Problem $9-44($LO$.3,9,10,12)$

Pedro and Anna plan to form the PA LLC by the end of $2024$ to produce and sell specialty athletic apparel. Pedro and Anna will both serve as member$-$managers of the LLC and will be active in its operations. The members will each contribute $\backslash (\backslash$$ $120,000\backslash )$ cash, and in addition, the LLC will borrow $\backslash (\backslash$$ $560,000\backslash )$ from First State Bank. The $\backslash (\backslash$$ $800,000\backslash )$ will be used to buy equipment and to lease a property they can use as a small manufacturing facility and a storefront.

The bank has stated that the debt must be guaranteed, and Anna has agreed to guarantee the entire amount. At the end of the year, the LLC also expects to have accounts payable of $\backslash$$$40,000$ for inventory and supplies.

The LLC$\text{'}$s operating agreement provides that all LLC items will be allocated equally. The agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC$\text{'}$s liquidation.

If the LLC claims $\backslash (80\backslash \%\backslash )$ bonus depreciation, it will report a loss of about $\backslash$$$680,000$ in $2024,$ which the LLC members would like to deduct.

Pedro and Anna would like to know how the debt $(\backslash$$$560,000$ loan and $\backslash$$$40,000$ of accounts payable$)$ will be allocated between them and how that allocation affects their ability to deduct the losses. Pedro and Anna are single individual taxpayers.

Consider all potential loss limitations$,$ and assume that neither Pedro nor Anna will have business income or losses from other sources.

Complete the memo for the PA LLC tax planning file for your manager's review that describes how the debt will be shared between Pedro and Anna for purposes of computing the adjusted basis of each LLC interest.

If an amount is zero, enter $"0".$

TAX FILE MEMORANDUM

DATE September $5,2024$

FROM Jane Diaz

SUBJECT PA LLC debt allocation

Facts: The PA LLC will be formed before the end of the current year to manufacture specialty athletic apparel.

The LLC will be equally owned by Pedro and Anna, and both parties will be managing members. It will

purchase equipment and pay other expenses at a total cost of $$800,000,$ with $$240,000$ paid in cash. The

remaining $$560,000$ will be borrowed from First State Bank. The loan will be personally guaranteed by Anna.

By the end of the tax year, the LLC will also have $$40,000$ of accounts payable $($not guaranteed by either LLC

member$).$

The operating agreement provides that all LLC items will be allocated equally. Capital accounts will be

appropriately maintained under the $704($b$)$ Regulations. Any member with a deficit capital account balance

upon liquidation of the LLC will be required to contribute cash in the amount of the deficit at that time.

The passive activity loss limitation would not apply, but the excess business loss limitation would. As single taxpayers, both Pedro and Anna would be limited to a $\backslash (\backslash$ddagger $\backslash )$ X loss. Therefore, of the total $\backslash$$ d X loss allocated to each partner, a $!$ X deduction would be permitted. The excess $\backslash$$ X loss would be carried over as part of each LLC member's net operating loss.