Ben Grimm is a 40% partner in We Four, LLC a super-heroing organization. (He does most of the heavy lifting. Reed has 40%, he is the brains. Sue has 10%--they never see her doing anything. Her brother Johnny has the other 10%--he gets too hot under the collar to deal with the customers.)
On 1 January 2013, his outside basis in his LLC interest was $125,000. This included his share of liabilities--$75,000. (Reed is always repairing and inventing gadgets?saving the world is expensive.)
In addition to the operating costs, the insurance premiums alone were six figures---you try paying for the cost of cleaning up after a visit from Dr. Doom?they still made a profit. The Company?s a net profit of $300,000 before any payments to partners.
Reed gets a guaranteed payment of $75,000 (a bit of a stretch, but he does invent the impossible) and Ben gets a guaranteed payment of $20,000 as a return on his investment (he used an inheritance form his Aunt Petunia to buy their headquarters). He gets another $30,000 for his services hitting things?this is a labor intensive business. Johnny and Sue each get $10,000.
The partnership made distributions during the year to all of the partners. Ben received:
a. cash of $65,000;
b. inventory with a FMV of $55,000 and a basis of $35,000; and
c. Unrealized receivables with a face value of $25,000 and a basis of $0. These were all of the outstanding receivables as of year-end.
d. An old Fantasti-car worth $45,000 with an inside basis of $25,000.
The distribution of cash and inventory was pro rata amongst all partners. However, only Ben received any receivables, the others received additional cash.
Cash flow was good so the company paid off all of its debt at year end.
Ben has come to you to explain what happened?tax wise. Specifically, he asks:
1. What is he supposed to report on his 2013 return? Income, loss, gain??? (Remember, Ben is strong but doesn?t understand a Thing about taxes).
2. What does he do about the inventory? Reed supplemented their income by selling gadgets to other superheroes (Tony Stark?s equipment is way overpriced).
Ben is thinking about using the equipment in a new side business on Yancey Street to be called ?Clobber This? where it would be used to help heroes de-stress. (Already he has had inquiries from Frank Castle, Wolverine and Bruce Banner). If the business proves less than fantastic, he plans to sell the equipment.
3. What does he do about the receivables? How will he be taxed and when? How much? He was told he has no tax until he collects.
4. What is his basis in the car? He plans to use it in his business and wants to depreciate it. The company had been depreciating it over 5 years using MACRS.
Ben thinks straight line is better; he remembers that from an old accounting course. What can he do?
5. What is his 31 December 2013 basis in the LLC?
6. Ben would like to transfer a 5% interest to his girlfriend, Alicia as a gift?although she can?t see why. However, his last accountant, Debbie T. Credit, said he?ll still get clobbered with the income?what does she mean? Only consider the income tax consequences, not gift tax.