In X1, Adam and Jason Formed ABC, LLC, a Car

question 80

Multiple Choice

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?

• A) Cory reports $60,000 of ordinary income in X2.
• B) Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2.
• C) Adam and Jason receive an ordinary deduction of $30,000 in X2.
• D) Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.

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Definitions:

Break-Even Time

The period it takes for a business or project to recover its costs, reaching a financial break-even point.

Payback Period

The payback period is the time it takes for an investment to generate cash flows sufficient to recover its initial cost.

Net Present Value

A calculation that compares the present value of cash inflows to the present value of cash outflows over a period of time, used to assess the profitability of an investment.

Payback Period Method

A simple calculation that divides the initial investment by the annual cash inflows to determine how long it will take to recoup the initial investment.