In: Accounting
Laurel contributed equipment worth $200,000, purchased 10 months ago for $260,000 cash and used in her sole proprietorship, to Sand Creek LLC in exchange for a 15 percent profits and capital interest in the LLC. Laurel agreed to guarantee all $15,000 of Sand Creek’s accounts payable, but she did not guarantee any portion of the $100,000 nonrecourse mortgage securing Sand Creek’s office building. Other than the accounts payable and mortgage, Sand Creek does not owe any debts to other creditors.
A) What is Laurel’s initial tax basis in her LLC interest?
B) What is Sand Creek’s initial basis in the contributed property?
A) $290,000
Laurel's basis in her LLC interest is made up of the $260,000 basis in the equipment (no depreciation was taken on the equipment prior to the contribution because it was acquired and contributed within the same calendar year) Laurel contributed, her $15,000 share of accounts payable that she guaranteed, and her $15,000 share of the nonrecourse mortgage securing Sand Creek's office building (15*100,000). Laurel's profits sharing ration is used to allocate a portion of the mortgage to her because it is nonrecourse debt.
B)
$260,000
The LLC takes a carryover basis in the contributed property.