Question

Rondo and his business associate, Larry, are considering forming a business entity called R&L but they are unsure about whether to form it as a C corporation, an S corporation or an LLC. Rondo and Larry would each invest $57,000 in the business. Thus, each owner would take an initial basis in his ownership interest of $57,000 no matter which entity type is formed. Shortly after the formation of the entity, the business borrowed $48,500 from the bank. If applicable, this debt is shared equally between the two owners.

a. After taking the loan into account, what is Rondo's tax basis in his R&L stock if R&L is formed as a C corporation?

b. After taking the loan into account, what is Rondo's tax basis in his R&L stock if R&L is formed as an S corporation?

c. After taking the loan into account, what is Rondo's tax basis in his R&L ownership interest if R&L is formed as an LLC?

Answer 1

(a). Rondo’s tax basis in his R&L stock if R&L is formed as a C corporation = $57000

Explanation;

As per information of the question it is given that Rondo and Larry would each invest $57,000 in the business hence Rondo’s tax basis will be $57000 because in case of C corporation debt can not be included in the tax basis of shareholders. Thus Rondo’s tax basis will be only $57000.

(b). Rondo’s tax basis in his R&L stock if R&L is formed as a S corporation = $57000

Explanation;

As per information of the question it is given that Rondo and Larry would each invest $57,000 in the business hence Rondo’s tax basis will be $57000 because in case of S corporation debt can not be included in the tax basis of shareholders. Thus Rondo’s tax basis will be only $57000.

(c). Rondo’s tax basis in his R&L stock if R&L is formed as a S corporation = $81250

Explanation;

As per information of the question it is given that Rondo and Larry would each invest $57,000 in the business. It is also given that business borrowed $48,500 from the bank and If applicable, this debt is shared equally between the Rondo and Larry. Hence Rondo’s tax basis will be $57000 + ($48250 / 2) = $81125 because in case of LLC debt is included in the tax basis of shareholders. Thus Rondo’s tax basis will be only $81125.