. Watts invests $40,500 and Lyon invests $49,500. The partners agree that Watts will work one-fourth of the total time devoted to the partnership and Lyon will work three-fourths. They have discussed the following alternative plans for sharing income and loss: (a) in the ratio of their initial capital investments; (b) in proportion to the time devoted to the business; (c) a salary allowance of $15,000 per year to Lyon and the remaining balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $15,000 per year to Lyon, 11% interest on their initial capital investments, and the remaining balance shared equally. The partners expect the business to perform as follows: Year 1, $13,000 net loss; Year 2, $32,500 net income; and Year 3, $54,167 net income. Required: Complete the tables, one for each of the first three years, by showing how to allocate partnership income or loss to the partners under each of…
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