DIP LLC reports ordinary income (before guaranteed payments) of $120,000, rent expense of $40,000, and interest income of $4,000 for the year. In addition, DIP paid guaranteed payments to partner Percy of $20,000. If Percy owns a 40% capital and profits interest, how much income will he report for the year and what is its character?

Question

Quizplus · Accepted Answer

First, we calculate the ordinary income before deducting the guaranteed payment: 
$120,000 ordinary income - $40,000 rent expense = $80,000 ordinary income. 
Then, we deduct Percy's guaranteed payment: 
$80,000 ordinary income - $20,000 guaranteed payment = $60,000 ordinary income. 
Percy's share of the ordinary income is 40%, which is: 
40% x $60,000 = $24,000 ordinary income. 
Percy's interest income is $4,000 x 40% = $1,600. 
Therefore, Percy will report $24,000 ordinary income, $1,600 interest income, and $20,000 guaranteed payment for the year.

DIP LLC Reports Ordinary Income (Before Guaranteed Payments) of $120,000