In the spring of 2019 Rebecca developed plantar fasciitis, a painful condition brought on by her heavy
Question:
In the spring of 2019 Rebecca developed plantar fasciitis, a painful condition brought on by her heavy foot use. In searching for a solution Rebecca stumbled upon an ancient blueprint for therapeutic sandals used by the Seminole tribe. Rebecca visited with tribal leaders in early summer 2019 and struck a deal to license the blueprint agreeing to pay the tribe 50 cents for each pair of sandals sold. The license agreement has a duration of 50 years. Rebecca then formed Feel Good Feet, LLC – a single member LLC owned by Rebecca. She capitalized the LLC with $25,000 in cash on August 1, 2019.
On August 11, 2019 Feel Good Feet, LLC signed a contract to acquire 2.5 acres of real property in the “301 Industrial Park” located just south of I-4 near the Florida State Fairgrounds. A few days later the LLC signed an agreement to have a contractor erect a 5,000 square foot metal building (with a brick front facing) on the site. The contractor will also complete a 2,200 square foot parking lot and landscaping. The land was $150,000 and the completed building was $75,000 with the drainage, landscaping and parking costing $10,000. Equipment for fabricating plastics, packaging and materials handling equipment cost $80,000. Office computers were $8,000 and office furniture was $12,000. The total loan (including $65,000 of operating capital cash) was $400,000 advanced by the Bank of Plant City at 6% interest, interest only payments on a five year “balloon” note. Rebecca personally guaranteed loan repayment when the entire transaction closed on January 2, 2020. The building was completed, equipment installed and the operation began its initial production of sandals on April 15, 2020.
Rebecca plans to open her own retirement account this year. She overheard some CPAs partying at the Palma Ceia Country Club Cabbage Festival Ball discussing the merits of an SEP-IRA with unlimited contributions for self-employed individuals. She thinks she may qualify for an SEP-IRA which would allow her to sock away at least $12,000 in such an account. She will follow your advice on how to invest some money for her sunset years.
Feel Good Feet, LLC:
(The results of Feel Good Feet, LLC should be included in Rebecca’s tax return using a Schedule C to report the single member LLC’s results)
Rebecca started this business with the support of her boss at Palma Ceia Shoe Repair who thought it “might be a fun sideline”. The business enlisted the endorsement of players from local pro sports teams touting the therapeutic qualities of the footwear. Many of the workers at the local casino have supported the line of sandals which are sold exclusively online and are fabricated when ordered from injection molds at the local plant. This limits inventory to raw materials but makes overtime an issue since production only takes place when orders come in. The sandals currently come in a single style and sell online for $129/pair. The business uses the cash method. The QuickBooks accounting system revealed the following for 2020. Rebecca did not take any salary or benefits from the LLC. Rebecca is confident that 2021 will bring success to the business, sales have increased every month since the business launched. Although the business started on its own website it recently came to agreements to sell on Amazon, Walmart.com and Etsy.
Sales Revenue $224,718
Expenses:
COGS $55,200
Interest Expense 24,000
Royalties 871
Wages 71,000
Payroll Taxes/Unemployment/Comp. 11,000
Advertising 1,900
Utilities 8,900
Insurance 5,300
Supplies 900
Telecommunications 1,800
Legal Fees to Set up the LLC 2,000
Rebecca counts on you to compute cost recovery for the enterprise (Rebecca does not want to take bonus or §179 cost recovery to avoid showing a loss to keep her banker happy) and find her the optimal tax treatment for her QBI deduction and overall tax liability now and in the future.
