Question

John, Jack, Jill, and Julie form limited liability company and elect to be S-Corporation. They contribute the following amounts:

John - 25,000

Jack - 10,000

Jill - 10,000

Julie - 5,000

The operating agreement says that all profits are to be distributed by law.

John will perform services for the company and get paid $100,000 a year for those services. The company will be able to deduct this amount from net income. In the first year of operations, the company had the following items of income:

Services - 160,000

Expenses - 24,000

Tax Depreciation - 28,000

Nobody withdraws any money from the S-Corp, except for Jack who withdraws $1,000.

Questions (using 2020 rates)

1. How much of John's taxable income is subject to Self Employment Tax ?

2. What is Jill's ending basis?

3. What is Julie's profit percentage? (e.g. if 22%, say .22)

Answer 1

1. $0 is subject to self employment taxes, which is calculated by ($160000-$24000-$28000) ×$25000/$50000 - $100000 (But limited to $54000)

Here, $25000 is John Contribution and $50000 is sum total of all contribution.

2. Contribution by Jack is $10000 but he receives $1000 + {($160000-$28000-$24000) × $10000 ÷ $50000} = $22600

3. Julie profit percentage - Julie shares of contribution ÷ Total Contribution

$5000 ÷ $50000 = 0.1