Balance Sheet and Tax Basis

Week 5 Problem Solution

Significant tax issues or concerns that may differ across entity types are:

• The business structure’s flexibility
• Protection of the liability
• The time and cost of organizing the entity

Significant non-tax issues or concerns that may differ across entity types are:

• Lowering of self-employment and FICA taxes
• Flexibility of special allocations
• Adding new owners

My recommendation for forming CCS is LLC.

I chose LLC because the organizing business members may reduce their individual tax liabilities by operating as a LLC. CCS should be concerned about FICA and self-employment taxes. LLCs must pay self-employment taxes. As the business grows past 3-4 years, I recommend CCS to look at the possibility of switching to and S Corporation. At this point, compensation needs may have reduced and the members would wish to fully benefit from self-employment tax removal.

Chapter 19, #39

• What amount of gain or loss does Zhang realize on the transfer of the property to her corporation?
• Loss Realized = FMV(Stock Received)+Mortgage Assumed–AdjustedTaxBasis = $300,000 + $100,000 – $410,000 Loss Realized= ($10,000)
• What amount of gain or loss does Zhang recognize on the transfer of the property to corporation. No loss is recognized on this transfer because of the requirements of Section 351.

What is Zhang’s tax basis in the stock she receives in the exchange? Tax Basis = Substituted Basis of the Assets Transferred – Assumed Mortgage = $410,000 – $100,000 Tax Basis= $310,000

What is the corporation’s tax-adjusted basis in each of the assets received in the exchange?

The corporation’s carryover basis is $400,000; the value of assets received minus the aggregate loss on the assets transferred applied to land. Inventory = $10,000, Building = $100,000, and Land = $290,000. Assume the corporation assumed a mortgage of $500,000 attached to the building and land. Assume the fair market value of the building is now $250,000 and the fair market value of the land is $530,000. The fair market value of the stock remains $300,000.

How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?

Realized Gain: $300K Stock FMV + $500K Mortgage – $410K Aggregate Tax Basis = $390,000 Realized Gain Tax Basis of Property: $500K – $410K = $90,000 Zhang would recognize a gain of $90,000 on the transfer under the new conditions since the assumed liability is greater than the total tax basis of the transferred property.

What is Zhang’s tax basis in the stock she receives in the exchange?

Tax Basis of Stock Received = Tax Adjusted Property Basis Transferred + Exchange Gain Recognized – Mortgage Assumed $410,000 + $90,000 – $500,000 = 0, Zhang can defer recognition of the $300,000 in stock.

What is the corporation’s tax-adjusted basis in each of the assets received in the exchange?

Inventory = $10,000 + ($20,000/$800,000 x $90,000) = $12,250 Building = $100,000 + ($250,000 / $800,000 x $90,000)= $128,125 Land= $300,000 + ($530,000 / $800,000 x $90,000) = $359,625 Total= Inventory + Building + Land = $12,250 + $128,125 + $359,625 Total = $500,000 The corporation’s total tax basis is the $410,000 carryover basis plus the gain recognized on the exchange.