Question

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 1/3^rd 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.

1. Using this information, they would like you to prepare proforma tax returns for the entity doing business as a C corporation, S corporation and a LLC with partnership tax status (assume a calendar year for each entity). For purposes of the LLC, assume the “members” are treated as general partners for purposes of determining any self-employment tax.

2.) Prepare a FMV and a tax basis balance sheet immediately following the contribution of the assets.

3. Prepare a tax return for one of the individuals. You can assume they are each single.

4. 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)?

Answer 1