Matt and Steve form MS partnership as equal partners. Matt contributes $50,000 w
ID: 2459660 • Letter: M
Question
Matt and Steve form MS partnership as equal partners. Matt contributes $50,000 while Steve contributes land with a fair market value of $50,000. During the current year, MS made distributions of $75,000 to each partner. The partnership earned net income of $300,000. What amount should Matt report on his individual tax return as income from MS? 0 $25,000 Capital Gain $75,000 Ordinary Income $75,000 Capital Gain $100,000 Ordinary Income $150,000 Ordinary Income $225,000 Ordinary Income $300,000 Ordinary Income
Explanation / Answer
$150,000 Ordinary Income
________
Explanation:
Steve will be required to report 50% of his share in the net income earned by the partnership firm on his individual tax return. Therefore, the total amount that will get reported will be $150,000 (300,000*50%). The distribution of $75,000 will be treated as a non-taxable return on capital. This amount will result in reduction in Steve's basis as follows:
Steve's Revised Basis = Fair Market Value of Land + Share in Net Income - Distribution Amount = 50,000 + 150,000 - 75,000 = $125,000