Question

Potato, an individual, is a 20 percent owner of starch llc. this year, potato was allocated $45,000 of ordinary income from starch llc, $1,000 of tax-exempt interest income, and $2,000 of nondeductible expenses. potato also received a $10,000 distribution from starch llc this year. at the beginning of the year, starch llc had outstanding debt of $100,000. at the end of the year, the entity’s outstanding debts increased to $130,000. required: if starch llc is taxed as a partnership, and her basis in her partnership interest at the beginning of the year is $30,000, determine potato's tax basis in her partnership interest at year-end. if starch llc is taxed as an s corporation, and her basis in her s corporation stock at the beginning of the year is $10,000, determine potato's tax basis in her corporate stock at year-end.

A) $57,000
B) $75,000
C) $62,000
D) $82,000

Answer 1

Potato's tax basis in her partnership interest at year-end is $64,000 if Starch LLC is taxed as a partnership. If Starch LLC is taxed as an S Corporation, Potato's tax basis in her corporate stock at year-end is $8,800.

Step-by-step explanation:

To determine Potato's tax basis in her partnership interest at year-end if Starch LLC is taxed as a partnership, we need to consider her allocated income, tax-exempt interest income, nondeductible expenses, and distributions. Potato's tax basis at the beginning of the year is $30,000. We start by adding the allocated ordinary income of $45,000, which brings the tax basis to $75,000. Then we subtract the nondeductible expenses of $2,000, leaving us with a tax basis of $73,000. Next, we add the tax-exempt interest income of $1,000, bringing the tax basis to $74,000. Finally, we subtract the distribution of $10,000, resulting in Potato's tax basis in her partnership interest at year-end of $64,000.

If Starch LLC is taxed as an S Corporation, the calculation of Potato's tax basis in her S Corporation stock at year-end takes into account her ownership percentage of the corporation. Potato's tax basis at the beginning of the year is $10,000. We start by adding the allocated ordinary income of $45,000 multiplied by her ownership percentage of 20%, which brings the tax basis to $19,000. Then we add the allocated tax-exempt interest income of $1,000 multiplied by her ownership percentage, resulting in a tax basis of $19,200. Finally, we subtract the nondeductible expenses of $2,000 multiplied by her ownership percentage, leaving us with a tax basis of $18,800. Considering the distribution of $10,000, Potato's tax basis in her corporate stock at year-end as an S Corporation is $8,800.