Question

Problem 20-61 (LO 20-4) The following information applies to the questions displayed below.) The partnership agreement of the G&P general partnership states that Gary will receive a guaranteed payment of $19,000, and that Gary and Prudence will share the remaining profits or losses in a 45/55 ratio. For year 1, the G&P partnership reports the following results: Sales revenue Gain on sale of land ($1231) Cost of goods sold Depreciation-MACRS Employee wages Cash charitable contributions Municipal bond interest Other expenses $ 83,200 $ 6,300 $(40,700) $ (16,600) $ (16,600) $ (3,400) $ 5,600 $ (4, 800) (Negative amounts should be indicated by a minus sign.) Problem 20-61 Part-c c. What do you believe Gary's share of self-employment income (loss) to be reported on his year 1 Schedule K-1 should be, assuming G&P is an LLC and Gary spends 2,000 hours per year working there full time? Self-employment income (loss)

Answer 1

Answer -

Description	Amount	Amount
Sales revenue		$83200
Less:
Cost of goods sold	$40700
Depreciation - MACRS	$16600
Employee wages	$16600
Other expenses	$4800
Guaranteed payments	$19000
		($97700)
Ordinary business loss		($14500)

Gary and Prudence share the profits or losses in a 45/55 ratio.

So,

= $14500 * 0.45 = $6525 losses allocated to Gary

Here,

Under Proposed Reg. §1.1402(a)-2, Gary’s $6525 share of ordinary business loss will reduce his $19000 guaranteed payment leaving him with $12475 of self-employment income (because he spent more than 500 hours working in the trade or business of the LLC). In this instance, the proposed regulations provide Gary with a favorable interpretation of the law.

So,

= $19000 - $6525 = $12475

Self-employment income (loss) = $12475