Question 85. Abigail, Bobby, and Claudia are equal owners in Lafter, an S cor

25 May Question 85. Abigail, Bobby, and Claudia are equal owners in Lafter, an S cor

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Question

85. Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Abigail and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner. Consider the following information for 2014:

As of January 1, 2014, Abigail, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0. On January 1, the stock basis is also the at-risk amount for each shareholder.
Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2014. Neither has any other source of passive income (besides Lafter, for Claudia).
On March 31, 2014, Abigail lends $5,000 of her own money to Lafter.
Anticipating the need for basis to deduct a loss, on April 4, 2014, Bobby takes out a $10,000 loan to make a $10,000 contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as collateral.
Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2014.
Lafter has C corporation earnings and profits of $15,000 as of January 1, 2014.
During 2014, Lafter reports a business loss of $75,000 computed as follows:

Sales revenue $90,000

Cost of goods sold (85,000)

Salary to Abigail (40,000)

Salary to Bobby (40,000)

Business (loss) ($75,000)

Lafter also reported $12,000 of tax-exempt interest income.

What amount of Lafter’s 2014 business loss of $75,000 are Abigail, Bobby, and Claudia allowed to deduct on their individual tax returns? What are each owner’s stock basis and debt basis (if applicable) and each owner’s at-risk amount with respect to the investment in Lafter at the end of 2014?

What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2015?

86. While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2014 and each contributed $50,000 in exchange for a 50 percent ownership interest. GTE also borrowed $200,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE’s 2014 activities.

GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).
GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
GTE paid $15,000 of rent for a building and equipment, $20,000 for advertising, $14,000 in interest expense, $4,000 for utilities, and $2,000 for supplies.
GTE contributed $5,000 to charity.
GTE received a $1,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $1,500 in short-term capital gain when it sold some of the stock.
On December 1, 2014, GTE distributed $20,000 to James and $20,000 to Paul.

Required:

a. Assume James and Paul formed GTE as an S corporation.

· Complete GTE’s Form 1120S page 1, Form 1120 S, Schedule K, and Paul’s Form 1120S Schedule K-1 (note that you should use 2013 tax forms).

· Compute the tax basis of Paul’s stock in GTE at the end of 2014.