Imani and Ahmad formed AI Partnership, a limited partnership. Imani will be the general partner and Ahmad will be a limited partner. He will not participate in management of the partnership but will simply hold the interest as a passive investment. Ahmad has no other sources of passive investment. Imani and Ahmad will each have a 50% profit/loss and capital interest. The partnership will make custom masks and sell them on Amazon. Imani’s initial contribution to the partnership was a commercial grade sewing machine worth $50,000 (adjusted basis $35,000). Imani had a $20,000 non-recourse loan which the partnership assumed. Ahmad, an attorney, contributed $10,000 of legal services and $40,000 of cash. During 2021, AI Partnership, borrowed $10,000 on an operating line of credit which Ahmed personally guaranteed and $5,000 on another recourse loan related the purchase of additional equipment (with no personal guarantee). During the first year of operation, AI Partnership distributed $10,000 to each partner. The 2021 profit and loss statement (tax basis) is below.
Required:
- Does either partner recognize income on the initial formation of the partnership?
- What is AI Partnership’s ordinary income and separately stated items?
- What is Ahmad and Imani’s initial partnership basis?
- What is Ahmad and Imani’s partnership basis at the end of 2021?
- What total amount of taxable income does Ahmad and Imani have for 2021?
