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While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat $($GTE$),$ specializes in custom$-$sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of $2023,$ and each contributed $$50,000$ in exchange for a $50$ percent ownership interest. GTE also borrowed $$200,000$ from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE$$s $2023$ activities.

$$ GTE uses the cash method of accounting $($for both book and tax purposes$)$ and reports income on a calendar$-$year basis.

$$ GTE received $$550,000$ of sales revenue and reported $$210,000$ of cost of goods sold $($it did not have any ending inventory$).$

$$ GTE paid $$30,000$ compensation to James, $$30,000$ compensation to Paul, and $$40,000$ of compensation to other employees $($assume these amounts include applicable payroll taxes, if any$).$

$$ GTE paid $$15,000$ of rent for a building and equipment, $$20,000$ for advertising, $$14,000$ in interest expense, $$4,000$ for utilities, and $$2,000$ for supplies.

$$ GTE contributed $$5,000$ to charity.

$$ GTE received a $$2,000$ qualified dividend from a great stock investment $($it owned $2$ percent of the corporation distributing the dividend$),$ and it recognized $$1,500$ in short$-$term capital gain when it sold some of the stock.

$$ On December $1,2023,$ GTE distributed $$30,000$ to James and $$30,000$ to Paul.

$$ GTE has qualified property of $$300,000($unadjusted basis$).$

Required:

a$.$ Assume James and Paul formed GTE as an S corporation.

$$ Complete GTE$$s Form $1120-$S page $1$; Form $1120-$S$,$ Schedule K; and Paul$$s Form $1120-$S Schedule K$-1($note that you should use $2022$ tax forms$).$

$$ Compute the tax basis of Paul$$s stock in GTE at the end of $2023.$

$$ What amount of Paul$$s income from GTE is subject to FICA or self$-$employment taxes?

$$ What amount of income, including its character, will Paul recognize on the $$30,000$ distribution he receives on December $1?$

$$ What amount of tax does GTE pay on the $$2,000$ qualified dividend it received?

b$.$ Assume James and Paul formed GTE as an LLC$.$

$$ Complete GTE$$s Form $1065,$ page $1$; Form $1065,$ Schedule K; and Paul$$s Form $1065,$ Schedule K$-1($note that you should use $2022$ tax forms$).$

$$ Compute the tax basis of Paul$$s ownership interest in GTE at the end of $2023.$

$$ What amount of Paul$$s income from GTE is subject to FICA or self$-$employment taxes?

$$ What amount of income, including its character, will Paul recognize on the $$30,000$ distribution he receives on December $1?$

$$ What amount of tax does GTE pay on the $$2,000$ qualified dividend it received?

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