Question

Lexi operates a booming business which sells fruits and vegetables delivered door to door to residential customers each morning. Her business invests its excess working capital whenever it is convenient. The business makes regular contributions to local charities to maintain a good business reputation.

Lexi started the business and operated as a sole proprietorship during the last 7 months of 2016. When she met with an attorney in December of 2016, the attorney advised Lexi to set up a Limited Liability Company (LLC) to conduct all business activities beginning January 1, 2017. During 2017 her business had the following items of income and expense:

Gross sales of fruits and vegetables                $280,000

Interest income                                         2,000

Dividend income                                         1,200

Short term capital gain                            4,100

Total receipts                       $287,300

Wages to employees (she did not pay a wage to herself)    $ 86,000

Rent & utilities                           61,000

Charitable contributions                     12,000

Total expenditures                         $159,000

Lexi prefers to own 100% of the LLC membership interests, but is willing to allow her significant other to own as much as 2% of the LLC membership interests if you advise her to do so.

(a)   (12 Points). Ignoring any elections the LLC may have previously made, list all options available to the LLC for the type(s) of income tax returns it could file for 2017?

(b)   (24 Points). Compute the operating income and describe the tax treatment of the operating income and any items which are not included in operating income for each alternative type of tax return you describe in part (a)?

Answer 1

a	Options available to the LLC for the types of income tax returns it could file for 2017
1	LLC can file return as sole proprietorship. In this case IRS will disregard LLC entity as separate
	from the owner. The owner will be responsible for filling the return and pay the tax by the due
	date. The owner will include the business income in the personal income tax return and will
	attach Schedule C in which the income and deductions related to business activity will be reported
2	LLC can file return as a Partnership firm. In this case, partnership will fill form 1065 for information
	purpose only. Partnership firm will provide each partner with Schedule K-1 with their share of
	income and deduction information, which each partner will include in its personal return, and is
	liable to pay tax on it. Partnership firm files the tax return but not actually pays the tax on business
	income.
3	LLC can file tax return as a corporate entity. In this case, Corporate entity will be treated as a
	separate taxpayer as one partner from other. The corporation is responsible for reporting all
	income and expenses on form 1120 each year and pay tax on it.
b	Operating income
	Gross sales of fruits and vegetable	$280,000
	Less: Expenses
	Wages to employees	$86,000
	Rent and Utilities	$61,000
	Operating income	$133,000
1	LLC file tax return as Sole proprietorship. Operating income will be included in Lexi's personal tax
	return form 1040. Details will be reported in Schedule C. Charitable contribtuion will be deducted
	with a limit of 50% on AGI. Dividend income, interest income and short term capital gain will also
	be reported on Form 1040
2	LLC files tax return as Partnership firm. Partnership will file form 1065 and each partner will include
	his share on its personal income tax return. 98% Lexi's share and 2% significant other.
3	LLC files tax return as Corporation. Corporation will file form 1120 and report operating income,
	dividend income, interest income and short term capital gain on this form and will deduct
	chartible contribution.