Question

Case 4 Title: Leslie Products Leslie Products LLC was formed by Marshall classmates Leslie Paulson and Justin Leslie. While they each own 40% of the company and work actively in the business, they have an investor, Alicia Keys, who is a 20% owner. This is a passive activity for her and she is treated as a limited partner for tax purposes. On the last day of its current tax year, the company received $275,000 when it sold a machine it had purchased for $200,000 three years ago to use in its business. At the time of the sale, the basis in the equipment had been reduced to $100,000 due to tax depreciation taken. In addition to this income, the company expects to have approximately $160,000 in income from regular operations. Research question: Will Alicia Keys have net earnings from self-employment due to her ownership interest in Leslie Products LLC?

Answer 1

According to the question,

The LLC has already taken the tax benefit over three years through depreciation on the Machine therefore now when they have sold it the Self employment Earning will be Increased by following amount

{Selling price of the equipment (-) Residual Value After Depreciation } * 92.35%

i.e. {$275,000 (-) $100,000 } * 92.35%

i.e. $161,612.5

The amount $ 175,000 i.e. profit on Sale of Machine will form part of Line 6 of Schedule C

Which will be multiplied by a fix percentage of 92.35 to convert it into Self Employment earnings (Multiplication will be done of total amount of net profit of line 31 of Schedule C ) which here will be {($175000+$165000)*92.35%} but as we are talking about increased Self employment Earning on sale of equipment the answer will be $ 161,612.5