Question

Pam and Joe each own 50% of Tucson LLC a limited liability company located in Tucson, AZ which was created in April of 2019. Tucson LLC provides veterinary services and uses the cash method of accounting. Pam and Joe have come to you on December 30, 2019 to ask your advice on some transactions they are considering.

Tucson's financial information is provided below:

Profit and Loss Statement January 1, 2019-December 30, 2019:

Gross Receipts:
Veterinary Services	$675,000
Expenses:
Salaries	$400,000
Utilities	$17,000
Depreciation	$15,000
Supplies	$75,000
Interest	$20,000
Total Expenses	$557,000
Net Income	$148,000

Balance Sheet – 12/30/2019

Assets:
Cash	$ 8,500
Equipment	$50,000
A/D – Equipment	(21,500)
Building	$250,000
A/D – Building	(100,000)
Total Assets	$187,000
Liabilities & Equity:
Mortgage – Building	$25,000
Member Capital – Avery	$81,000
Member Capital – Henry	$81,000
Total Liabilities & Equity	$187,000

Please provide Tucson LLC advice on the following transaction:

1. They would like to purchase additional equipment for their business, they have not purchased any other fixed assets in 2019.

	Asset	Cost
	Examination Table	$15,000
	X-Ray Machine	$250,000

(a). Calculate the tax depreciation assuming these assets are purchased and placed in service on 12/31/2019 assuming that they have elected not to take Section 179 expense and bonus depreciation on these assets. (b). Calculate tax depreciation assuming these assets are purchased on 12/31/2019 assuming that they have not made any elections out of 179 or bonus depreciation. In each calculation assume Tucson LLC would like to take the maximum allowable deduction.

2. Tucson LLC is considering whether or not they should expand their business to sell flea & tick medications, dog and cat food, pet toys and collars beginning on 1/1/2020. Discuss the tax issues that we have covered so far this semester that may result from Tucson LLC maintaining inventory in addition to providing veterinary services.
3. In order to accommodate the inventory required from #2 above, they believe they would need to relocate to a new space. The fair market value of Tucson LLC’s building is $425,000, the cost, A/D and mortgage on the building are on the balance sheet above. They recently met with two potential buyers for the building:

• Fred Rouleau, who owns a building which would suit their needs. Fred would like to enter into a like kind exchange with Tucson LLC. Fred has agreed to assume Tucson's mortgage on the building as part of the like kind exchange. The relevant information on Fred’s building is as follows:

FMV $400,000

Cost                             $200,000

A/D-Tax                       ($125,000)

• Chris Burke also has a building that would suit Tucson LLC’s needs with a FMV of $430,000. Separately, Tucson LLC’s real estate agent has a buyer interested in purchasing Tucson LLC’s building for its FMV of $425,000.

Determine whether it is better from a tax perspective for Tucson LLC to enter into a like kind exchange with Fred or if they should buy the building from Chris and sell their building to the buyer their real estate agent identified.

When making your determination consider both the gain on sale of the Tucson LLC's building (if any) as well as the tax depreciation expense allowable on the new building acquired by Tucson LLC. You must show your calculations for each scenario as support for your conclusion.

4. Detail for the fixed assets on the balance sheet above is as follows:

   Date Acquired	Description	Cost	Tax A/D
   4/1/2019	Furniture & Fixtures	$15,000	$8,000
   4/1/2019	Veterinary Equipment	$31,000	$12,500
   4/1/2019	Copier	$4,000	$1,000

Tucson LLC plans to sell all of these assets on 12/31/2019, the proceeds are as follows:

Furniture & Fixtures	$10,000
Veterinary Equipment	$35,000
Copier	$2,000

Calculate the amount and character of the gain or loss on the sale of these assets.

Answer 1

Calculation of tax depreciation assuming these assets are purchased and placed in service on 12/31/2019 assuming that they have elected not to take Section 179 expense and bonus depreciation on these assets and Calculation of tax depreciation assuming these assets are purchased on 12/31/2019 assuming that they have not made any elections out of 179 or bonus depreciation. Tucson LLC would like to take the maximum allowable deduction in calculation. Calculation of Gain or Loss on the sale of assets.