Good Eats Tax Project

Although Lloyd Jones and his best friend Donna Taylor both studied biology at school, they ended up pursuing careers in professional cake decorating. Their company, Good Eats, specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations. Lloyd and Donna formed the business at the beginning of 2021 and each contributed $60,000 in exchange for a 50 percent ownership interest. Good Eats also borrowed $250,000 from a local bank. Both Lloyd and Donna had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to Good Eats 2021 activities.

• Good Eats uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
• Good Eats received $500,000 of sales revenue and reported $200,000 of cost of goods sold (it did not have any ending inventory).
• Good Eats paid $50,000 compensation to Lloyd, $50,000 compensation to Donna, and $50,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
• Good Eats paid $25,000 of rent for a building and equipment, $10,000 for advertising, $15,000 in interest expense, $5,000 for utilities, and $5,000 for supplies.
• Good Eats contributed $10,000 to charity.
• Good Eats received a $2,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $3,000 in short-term capital gain when it sold some of the stock.
• On December 1, 2021, Good Eats distributed $30,000 to Lloyd and $30,000 to Donna.
• Good Eats has qualified property of $400,000 (unadjusted basis).

Requirements:

a. Assume Lloyd and Donna formed Good Eats as an S corporation.
• Complete Good Eats Form 1120S page 1, Form 1120 S, Schedule K, and Lloyd's Form 1120S Schedule K-1 (note that you should use 2021 tax forms).
• Compute the tax basis of Lloyd's stock in Good Eats at the end of 2021.
• What amount of Lloyd's income from Good Eats is subject to FICA or self-employment taxes?
• What amount of income, including its character, will Lloyd recognize on the $30,000 distribution he receives on December 1?
• What amount of tax does Good Eats pay on the $2,000 qualified dividend it received?

b. Assume Lloyd and Donna formed Good Eats as an LLC.
• Complete Good Eats Form 1065 page 1, Form 1065, Schedule K, and Lloyd's Form 1065, Schedule K-1 (note that you should use 2021 tax forms).
• Compute the tax basis of Lloyd's ownership interest in Good Eats at the end of 2021.
• What amount of Lloyd's income from Good Eats is subject to FICA or self-employment taxes?
• What amount of income, including its character, will Lloyd recognize on the $30,000 distribution he receives on December 1?
• What amount of tax does Good Eats pay on the $2,000 qualified dividend it received?