Ryan Ross (111-11-1111), Oscar Oleander (222-22-2222), Clark Carey (333-33-3333), and Kim Kardigan (444-44-4444) are equal members in ROCK the ages, LLC. ROCK serves as agents and managers for prominent musicians in the Los Angeles area. The LLC’s Federal ID number is 55-5555555. It uses the cash basis and the calendar year and began operations on January 1, 2002. Its current address is 6102 Wilshire Boulevard, Suite 2100, Los Angeles, CA 90036. ROCK was the force behind such music icons as Rhiannon and Ulster and has had a very profitable year. The following information was taken from the LLC’s income statement for the current year:
Fees and commissions $4,800,000
Taxable interest income from bank deposits 1,600
Tax-exempt interest 3,200
Gains and losses on stock sales 4,000
Total revenues $4,808,800
Advertising and public relations $ 380,000
Charitable contributions 28,000
Section 179 expense 20,000
Employee salaries 1,000,000
Guaranteed payment, Ryan Ross, office manager 800,000
Guaranteed payment, other members 600,000
Entertainment, subject to 50% disallowance 48,000
Legal and accounting fees 132,000
Office rentals paid 80,000
Interest expense on operating line of credit 10,000
Insurance premiums 52,000
Office expense 200,000
Payroll taxes 92,000
Total expenses $3,968,800
During the past couple of years, ROCK has taken advantage of bonus depreciation and section 179 deductions and fully remodeled the premises and upgraded its leasehold improvements. This year, ROCK wrapped up its remodel with the purchase of $20,000 of office furniture for which it will claim a section 179 deduction. (For simplicity, assume that ROCK uses the same cost recovery methods for both tax and financial purposes.) There is no depreciation adjustment for alternative minimum tax purposes.
ROCK invests much of its excess cash in non-dividend-paying growth stocks, and tax-exempt securities. During the year, the LLC sold two securities. On June 15, 2013, ROCK purchased 1,000 shares of Tech, Inc. stock for $100,000; it sold those shares on December 15, 2013, for $80,000. On March 15, 2012, ROCK purchased 2,000 shares of BioLabs, Inc. stock for $136,000; it sold those shares for $160,000 on December 15, 2013.
Net income per books is $840,000. The firm’s activities do not constitute “qualified production activities” for purposes of the section 199 deduction. On January 1, 2013, the members’ capital accounts equaled $200,000 each. No additional capital contributions were made in 2013. In addition to their guaranteed payments, each member withdrew $250,000 cash during the year. The LLC’s balance sheet as of December 31, 2013, is as follows:
Cash $ 444,000 ??
Tax-exempt securities 120,000 10,000
Marketable securities 436,000 300,000
Leasehold improvements, furniture, and equipment 960,000 980,000
Accumulated depreciation (960,000) (980,000)
Total assets $ 1,000,000 ??
Operating line of credit $ 200,000 $ 160,000
Capital, Ross 200,000 ??
Capital, Oleander 200,000 ??
Capital, Carey 200,000 ??
Capital, Kardigan 200,000 ??
Total liabilities and capital $ 1,000,000 $ ??
Assume that all debt is shared equally by the members. Each member has personally guaranteed the debt of the LLC.
None of the members, all of whom are U.S. citizens, sold any portion of their interests in ROCK during the year. All of the entity’s financial operations are concentrated in California. The LLC had no foreign bank accounts or operations and no interest in any U.S. or foreign trusts, corporations, or partnerships. The LLC is not publicly traded and is not a statutory tax shelter. The LLC is not subject to consolidated audit procedures. Ryan Ross is the tax matters partner.
The business code for “Agents and Managers for Artists, Athletes, Entertainers, and Other Public Figures” is 711410. ROCK is not a partner in any other partnership. The LLC’s form 1065 was prepared by Ryan Ross and sent to the Ogden, UT IRS Service Center. All members are active in LLC operations.
a) Prepare form 1065, Schedule K, and relevant supporting schedules for ROCK the Ages, LLC, leaving blank any items where insufficient information has been provided. If you are using tax return preparation software, also prepare Form 4562 and Schedule D. (Note: You can assume that the answer to each “yes/no” question on Form 1065, page 3 is “no” unless otherwise discussed above.)
b) Prepare Schedule K-1 for Ryan Ross, 15520 W. Earlson Street, Pacific Palisades, CA 90272