Economics Income Question Task
50. (LO3)
Jack and Jill are owners of UpAHill, an S corporation. They own 25 and 75 percent, respectively.
- a. What amount of ordinary income and separately stated items are allocated to them for years 1 and 2 based on the information above?
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1st Year or Year 1: Ordinary income is 42,500. 00 42,500*25% = 10,625
Allocated to Jack 42,500*75% = 31,875
Stated Items: Interest Income 2,000. 00 500. 00 is allocated to Jack 1,500. 00 is allocated to Jill Dividend
Income: 1,000. 00 250. 00 allocated to Jack 750. 00 allocated to Jill
- b. Complete UpAHill’s Form 1120S, Schedule K, for year 1. See attached
- c. Complete Jill’s 1120S, Schedule K-1, for year 1. See attached Schedule
51. (LO3, LO4)
Assume Jack and Jill, 25 and 75 percent shareholders in UpAHill corporation, have tax bases in their shares at the beginning of year 1 of $24,000 and $56,000, respectively. Also, assume no distributions were made. Given the income statement above, what are their tax bases in their shares at the end of the year.
1. Considering the 24,000 and 56,000 respectively, Jack tax basis is calculated with his original cost of
24,000 + 10,625 + 500 + 125 = 32,250. 00 Jill 56,000 + 31,875 + 1,500 + 375 = 89,750. 00 1. LO
Joey is a 25 percent owner of Loopy LLC. He no longer wants to be involved in the business. What options does Joey have to exit the business? The remedy to Joey's issue should be contained within the operating agreement. In some states such as CA, this is a requirement for LLCs. In some cases where operating agreements are not available, a buy out membership interest dissolve the LLC may be the only option.
2. (LO1) Compare and contrast the aggregate and entity approaches for a sale of a partnership interest. Two approaches govern the rules governing the federal taxation of partnerships and partners– aggregate and entity. The aggregate, also known as the conduit approach views a partnership as though each partner owned the assets and liabilities of the partnership. An entity approach treats the partnership and its partners as separate entities. Whereas Congress is aware, the two approaches are confused due to nonspecific statutory language offering guidance. Under the aggregate approach, section 701 recommends that the owners are subject to tax, not the partnership. The entity approach is recommended by the IRS that subchapter K follow this approach with respect to partnership interest transactions. What restrictions might prevent a partner from selling his partnership interest to a third party? Restrictions on the activities of general partners place a limit on the amount of private investment management of venture capital can make from any private investment. General partners are limited in their ability to sell their general partnership interest in the venture fund to a third party. These sales would reduce the general partner’s incentive to monitor and produce an effective exit strategy for the venture fund portfolio companies.
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