Project 2: Don and Joe went into business together as equal co-owners. Joe had a lot of money but no business sense and Don had the “know how”. Don and Joe each invested $10,000 and Joe loaned the business $90,000. Chase loaned the business another $100,000 after Joe and Don agreed to guarantee the loan.
In the first year, as is typical, the business struggled and incurred ordinary operating income of $50,000, excluding the payment promised to Don of $65,000 annually for his labor. The business earned interest income of $2000, a short term capital loss of $4000, and made qualified charitable contributions of $1000.
In the second year of business ordinary operating income was $32,000. including the promised amount for Don’s labor. The business earned $1200 in interest income and incurred a $1500 capital gain and paid $2500 in qualified charitable contributions. Joe was repaid $10,000 for his loan and Chase received $3000 in principal payments. An equal distribution of $4000 was made to each owner.
Calculate both owners “at risk” basis at year end for both years, showing all your work (1) first assuming the entity is a partnership and (2) second assuming it is a S Corporation.
