At the beginning of the current year Carl invested $175,000 of cash in exchange for a 60% ownership Interest in SMAC, Ltd. During the year SMAC experienced the following transactions: Generated an Ordinary Business Loss of ($130,000) Borrowed $75,000 from Wells Fargo Bank. Made proportionate current property distributions to the owners that had a total FMV of $350,000 and basis of $150,000. Assume the entity is organized as an LLC, and that the operating agreement states that all items will be allocated based proportionately on the ownership interests, except for non-separately stated income(loss). For that item, Carl negotiates a special allocation equal to one-half of his ownership percentage. What is Carl’s ending outside basis in the entity?
To calculate Carl's ending outside basis in the LLC, we need to consider his initial investment, his share of the LLC's loss, any additional loans he's personally responsible for, and the impact of the property distributions. Here's how it breaks down: 1. Initial Investment: Carl starts with a $175,000 basis due to his cash contribution. 2. Ordinary Business Loss: The LLC experienced a $130,000 ordinary business loss. Carl negotiated a special allocation of one-half of his ownership percentage, which is 60%. Therefore, he is allocated 30% of the loss (0.5 * 60% = 30%). Carl's share of the loss is $130,000 * 30% = $39,000. 3. Borrowed Money: The $75,000 borrowed by the LLC from Wells Fargo Bank does not directly affect Carl's basis unless he is personally liable for the loan. If the LLC is a partnership for tax purposes and Carl is personally liable for the loan, his basis would increase. However, if the LLC is treated as a partnership and Carl is not personally liable (nonrecourse debt), then it does not affect his basis. 4. Property Distributions: The property distributions have a total FMV of $350,000 and a basis of $150,000. Carl's share of the distribution is 60% of $350,000 FMV, which is $210,000. However, for basis calculations, we use
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