Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $45,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $4,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $40,000 and an adjusted basis of $25,000 and is secured by a $30,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?
A) $32,500
B) $34,000
C) $37,500
D) $39,000

Question

Quizplus · Accepted Answer

Brett's outside basis in the LLC interest would be calculated by adding his cash contribution ($4,000) to his adjusted basis in the property contributed ($25,000), and then adding his share of the LLC's liability ($30,000 nonrecourse mortgage divided by 2, since they are equal partners, equals $15,000). This totals to $44,000. However, since the LLC also takes a $45,000 loan from First Bank, Brett's share of this liability would also be added to his basis. This loan is also nonrecourse, and when divided by 2, adds $22,500 to his basis. Therefore, the correct calculation is $4,000 (cash) + $25,000 (adjusted basis of the building) + $15,000 (half of the building's mortgage) + $22,500 (half of the LLC's loan from First Bank) = $66,500. However, none of the provided options match this calculation, indicating a misunderstanding in the question's premise or a mistake in the calculation process. Given the options, none directly align with the correct calculation based on the provided information, suggesting a need for clarification or correction.

Erica and Brett Decide to Form Their New Motorcycle Business