Kim received a one-third profits and capital interest in Bright Line, LLC, in exchange for legal services she provided. In addition to her share of partnership profits or losses, she receives a $23,000 guaranteed payment each year for ongoing services she provides to the LLC. For X4, Bright Line reported the following revenues and expenses: sales-$143,000, cost of goods sold-$83,000, depreciation expense-$40,000, long-term capital gains-$8,000, qualified dividends-$5,300, and municipal Bond interest-$3,300. How much ordinary business income (loss)will Bright Line allocate to Kim on her Schedule K-1 for X4?
A)($13,000)
B)$6,000
C)$8,000
D)$13,000
E)None of the choices will be reported as ordinary business income (loss)on Schedule K-1.

Question

Quizplus · Accepted Answer

Bright Line's ordinary business income is calculated by subtracting its expenses from its revenues. The revenues are $143,000 from sales. The expenses include cost of goods sold ($83,000) and depreciation expense ($40,000), totaling $123,000. Therefore, the ordinary business income is $143,000 - $123,000 = $20,000. Long-term capital gains, qualified dividends, and municipal bond interest are not included in the calculation of ordinary business income because they are separately stated items on Schedule K-1. Kim's share of the ordinary business income would be one-third of $20,000, which is $6,666.67. However, the guaranteed payment of $23,000 is not part of the ordinary business income calculation for the purpose of determining her share of the LLC's profits or losses. The guaranteed payment is reported separately on the Schedule K-1. Therefore, none of the choices provided correctly represent the ordinary business income (loss) that will be allocated to Kim on her Schedule K-1 for the ordinary business income portion.

Kim Received a One-Third Profits and Capital Interest in Bright