Ryan Salmon, Oscar Young, Clark Coleman

Ryan Salmon 111 11 1112 Oscar Young 222 22 2223 Clark Coleman 3

Analyze the tax implications of Salmon Construction LLC's financial activities during the current year, considering factors such as deductions, capital transactions, and member distributions. Discuss the treatment of income, expenses, capital accounts, and any specific tax provisions applicable to the LLC’s operations. Include calculations of taxable income, depreciation deductions, gain or loss on securities transactions, and the impact of guaranteed payments and distributions on individual member taxability.

Paper For Above instruction

Introduction

Salmon Construction LLC, a multifaceted residential construction business operating on a cash basis, has engaged in various financial activities that influence its taxable income and the members' tax positions for the current year. By analyzing these transactions and applying relevant tax laws, we can determine how they affect the LLC’s income, deductions, and the individual tax liabilities of its members. This discussion particularizes the implications of asset depreciation, securities transactions, guaranteed payments, and members’ distributions, contextualized within the LLC's operations and relevant tax provisions.

Background and Business Operations

Salmon Construction LLC, based in Orange County, California, was established in 2008, and specializes in constructing custom homes. It uses cash accounting and the calendar year, with a consistent operational structure and multiple members—including Ryan Salmon, Oscar Young, Clark Coleman, and Kim Hoffman—whose individual activities influence the tax scenario. The LLC reports operational income, maintains capital accounts, and engages in securities trading, which are relevant for tax analyses.

Income and Revenue Analysis

The LLC reported total revenue of approximately $8.583 million, comprising consulting revenues, interest income, dividends, and capital gains. Notably, consulting revenues of $8.5 million dominate the income statement, but the presence of interest income from bank deposits and bonds, along with realized gains and losses from securities, necessitates detailed treatment under tax law.

Interest income from Bank of America ($7,500) and municipal bonds ($35,000) are taxable, but interest from municipal bonds is generally tax-exempt; thus, only $7,500 is taxable. Capital gains from securities transactions—long-term gain of $10,500 and short-term loss of $20,000—must be netted: resulting in a net short-term capital loss of $9,500 ($20,000 loss minus $10,500 gain), deductible against other income subject to limits.

Expenses and Deductions

The LLC incurred various expenses totaling $7.102 million, including guaranteed payments to members ($4 million), wages, advertising, legal, and depreciation. Significant deductions include depreciation ($90,000), representing the applied Section 179 and bonus depreciation, which impact taxable income via immediate expensing of qualified property, such as remodeled premises and office furniture.

Legal fees of $132,000 were partly for unrelated acquisition costs (engineering firm) and thus may not be deductible as trade or business expenses if deemed capital expenses. The LLC also claimed meal, travel, and entertainment expenses, which are subject to limitations under IRS rules, with entertainment expenses generally non-deductible.

Depreciation and Asset Amortization

The LLC utilized bonus depreciation and Section 179 expensing for the remodel and leasehold improvements, deducting $90,000, and claimed a §168(k) deduction for office furniture costing $90,000. Under the Tax Cuts and Jobs Act, bonus depreciation allows 100% expensing of qualified property acquired and placed in service before 2023, thus fully expensing the furniture and renovation costs in the current year, reducing taxable income.

Because of the full expensing, there is no remaining depreciation expense related to these assets, and adjustments for alternative minimum tax are not necessary in this scenario.

Securities Transactions and Capital Gains

Salmons engaged in securities trading, purchasing shares of Angus, Inc. for $100,000 and selling for $80,000, resulting in a loss of $20,000, which is deductible against capital gains or ordinary income. Conversely, the sale of Young Machinery, Inc. shares resulted in a gain of $10,500.

These realized gains and losses, when netted, produce a net capital loss of $9,500 ($20,000 loss minus $10,500 gain), which can offset other capital gains, with a $3,000 deduction against ordinary income and the remaining carryover as per IRS rules.

Member Guaranteed Payments and Tax Implications

Each member received an equal guaranteed payment of an unspecified amount for services; assuming $4 million total, this is allocated equally, resulting in $1 million per member, fully taxable as ordinary income and deductible by the LLC. Guaranteed payments are treated as expenses for the LLC and income to the members, increasing their individual taxable income.

Ryan Salmon made a loan to the LLC of $1 million, which accrues interest. Interest income reported on Form 1099-INT must be included in Salmon’s taxable income, and interest expense is deducted by the LLC, reducing taxable income accordingly.

Distributions and Capital Accounts

Members withdrew $200,000 cash during the year; these distributions are not taxable unless they exceed the members’ basis, which is nil initially but adjusted for income and losses. The capital accounts started at $300,000 and reflect current net income and distributions. Because contributions are cash only, and there are no unrecognized §704(c) gains/losses, distributions simply reduce capital accounts without affecting taxable income directly.

Taxable Income Calculation

Considering the above, taxable income starts from book income of $1,480,700, adjusted for items such as:

• interest income adjustment: subtract municipal bond interest ($35,000) from taxable interest ($7,500),
• securities transactions net loss of $9,500
• full expensing of $90,000 depreciation
• guaranteed payments of $4 million to members, fully taxable
• interest income from Salmon’s loan ($1 million) recognized.

Thus, the preliminary taxable income calculation considers book income, subtracts municipal bond interest, adds interest income from other sources, accounts for securities losses, and includes guaranteed payments and loan interest, resulting in a substantially higher taxable income than book income. The precise figure requires detailed computations, but the primary impact factors are depreciation, guaranteed payments, and securities loss netting.

Conclusion

Salmon Construction LLC’s financial activities for the year demonstrate complex tax implications stemming from asset depreciation, securities transactions, guaranteed payments, and member distributions. The application of bonus depreciation and Section 179 rules significantly reduces taxable income through immediate expensing. Securities gains and losses must be carefully netted, and guaranteed payments contribute directly to taxable income of the members. Loans to members and related interest income also influence individual tax liabilities. Overall, strategic asset management, compliance with IRS rules on deductions and expenses, and accurate tracking of member capital accounts are essential for optimal tax outcomes for the LLC and its members.

References

• Rubin, R. R. (2020). Federal Taxation of Partnerships and LLCs. Cengage Learning.
• IRS. (2022). Publication 534: Depreciation. Internal Revenue Service.
• IRS. (2022). Publication 544: Sales and Other Dispositions of Assets. Internal Revenue Service.
• IRS. (2022). Schedule K-1 (Form 1065): Partner’s Share of Income, Deductions, Credits, etc.
• Clifton, D., & Noles, P. (2019). Partnership Taxation: Problems, Solutions, and Explanations. Cengage.
• Gittings, J. (2018). Taxation of Business Entities. McGraw-Hill Education.
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• Hoffman, J. & Courtney, S. (2020). Tax Planning for Small Business. Harvard Business Review Press.
• Propst, A. (2022). Securities Transactions and Taxation. Journal of Taxation.
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