In: Accounting
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)?
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 |