Question

Mike, Matt, Brooke, and Kellie decide to go into business together. The form a limited partnership where Mike, Matt, and Brooke are the limited partners. They contribute the following amounts: Mike - 25,000 Matt - 10,000 Brooke - 10,000 Kellie - 5,000

Additionally, the partnership agreement states that all profits are to be distributed equally. Mike will perform services for the company and will be paid $100,000 a year for those services. The company will be able to deduct this amount from net income. In the first year of operations, the company had the following items of income:
Services - 160,000
Expenses - 24,000
Depreciation - 28,000
Finally, no one withdraw any money from the partnership, save Matt who withdraws $15,000.
What is the maximum Kellie can withdraw without having a gain in excess of basis?

Answer 1

$7,000

Step-by-step explanation:

the partnership's net income = $160,000 - $100,000 - $24,000 - $28,000 = $8,000

since net income is divided equally among the 4 partners, then each partner is allocated $2,000

Kellie's capital account = $5,000 + $2,000 (her share of profits) = $7,000

if she withdraws more than $7,000, then she should report a gain in excess of basis