Problem 10-61 (LO. 3, 9, 10) Paul and Anna plan to form the PA LLC by the end of the current year to produce and sell specialty athletic apparel. Paul and Anna will both serve as member-managers of the LLC and will be active in its operations. The members will each contribute $80,000 cash, and in addition, the LLC will borrow $440,000 from First State Bank. The 600,000 will be used to buy equipment and to lease a property they can use as a small manufacturing facility and a storefront The bank has stated that the debt must be guaranteed, and Anna has agreed to guarantee the entire amount. At the end of the year, the LLC also expects to have accounts payable of $40,000 for inventory and supplies The LLC's operating agreement provides that all LLC items will be allocated equally. The agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC's liquidation If the LLC claims 100% bonus depreciation, it will report a loss of about $580,000 in its first year, which the LLC members would like to deduct Paul and Anna would like to know how the debt ($440,000 loan and $40,000 of accounts payable) will be allocated, and how that allocation affects their ability to deduct the losses Consider all potential loss limitations and assume that neither Paul nor Anna will have business income or losses from other sources Complete the memo for the PA LLC tax planning file for your manager's review that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest If an amount is zero, enter "O". TAX FILE MEMORANDUM DATE December 11, 2018 FROM Jane Student SUBJECT PALLC debt allocation Facts: The PA LLC will be formed before the end of the current year to manufacture specialty athletic apparel The LLC will be equally owned by Paul and Anna, and both parties will be managing members. It will purchase equipment and pay other expenses for $600,000, with $160,000 paid in cash. The remaining $440,000 will be borrowed from First State Bank. The loan will be personally guaranteed by Anna. By the end of the tax year, the LLC will also have $40,000 of accounts payable (not guaranteed by either LLC member) The operating agreement provides that all LLC items will be allocated equally. Capital accounts will be appropriately maintained under the 704(b) Regulations. Any member with a deficit capital account balance upon liquidation of the LLC will be required to contribute cash in the amount of the deficit at that time The LLC expects to produce a loss of about $580,000 for its first taxable year (allocated $290,000 each to Paul and Anna), and the LLC members would both like to be able to deduct their share of the loss Problem 10-61 (LO. 3, 9, 10) Paul and Anna plan to form the PA LLC by the end of the current year to produce and sell specialty athletic apparel. Paul and Anna will both serve as member-managers of the LLC and will be active in its operations. The members will each contribute $80,000 cash, and in addition, the LLC will borrow $440,000 from First State Bank. The 600,000 will be used to buy equipment and to lease a property they can use as a small manufacturing facility and a storefront The bank has stated that the debt must be guaranteed, and Anna has agreed to guarantee the entire amount. At the end of the year, the LLC also expects to have accounts payable of $40,000 for inventory and supplies The LLC's operating agreement provides that all LLC items will be allocated equally. The agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC's liquidation If the LLC claims 100% bonus depreciation, it will report a loss of about $580,000 in its first year, which the LLC members would like to deduct Paul and Anna would like to know how the debt ($440,000 loan and $40,000 of accounts payable) will be allocated, and how that allocation affects their ability to deduct the losses Consider all potential loss limitations and assume that neither Paul nor Anna will have business income or losses from other sources Complete the memo for the PA LLC tax planning file for your manager's review that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest If an amount is zero, enter "O". TAX FILE MEMORANDUM DATE December 11, 2018 FROM Jane Student SUBJECT PALLC debt allocation Facts: The PA LLC will be formed before the end of the current year to manufacture specialty athletic apparel The LLC will be equally owned by Paul and Anna, and both parties will be managing members. It will purchase equipment and pay other expenses for $600,000, with $160,000 paid in cash. The remaining $440,000 will be borrowed from First State Bank. The loan will be personally guaranteed by Anna. By the end of the tax year, the LLC will also have $40,000 of accounts payable (not guaranteed by either LLC member) The operating agreement provides that all LLC items will be allocated equally. Capital accounts will be appropriately maintained under the 704(b) Regulations. Any member with a deficit capital account balance upon liquidation of the LLC will be required to contribute cash in the amount of the deficit at that time The LLC expects to produce a loss of about $580,000 for its first taxable year (allocated $290,000 each to Paul and Anna), and the LLC members would both like to be able to deduct their share of the loss