Tax Questions
This year, Reggie’s distributive share from Almonte Partnership includes $8,000 of interest income, $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?
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.)
How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation?
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 | 30,000 | 45,000 | B—Capital | 16,000 | 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 |
| 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?
