Chloe and Emma start a new business, Cement Sidewalks and Accessories (CSA), during the current year. CSA is organized as a partnership. Chloe owns 40% of CSA; Emma owns the remaining 60%. Chloe and Emma come to your firm for advice on the tax consequences of their business. Your supervisor gives you the following information, as prepared by Chloe and Emma for their first year of operation:

Sales .............. $ 210,000

Cost of materials .......... (95,000)

Labor costs ............ (90,000)

Other expenses ........... (55,000)

Loss on sale of stock ......... (18,000)

Cash withdrawals by partners .... (70,000)

Loss .............. $(118,000)

Prepare a memo for your supervisor explaining the ramifications of CSA’s first-year results for Chloe’s and Emma’s tax liabilities.