Sam and Trang Are Going to Establish a Business

question 99

Essay

Sam and Trang are going to establish a business. Sam will contribute cash of $100,000 for a 50% interest, and Trang will contribute land and a building worth $135,000 adjusted basis of $65,000) for a 50% interest. The land and building are encumbered by a $35,000 mortgage, which the entity assumes. Determine the tax consequences of the contribution to Sam, Trang, and the entity if the business is:
a. An S corporation.
b. A partnership.
c. A C corporation.

---

Definitions:

Predetermined Overhead Rate

An estimated rate used to allocate manufacturing overhead costs to products based on a particular activity base, such as labor hours or machine hours.

Finishing Department

The division within a manufacturing process where products undergo final touch-ups, quality checks, and preparations before delivery or sale.

Direct Labor-Hours

The total time workers or employees spend directly manufacturing a product or providing a service.

Overhead Applied

The allocation of estimated overhead costs to individual units of production, based on a predetermined rate.