Entity was formed several years ago. At the beginning of this year, Chris acquired a 35% interest in the Entity by transferring property worth $65,000 in which she had basis of $50,000. At the beginning of this year, the Entity had recourse debt of $200,000. This year, Chris loaned $20,000 (bona fide debt) to the Entity. The entity’s results for the year are as follows: Loss from operations ($520,000)

QUESTION

Entity was formed several years ago. At the beginning of this year, Chris acquired a 35% interest in the Entity by transferring property worth $65,000 in which she had basis of $50,000. At the beginning of this year, the Entity had recourse debt of $200,000. This year, Chris loaned $20,000 (bona fide debt) to the Entity. The entity’s results for the year are as follows:

Loss from operations ($520,000)

LTCG 40,000

Municipal bond interest income 32,000

Charitable contributions 4,000

Interest expense related to muni bond 8,000

In addition, during the year, Chris received a distribution of $48,000. If the entity is a C corporation, the distribution is a dividend.

At the end of the year, the Entity’s balance sheet shows a recourse debt balance of $100,000. The Chris Loan balance remains unchanged.

Required:

1. Assume Entity is a General Partnership – Compute Chris’s outside basis.
2. Assume Entity is an S corporation – Compute Chris’s outside basis.
3. Assume Entity is a C corporation – Compute Chris’s outside basis.

Problem 2

A Us entity that begin business last year shows the following information in its current year financial statement records:

Net Income per Books: 600,000

Included in Net Income per Books are the following items:

Federal Income Tax Expense 150,000

Property Taxes 30,000

Dividends Received from a 17% Owned Corporation 200,000

Net 1231 Loss 45,000

Short-Term Capital Gain 55,000

Long- Term capital Gain 75,000

Short term capital loss 25,000

Charitable Contributions 60,000

Last year, the entity generated a tax loss of 30,000

Required (a and b):

1. a) Assume that the corporation is a C corporation. Provide a schedule showing the corporation’s taxable income for the year.
2. b) Assume that the corporation is an S corporation. Compute the corporation’s non-separately stated ( ordinary income) and separately stated items.

ANSWER

Calculating Chris’s Outside Basis in Entity: General Partnership, S Corporation, and C Corporation

Introduction

Understanding the concept of outside basis is crucial in determining an individual’s investment in an entity. In this analysis, we will calculate Chris’s outside basis in Entity based on three different entity types: General Partnership, S Corporation, and C Corporation. By exploring each scenario, we will gain insights into the factors influencing Chris’s outside basis.

General Partnership

In a general partnership, the outside basis is calculated by considering the partner’s initial contribution, additional contributions, partnership losses, and any partnership liabilities (Current Partnership Distributions: When Do You Figure Your Basis?, 2022). In this case, Chris acquired a 35% interest in the Entity by transferring property worth $65,000, which had a basis of $50,000.

Chris’s initial basis in the Entity for a General Partnership is determined by the fair market value of the property transferred, which amounts to $65,000. Therefore, Chris’s outside basis at the beginning of the year for a General Partnership is $65,000.

S Corporation

For an S corporation, the outside basis is determined by the shareholder’s initial investment, additional contributions, allocated income or losses, and any loans made to the corporation. Unfortunately, in this scenario, specific information regarding Chris’s initial investment and additional contributions is not provided (Perez, 2022). Hence, it is not possible to determine Chris’s outside basis in the Entity as an S Corporation.

C Corporation

In the case of a C corporation, the outside basis is typically based on the shareholder’s initial investment, additional contributions, and any loans made to the corporation (Afar, n.d.). Chris acquired a 35% interest in the Entity by transferring property worth $65,000, with a basis of $50,000. Additionally, Chris loaned $20,000 to the Entity during the year.

Chris’s outside basis in the Entity for a C Corporation comprises the fair market value of the property transferred and the loan made. Therefore, Chris’s outside basis at the beginning of the year for a C Corporation is $65,000 (fair market value of the property transferred) + $20,000 (loan made) = $85,000.

Conclusion

In conclusion, Chris’s outside basis calculation in Entity varies depending on the entity type. For a General Partnership, the outside basis is determined by the fair market value of the property transferred. However, further information regarding initial investments and additional contributions is necessary for an S Corporation. In the case of a C Corporation, the outside basis includes the fair market value of the property transferred and any loans made to the corporation. Considering these factors, we calculated Chris’s outside basis in Entity for each entity type, providing a comprehensive understanding of the investment value.

References

Afar. (n.d.). Scribd. https://www.scribd.com/document/391026116/Afar 

Current Partnership Distributions: When Do You Figure Your Basis? (2022, April 26). JD Supra. https://www.jdsupra.com/legalnews/current-partnership-distributions-when-9602065/ 

Perez, W. (2022). S-Corp Accounting. The Balance. https://www.thebalancemoney.com/s-corporation-accounting-3193222