Pedro and Anna plan to form the PA LLC by the end of 2022 to produce and
Pedro and Anna plan to form the PA LLC by the end of 2022 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 $80,000 of cash, and in addition, the LLC will borrow $440,000 from First State Bank. The $600,000 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 $40,000 for inventory and supplies.
The LLC’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’s liquidation.
If the LLC claims 100% bonus depreciation, it will report a loss of about $580,000 in 2022, which the LLC members would like to deduct. Pedro and Anna would like to know how the debt ($440,000 loan and $40,000 of accounts payable) will be allocated, and how that allocation affects their ability to deduct the losses. Assume both Pedro and Anna are single individual taxpayers. If limitations arise, can any adjustments be made to ensure the losses can be deducted? Consider all potential loss limitations, and assume that neither Pedro nor Anna will have business income or losses from other sources. Using the format (1) facts, (2) at issue, (3) conclusion and recommendations, and (4) law and analysis, draft a 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. Include any planning ideas that could be addressed to improve the results.
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