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.

Answer 1

To determine Potato's tax basis in her partnership interest at year-end if Starch LLC is taxed as a partnership, the changes in her basis throughout the year should be calculated. If Starch LLC is taxed as an S corporation, the tax basis in Potato's corporate stock at year-end can be determined in a similar manner.

Step-by-step explanation:

If Starch LLC is taxed as a partnership, Potato's tax basis in her partnership interest at year-end can be determined by calculating the changes in her basis throughout the year. Her beginning basis of $30,000 would increase by the $45,000 allocated ordinary income and the $1,000 tax-exempt interest income. It would then be reduced by the $2,000 nondeductible expenses. Finally, the $10,000 distribution received and the increase in outstanding debts ($30,000) to ($130,000) would further reduce the tax basis. The final tax basis in her partnership interest at year-end would be the result of these calculations.

If Starch LLC is taxed as an S corporation, Potato's tax basis in her corporate stock at year-end can be determined in a similar manner. Her beginning basis of $10,000 would be adjusted by the allocated income and the nondeductible expenses, as well as any distributions received and changes in the outstanding debts of the corporation. By making these adjustments, the tax basis in her corporate stock at year-end can be determined.