The RGBY LLC operating agreement provides that 50% of depreciation expense is allocated to Red, and all remaining income (including the remaining 50% of depreciation) is allocated equally among the four partners. Before guaranteed payments and depreciation, RGBY's net income is $120,000 for the year. RGBY's depreciation expense is $20,000, and it paid a guaranteed payment to Yellow of $8,000. Assume all allocations and payments meet the substantial economic effect rules. After all deductions and special allocations are taken into account, Red is allocated a net of $15,500 from the partnership.

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According to the operating agreement, 50% of depreciation expense is allocated to Red, which is $10,000 (50% of $20,000). Therefore, the remaining depreciation expense is $10,000, which is allocated equally among the four partners, resulting in an additional allocation of $2,500 each. After subtracting the guaranteed payment to Yellow ($8,000) and Red's allocation of depreciation expense ($10,000), the remaining income for allocation is $102,000. Since it is allocated equally among the four partners, each partner receives $25,500 ($102,000 divided by 4). Adding Red's allocation of depreciation and income, Red receives a total allocation of $35,500, which is netted down to $15,500 after taking into account other deductions and special allocations.

The RGBY LLC Operating Agreement Provides That 50% of Depreciation