DIP LLC reports ordinary income (before guaranteed payments) of $120,000, rent expense of $40,000, and interest income of $4,000 for the year. In addition, DIP paid guaranteed payments to partner Percy of $20,000. If Percy owns a 40% capital and profits interest, how much income will he report for the year and what is its character?

$24,000 ordinary income

$1,600 interest income

$20,000 guaranteed payment.

Explanation:

Calculation for what how much income will Percy report for the year and what is its character

Calculation for Percy Ordinary income: 120,000 - 40,000 - 20,000

= 60,000 x 40%

= 24,000.

Calculation for Percy Interest income:

4,000 x 40%

= 1,600

Guaranteed Payment: 20,000

Therefore what Percy will report will be: $24,000 ordinary income

$1,600 interest income

$20,000 guaranteed payment.

c is the correct answer.

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