This year, Reggie’s distributive share from Almonte Partnership includes $8,000 of interestincome, $4,000 of dividend income, and $60,000 of ordinary business income.
A. Assume that Reggie materially participates in the partnership. How much of his distributive
share from Almonte Partnership is potentially subject to the net investment income tax?
B. Assume that Reggie does not materially participate in the partnership. How much of his
distributive share from Almonte Partnership is potentially subject to the net investment income
tax?
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David would like to organize HOS (a business entity) as either an S corporation or as a
corporation (taxed as a C corporation) generating a 12 percent annual before-tax return
on a $444,000 investment. David’s marginal tax rate is 24 percent and the corporate tax
rate is 21 percent. David’s marginal tax rate on individual capital gains and dividends is
15 percent. HOS will pay out its after-tax earnings every year to either its members or its
shareholders. If HOS is taxed as an S corporation, David’s business income allocation
would be subject to a 3.8 percent net investment income tax (he is a passive investor in
the business), and the business income allocation would qualify for the deduction for
qualified business income. (Round your intermediate calculations and final answer to
whole number dollar amount.)
1. How much would David keep after taxes if HOS is organized as either an S
corporation or a C corporation?
2. What are the overall tax rates (combined owner and entity level) if HOS is
organized as either an S corporation or a C corporation?
J&J, LLC, was in its third year of operations when J&J decided to expand the number of
members from two, A and B, with equal profits and capital interests, to three members,
A, B, and C. The third member, C, will contribute her financial expertise to the LLC in
exchange for a one-third capital interest in J&J. Given the balance sheet below reflecting
the financial position of J&J on the date member C is admitted, what are the tax
consequences to members A, B, and C, and to J&J, when C receives her capital interest?
If, instead, member C receives a one-third profits interest, what would be the tax
consequences to members A, B, and C, and to J&J?
J&J Limited Liability Company
Balance Sheet
Basis
FMV
Basis
FMV
Cash
$ 20,000 $ 20,000 Account Payable
$ 7,000 $ 7,000
Inventory
5,000
5,000
Mortgage Payable
20,000
20,000
Equipment 10,000
17,000
A—Capital
22,000
30,000
Building
45,000
B—Capital
16,000
30,000
30,000
Total Assets $ 65,000 $ 87,000 Total liability and OE $ 65,000 $ 87,000
XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each
50 percent shareholders. At the beginning of the year, Jane’s basis in her XYZ stock was
$44,000. XYZ reported the following tax information for 2020.
Description
Amount
Sales revenue
$ 726,000
Cost of goods sold
(204,000)
Long-term capital gain 12,000
Dividend income
11,000
Description
Amount
Tax-exempt interest
7,000
Salary to owners
(124,000)
Employee wages
(54,000)
Depreciation expenses (11,600)
Miscellaneous expenses (11,000)
Overall net income
$ 351,400
Required:
a. What amount of ordinary business income is allocated to Jane?
b. What is the amount and character of separately stated items allocated to Jane?
c. What is Jane’s basis in her XYZ Corporation stock at the end of the year?
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