Comprehensive Problem $11-86($Algo$)($LO $11-1,$ LO $11-2,$ LO $11-3,$ LO $11-4,$ LO $11-5,$ LO $11-6)$

While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat $($GTE$),$ specializes in custom$-$sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of $2024,$ and each contributed $\backslash (\backslash$$ $110,000\backslash )$ in exchange for a $50$ percent ownership interest. GTE also borrowed $\backslash (\backslash$$ $440,000\backslash )$ from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE's $2024$ activities:

$-$ GTE uses the cash method of accounting $($for both book and tax purposes$)$ and reports income on a calendar$-$year basis.

$-$ GTE received $\backslash (\backslash$$ $750,000\backslash )$ of sales revenue and reported $\backslash (\backslash$$ $350,000\backslash )$ of cost of goods sold $($it did not have any ending inventory$).$

$-$ GTE paid $\backslash$$$60,000$ compensation to James, $\backslash$$$60,000$ compensation to Paul, and $\backslash$$$70,000$ of compensation to other employees $($assume these amounts include applicable payroll taxes, if any$).$

$-$ GTE paid $\backslash (\backslash$$ $21,000\backslash )$ of rent for a building and equipment, $\backslash (\backslash$$ $26,000\backslash )$ for advertising, $\backslash (\backslash$$ $30,800\backslash )$ in interest expense, $\backslash (\backslash$$ $4,600\backslash )$ for utilities, and $\backslash (\backslash$$ $2,600\backslash )$ for supplies.

$-$ GTE contributed $\backslash (\backslash$$ $8,000\backslash )$ to charity.

$-$ GTE received a $\backslash (\backslash$$ $2,200\backslash )$ qualified dividend from a great stock investment $($it owned $2$ percent of the corporation distributing the dividend$),$ and it recognized $\backslash (\backslash$$ $2,100\backslash )$ in short$-$term capital gain when it sold some of the stock.

$-$ On December $1,2024,$ GTE distributed $\backslash (\backslash$$ $26,000\backslash )$ to James and $\backslash (\backslash$$ $26,000\backslash )$ to Paul.

$-$ GTE has qualified property of $\backslash (\backslash$$ $306,000\backslash )($unadjusted basis$).$

Note: Leave no answers blank. Enter zero if applicable. Enter N$/$A if not applicable.

Comprehensive Problem $11-86($Algo$)$ Part a$-3$

a$-3.$ Assume James and Paul formed GTE as an S corporation.

$1.$ Compute the tax basis of Paul's stock in GTE at the end of $2024.$

$2.$ What amount of Paul's income from GTE is subject to FICA or self$-$employment taxes?

$3.$ What amount of income, including its character, will Paul recognize on the $\backslash (\backslash$$ $26,000\backslash )$ distribution he receives on December $1?$

$4.$ What amount of tax does GTE pay on the $\backslash (\backslash$$ $2,200\backslash )$ qualified dividend it received?