Question

In: Accounting

Ben, Jason, and Kelly are planning on forming a business together.   The business will begin as...

Ben, Jason, and Kelly are planning on forming a business together.   The business will begin as of 1/1/19 (assets transferred as of this day). They plan on transferring the following assets to the business:

Asset               Original Cost     FMV      Date of Acquisition     Liabilities

Ben:                 Computer        $15,000              $11,000           1/1/16                      $0

                        Cash                14,000

Jason:             Car                  $30,000              $25,000           1/1/17                      $20,000

                        Cash                20,000

Kelly:              Office Furn.    $40,000              $25,000           1/1/18                      $0

(Note – You have to figure the adjusted basis in the assets. You should assume that each asset was depreciated under MACRS)

In exchange for the assets, each individual will receive a 1/3rd ownership interest in the entity. The business will obtain an $80,000 bank loan for working capital needs.

The business will be in retail sales over the Internet. They expect the following income and expense items (not counting depreciation which you are to figure).

Sales                            $300,000

COGS                         100,000

Interest Income                5,000

Salaries & Wages          40,000

Repairs & Maint              8,000

Rent                                30,000

Interest Expense             12,000

Charitable Cont.              30,000

The entity distributes $20,000 to each individual.

Here are some of my calculations to help with the question:

As of: 1/1/2019
Total Accum. Depr. Adj. basis
Computer $      10,680.00 $              4,320.00
Car $      15,600.00 $           14,400.00
Office Furn. $        5,716.00 $           34,284.00
Depr. By year continued
2019 2020 2021
$      1,728.00 $        1,728.00 $                 864.00
$      5,760.00 $        3,456.00 $              3,456.00
$      9,796.00 $        6,996.00 $              4,996.00


Question: Ben expects to sell his interest in the business three years from now. He expects to sell his interest for $300,000. The income and expense items are expected to be exactly the same for the next three years (except for the amount of depreciation). What will be the tax implications of this sale under each form of entity (assume the entity still has the $80,000 loan and the other loan is paid off)?

Solutions

Expert Solution

ASSETS ORIGINAL COST DATE OF ACQUISITION DATE OF TRANSFERENCE RECOVERY PERIOD LIABILITY 1/1/2017 1/1/2018 1/1/2019 TOTAL ACCUMULATED DEPRECIATION ADJUSTED BASIS 1/1/19
COMPUTER       15,000.00 1/1/2016 1/1/2019 5 YEARS         3,000.00         4,800.00         2,880.00                10,680.00         4,320.00
CAR       30,000.00 1/1/2017 1/1/2019 5 YEARS                                 20,000.00 X         6,000.00         9,600.00                15,600.00       14,400.00
OFFICE FURNITURE       40,000.00 1/1/2018 1/1/2019 7 YEARS X X         5,716.00                  5,716.00       34,284.00
               31,996.00      


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