When the PDQ Partnership Formed, It Knew It Had a Good

question 71

Essay

When the PDQ Partnership formed, it knew it had a good product, but it was a bit short on cash. After seeing the product, Jim, a CPA, said that he would set up an accounting system for the partnership in exchange for a 15% profits interest in the partnership. The partners agreed to this, as Jim was receiving only a profits interest and not a capital interest in the partnership. Jim's usual fee for this type of service would be approximately $5,000. What tax issues should Jim and the PDQ Partnership consider with respect to the payment made for the services?

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Definitions:

Corporate Bonds

Debt securities issued by corporations to finance their operations, which pay interest to investors until maturity.

Available-For-Sale

A classification of securities which are not actively traded by the company, with changes in value reported in other comprehensive income.

Significant Influence

The power to participate in the financial and operating policy decisions of another entity, but not control those policies.

Net Income

The amount of profit a company has left over after paying all its expenses and taxes.