Ryan Salmon (111-11-1112), Oscar Young (222-22-2223), Clark Coleman (333-33-3

  
Ryan Salmon (111-11-1112), Oscar Young (222-22-2223), Clark Coleman (333-33-3334), and
Kim Hoffman (444-44-4445) are equal, active, and unrelated members in Salmon Construction
LLC (Salmon). Salmon provides residential construction services for clients that build custom
homes in the Orange County area. The LLC’s Federal ID number is 55-5555556. It uses the cash
basis and the calendar year and began operations on January 1, 2008. Its current address is 2501
Irvine Boulevard, Suite 2100, Tustin, CA 28782. The financial information enclosed from the
LLC’s income statement for the current year.
Recently, Salmon has taken advantage of bonus depreciation and § 179 deductions and fully
remodeled the premises and upgraded its leasehold improvements. This year, Salmon wrapped
up its remodel with the purchase of $90,000 of office furniture for which it will claim a §168(k)
deduction. (For simplicity, assume that Cam uses the same cost recovery methods for both tax
and financial purposes.) There is no depreciation adjustment for alternative minimum tax
purposes.
Salmon invests much of its excess cash in dividend-paying stocks and tax-exempt securities.
During the year, the LLC several securities transactions. On June 15, purchased 1,000 shares of
Angus, Inc. stock for $100,000; it sold those shares on December 15 for $80,000. On March 15
of last year, Salmon purchased 2,000 shares of Young Machinery, Inc. stock for $189,000; it
sold those shares for $199,500 on December 15 of the current year. These transactions were
reported to the IRS on Forms 1099–B; Salmons’ basis in these shares was reported.
Each member received an equal guaranteed payment for services rendered. Also, Ryan Salmon
loaned the partnership $1,000,000 in 2009. It is an interest only note due in 2028. The LLC
issued Ryan a 1099 INT for the interest on the loan.
Net income per books is $1,480.700. On January 1, the members’ capital accounts equaled
$300,000 each. No additional capital contributions were made this year. In addition to their
guaranteed payments, each member withdrew $200,000 cash during the year. All contributions
and distributions have been in cash, so the LLC has no net unrecognized § 704(c) gain or loss.
The LLC’s balance sheet as of December 31 of this year is also enclosed.
Except for the Ryan Salmon loan, all debt is shared equally by the members. Each member has
personally guaranteed the line of credit debt of the LLC. All members are active in LLC
operations.
For our purposes, assume that Salmons’ operations constitute one active trade or business for
purposes of the passive activity and at-risk limitations. (Note that the § 179 deduction is a
business-related expense.).
Financial Statements-Cash Basis
12/31/2022
Consulting Revenues 8,500,000
Interest Income Bank of America 7,500
Interest from City of Tustin Bonds 35,000
Long Term Capital Gains 10,500
Short term Capital Loss (20,000)
Ordinary Dividends 50,000
Total Revenue 8,583,000
Guaranteed Payments 4,000,000
W-2 Wages 750,000
Advertising 450,000
Charitiable Contributions 99,000
Depreciation 90,000
Repairs and Maintenance 25,000
Interest Expense-Line of Credit 50,000
Interest Expense- Loan from Salmon** 75,000
Legal and Accounting Fees* 132,000
Meals (non restaurant) 250,000
Travel 300,000
Entertainment 250,000
Insurance 52,000
Office Rent 200,000
Office Expense 200,000
Payroll Taxes 100,000
Utilities 54,300
Lobbying 25,000
Total Expenses 7,102,300
Book Income 1,480,700
* Includes $50,000 Legal Fees from a failed acquisition of an engineering firm
(not their trade or business)
** 1099 was issued to Mr. Salmon
                                                   12/31/2021                                                                         12/31/2022
Cash                                             2,700,000                                                                         2,630,700
Marketable Securities                    500,000                                                                           1,250,000
Office Equipment                          960,000                                                                            1,050,000
Accumulated Depreciation             (960,000)                                                                        (1,050,000)
Total Assets                                    3,200,000                                                                         3,880,700
Line of Credit                                  1,000,000                                                                         1,000,000
Loan from Salmon                          1,000,000                                                                        1,000,000
Capital Account-Salmon                 300,000                                                                            470,175
Capital Account-Young                   300,000                                                                            470,175
Capital Account-Coleman               300,000                                                                            470,175
Capital Account-Hoffman                300,000                                                                           470,175
Total Liabilities and Equity               3,200,000                                                                        3,880,700