Question

In the current year, the DOE LLC received revenues of $300,000 and paid the following amounts: $50,000 of business expenses (rent, utilities, wages, depreciation, etc.), a $50,000 guaranteed payment (for services) to 50% member Dave, $20,000 to member Ethan for consulting services, and $10,000 as a distribution to member Olivia. In addition, the LLC earned $4,000 of tax-exempt interest income during the year. Dave is the managing member of the LLC. Dave’s basis in his LLC interest was $50,000 at the beginning of the year and includes a $15,000 share of LLC liabilities. At the end of the year, his share of the LLC’s liabilities was $25,000.

1. How much income must Dave report for the tax year and what is the character of the income?
2. What is Dave’s basis in his LLC interest at the end of the tax year?
3. On what income will Dave’s self-employment tax be calculated?
4. What is the maximum amount Dave might be able to deduct for this business under [section symbol] 199A?

Answer 1

SOLUTION:

a)HOW MUCH INCOME MUST DAVE REPORT FOR THE TAX YEAR AND WHAT IS THE CHARACTER OF THE INCOME ?

PARTICULARS	AMOUNT
REVENUE	$ 300000
RENT AND UTILITIES	$ 50000
GUARANTEED PAYMENT TO DAVE	$ 50000
CONSULTING EXPENSES TO ETHAN	$ 20000
ORDINARY INCOME	= $300000-[$50000+$50000+$20000] =300000-120000 =$180000

b)WHAT IS DAVE'S BASIS IN HIS LLC INTEREST AT THE END OF THE TAX YEAR ?

PARTICULARS	AMOUNT
BEGINNING BASIS	$ 50000
INCREASE IN SHARE OF THE LLC'S LIABILITIES	$10000-4000=$6000
SHARE OF ORDINARY INCOME	$ 50000
SHARE OF TAX-EXEMPT INTEREST INCOME	$ 10000*10% =$1000
ENDING BASIS	=50000+6000+50000+1000 =107000

DAVE GUARANTEED AMOUNT IS NOT EFFECTED TO THE ENDING BASIS.

c) ON WHAT INCOME WILL DAVE'S SELF-EMPLOYMENT TAX BE CALCULATED?

$ 107000 ON DAVE'S SELF EMPLOYMENT TAX WILL BE CALCULATED.

d)

LLC OWNERS MAY ALSO BE ELIGIBLE FOR A NEW INCOME TAX DEDUCTIONS FOR PASS THROGH ENTITIES ESTABLISHED BY THE TAX CUTS AND JOB ACT.

STARTING IN 2018 , THE OWNER OF A PASS THROUGH ENTITY INCLUDING A SINGLE OR MULTIPLE MEMBER LLC, CAN DEDUCT FOR INCOME TAX PURPOSE UPTO 20% OF THE NET INCOME FROM THE ENTITY.

HOWEVER, IF TAXABLE INCOME EXCEEDS AN ANNUAL THRESHOLD, THE DEDUCTION IS LIMITED TO 50% OF THE AMOUNT PAID TO EMPLOYEES OF THE ENTITY,25% OF EMPLOYEE PAYMENTS PLUS 2.5% OF THE VALUE OF DEPRECIABLE BUSINES PROPERTY.

ENTERPRENEURS WITH TAXABLE INCOME BELOW $157500 IF SINGLE ,OR $ 315000 IF MARRIED MAY QUALIFY.

  

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