LeBron, Dennis, and Susan formed the Bar T LLC at the beginning of the current year. LeBron and Dennis each contributed $200,000 and Susan transferred several acres of agricultural land she had purchased two years earlier to the LLC. The land had a tax basis of $50,000 and was appraised at $300,000. The land was also encumbered with a $100,000 nonrecourse mortgage (i.e., qualified nonrecourse financing) for which no one was personally liable. The members plan to use the land and cash to begin a cattle-feeding operation. Susan will work full-time operating the business, but LeBron and Dennis will devote less than two days per year to the operation. All three members agree to split profits and losses equally. At the end of the first year, Bar T had accumulated $40,000 of accounts payable jointly guaranteed by LeBron and Dennis and had made a $9,000 principal payment on the mortgage. None of the members have passive income from other sources.
For the first year of operations, the partnership records disclosed the following information:
Sales revenue............................................................................... $620,000
Cost of goods sold....................................................................$380,000
Operating expenses....................................................................$670,000
Dividends.................................................................................$1,200
Municipal bond interest...................................................................$300
Salary paid as a guaranteed payment to Susan (not included in expenses) ...$10,000
Cash distributions split equally among the members at year-end................$3,000
a. Compute the adjusted basis of each member's interest immediately after the formation of the LLC.
b. When does each member's holding period for his or her LLC interests begin?
c. What is Bar T's tax basis and holding period in its land?
d. What is Bar T's required tax year-end?
e. What overall methods of accounting were initially available to Bar T?
f. List the separate items of partnership income, gains, losses, deductions and other items that will be included in each member's Schedule K-1 for the first year of operations. Use the proposed self-employment tax regulations to determine each member's self-employment income or loss.
g. What are the members' adjusted bases in their LLC interests at the end of the first year of operations?
h. What are the members' at-risk amounts in their LLC interests at the end of the first year of operations?
i. How much loss from Bar T, if any, will the members be able to deduct on their individual returns from the first year of operations?