Overview
ABC, LLC (ABC) was formed on January 1, 2023, with the partners making the following contributions:
Partner Contributions
Georgia (40%) $125,000 cash, Whiteacre (FMV $187,500; Basis $75,000); Blueacre (FMV $625,000; Basis $250,000; subject to NR debt of $437,500); each property held 6 years prior to contribution
Megan (30%) $375,000 cash
John (20%) Greenacre (FMV $250,000; Basis $312,500); held for 2 years prior to contribution
Willie (10%) $125,000 cash
ABC’s business activity began on January 1, 2023, and it is a calendar year taxpayer. It specializes in the sale of hiking equipment and outdoor clothing. On the first day of the year, ABC purchased equipment for $787,500 by paying $625,000 cash and taking out a non-recourse loan from County Bank for $162,500. County Bank required Georgia and Megan to each execute a legally binding personal guarantee for $62,500 ($62,500 guarantee for each, of the total $162,500 principal). Assume the equipment purchased is 7-year property depreciable on a straight-line basis beginning in 2023. The equipment is qualified property for purposes of section 199A.
The LLC agreement for ABC provides that all items of income and loss shall be allocated to the partners in accordance with the partner’s percentage interest except as required by section 704(c) and except that all depreciation from the equipment is specially allocated to Georgia.
ABC uses the accrual method. It elected the remedial method with respect to the properties contributed by Georgia and the traditional method with respect to the property contributed by John. It holds all contributed properties for investment purposes (i.e., they are not used in ABC’s trade or business).
For its taxable year ended Dec. 31, 2023, ABC has the following additional income and expense items. Assume that ABC’s business is a qualified trade or business for purposes of section 199A and that all of ABC’s ordinary business income is qualified business income.
Income Items
Gross Sales | $5,250,000 |
Interest Rec’d – Nike Bonds | $45,612 |
Dividends Rec’d from US Corp | $33,750 |
Sale of Whiteacre Property | $350,000 (cash proceeds) |
Sale of Greenacre Property | $275,000 (cash proceeds) |
Expense Items
COGS | $3,100,000 |
Advertising | $140,000 |
Charitable Contributions | $37,500 |
Employee Salaries (W-2 Wages) | $850,000 |
Guaranteed Payment for Services – Georgia – (paid Jan 4, 2024) | $181,250 |
Guaranteed Payment for Services – Megan – (paid Jan 4, 2024) | $81,250 |
Payment of John for accounting work performed during the year – (paid Jan 4, 2024) | $40,000 |
Legal fees | $22,500 |
Rent | $38,750 |
Investment Interest | $9,312 |
Other Office Expenses | $76,250 |
Payroll Taxes | $44,712 |
Utilities | $78,100 |
Insurance for business liability | $112,500 |
Assume the charitable contributions were cash contributions made to a public charity.
In December, the partnership made cash distributions to the partners as follows: Georgia ($50,000); Megan ($37,500); John ($25,000); and Willie ($12,500).
You may ignore self-employment tax implications. ABC made no principal payments on any of its debt during 2023.
Complete form 1065 (page 1 and Schedule K only) and the Schedule K-1 for each partner. You do not need to complete any other forms or schedules that would accompany the full 1065. You may fill in the gaps of any information not provided. Your tax return should be prepared professionally and include all required accompanying statements (white paper) providing detail on certain line items on the return.