Karen contributed fully depreciated ($0 basis) property valued at $30,000 to the BKLM General Partnership in exchange for a 40% interest in the partnership. The partnership had $50,000 of liabilities at this time, which were shared in accordance with the partners' interests.
During the first year of partnership operations, BKLM had the following taxable income (100% amounts):
Revenues $ 400,000
Guaranteed payment to Ashley (50,000)
Salary expense (nonpartners) (200,000)
Supplies (40,000)
Insurance (20,000)
Depreciation (no Sec. 179 amounts) (10,000)
Taxable Interest income 20,000
Long-term capital gain 10,000
Non-deductible fines (2,000)
Karen's share of partnership liabilities on the last day of the partnership year was $13,000.
a. Compute Karen's share of the partnership's ordinary income and separately stated items for the year.
b. What is Karen's basis in her partnership interest at the end of the tax year?
c. Assume Karen has come to you for advice at the end of the current year, and she is interested in taking a distribution from the partnership. What is the maximum amount of cash she can withdraw tax-free from the partnership?
d. What is the minimum amount she should withdraw in order to provide her with enough cash to pay any income taxes (ignore self-employment tax) she will owe because of her partnership ownership? Assume she is in the 35% marginal tax bracket (use a flat rate).
e. Assuming Karen works 750 hours per year in the business, what amount of her income from the partnership is subject to self-employment tax?