On January 1, 2022, Demi Lee and Quinn Brown formed The Custom Cabinets Company. Demi contributed...

 

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On January 1, 2022, Demi Lee and Quinn Brown formed The Custom Cabinets Company. Demi contributed cash of $240,000 to the partnership in return for a 60% interest in capital and profits. Quinn contributed machinery with a basis of $90,000 and a fair market value (FMV) of $160,000 to the partnership in return for a 40% interest in capital and profits. Quinn depreciated the machinery using the straight- line method. There were five years remaining in the original eight years of useful life of the machinery when Quinn contributed it to the partnership. The partnership had operating income for 2022 of $40,000. Prepare the tax workpapers using an Excel document for The Custom Cabinets Company's partners in which you include the following information: Part A: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method. Also determine the effects on the capital accounts of each partner. Part B: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method with curative allocations. Also determine the effects on the capital accounts of each partner. Part C: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the remedial method. Also determine the effects on the capital accounts of each partner. In addition to determining the effects for 2022, determine the basis and return effects in Year 7 under the remedial method. Part D: Demi believes that there will be a substantial increase in her marginal tax rate in the future (over the next 3-5 years). Given this expectation, what method would Demi prefer that the partnership use to account for the ceiling effect? Explain your answer. On January 1, 2022, Demi Lee and Quinn Brown formed The Custom Cabinets Company. Demi contributed cash of $240,000 to the partnership in return for a 60% interest in capital and profits. Quinn contributed machinery with a basis of $90,000 and a fair market value (FMV) of $160,000 to the partnership in return for a 40% interest in capital and profits. Quinn depreciated the machinery using the straight- line method. There were five years remaining in the original eight years of useful life of the machinery when Quinn contributed it to the partnership. The partnership had operating income for 2022 of $40,000. Prepare the tax workpapers using an Excel document for The Custom Cabinets Company's partners in which you include the following information: Part A: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method. Also determine the effects on the capital accounts of each partner. Part B: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the traditional method with curative allocations. Also determine the effects on the capital accounts of each partner. Part C: For 2022, determine the effect of these transactions on the basis and tax return of each partner if the partnership uses the remedial method. Also determine the effects on the capital accounts of each partner. In addition to determining the effects for 2022, determine the basis and return effects in Year 7 under the remedial method. Part D: Demi believes that there will be a substantial increase in her marginal tax rate in the future (over the next 3-5 years). Given this expectation, what method would Demi prefer that the partnership use to account for the ceiling effect? Explain your answer.

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