Question

CL LLC is a manufacturing business and reported taxable income of $40,000,000 before interest expense, taxes, depreciation, and amortization (“tax EBITDA”), plus $1,500,000 of separately stated investment income. CL incurred interest expense of $1,000,000 in connection with this investment income and $14,000,000 in con-nection with its trade or business.a.How much interest expense can CL deduct?b.How is the interest expense reported on CL’s Schedule K?c.What action, if any, is needed by the LLC members?d.How would your answers to parts (a) through (c) change if CL’s tax EBITDA was $4,000,000 (plus $150,000 of investment income), its average annual gross receipts for all prior tax years was $10,000,000 or less, and the interest expense amounts were $100,000 (investment) and $1,400,000 (business)?

Answer 1

a.How much interest expense can CL deduct?

b.How is the interest expense reported on CL’s Schedule K?

c.What action, if any, is needed by the LLC members?

d.How would your answers to parts (a) through (c) change if CL’s tax EBITDA was $4,000,000 (plus $150,000 of investment income), its average annual gross receipts for all prior tax years was $10,000,000 or less, and the interest expense amounts were $100,000 (investment) and $1,400,000 (business)?

Refer to the below images for more detailed solution with explanation.

How o much interest expense can el deduct ? Readrement a CL on The and can deduct $12000000 of its form 1065, page I ($40000000 remaining & 200oooo is allowed carried forward. business interest expense tax EBITDA + 30.1.). to the Lle members interest expense reported on cl's How is schedule the kr Requixement on its Schedule , CL reports the f 1000000 of portfolio interest expense as a separately stated deduction (line 13 -Lode Lon Schedule k-1). In addition, it reports the $2000000 of excess business interest as a separately Stated item so that the the members can claim a on in toture years (line 13 code leon schedule k-1). @ what action, if any, is needed by the the members & Rearixement In the corrent year, the the members will deduct their distributive shares of the 4 1000000 investment interest expense to the extent permitted - In future years, the the members can deduct their distributive shares of the & 2000000 excess boriness interest carry over against excess taxable income the the allocated to members in those dotore years. (Excess taxable income would be allocated to the partners in Erture tax years on schedule kai, line ao code AE.).

Requirement a It average annual gross receipts do not exceed $26000000 for the prior tax year, the business interest expense limitation does not apply to all business interest expense is corrently deductible by the the on Form 1065, page 1. The f 100,000 of portfolio interest expense is still treated as a separately stated item. - -