Although Lloyd Jones and his best friend Donna Taylor both studied biology at school, they ended up pursuing careers in professional cake decorating. Their company, Good Eats, specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. Lloyd and Donna formed the business at the beginning of 2021 and each contributed $60,000 in exchange for a 50 percent ownership interest. Good Eats also borrowed $250,000 from a local bank. Both Lloyd and Donna had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to Good Eats 2021 activities.

• Good Eats uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
• Good Eats received $500,000 of sales revenue and reported $200,000 of cost of goods sold (it did not have any ending inventory).
• Good Eats paid $50,000 compensation to Lloyd, $50,000 compensation to Donna, and $50,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
• Good Eats paid $25,000 of rent for a building and equipment, $10,000 for advertising, $15,000 in interest expense, $5,000 for utilities, and $5,000 for supplies.
• Good Eats contributed $10,000 to charity.
• Good Eats received a $2,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $3,000 in short-term capital gain when it sold some of the stock.
• On December 1, 2021, Good Eats distributed $30,000 to Lloyd and $30,000 to Donna.
• Good Eats has qualified property of $400,000 (unadjusted basis).

Requirements:

1. Assume Lloyd and Donna formed Good Eats as an S corporation.
   • Complete Good Eats Form 1120S page 1, Form 1120 S, Schedule K, and Lloyds Form 1120S Schedule K-1 (note that you should use 2021 tax forms). (25 points)
   • Compute the tax basis of Lloyds stock in Good Eats at the end of 2021. (10 points)
   • What amount of Lloyds income from Good Eats is subject to FICA or self-employment taxes? (5 points)

• What amount of income, including its character, will Lloyd recognize on the $30,000 distribution he receives on December 1? (5 points)
• What amount of tax does Good Eats pay on the $2,000 qualified dividend it received? (5 points)

1. Assume Lloyd and Donna formed Good Eats as an LLC.
   • Complete Good Eats Form 1065 page 1, Form 1065, Schedule K, and Lloyds Form 1065, Schedule K-1 (note that you should use 2021 tax forms). (25 points)
   • Compute the tax basis of Lloyds ownership interest in Good Eats at the end of 2021. (10 points)
   • What amount of Lloyds income from Good Eats is subject to FICA or self-employment taxes? (5 points)

• What amount of income, including its character, will Lloyd recognize on the $30,000 distribution he receives on December 1? (5 points)
• What amount of tax does Good Eats pay on the $2,000 qualified dividend it received? (5 points)