Profit Sharing Calculation Example

What is the basis for Straw's contribution in the profit sharing scenario?

Based on the data provided, how is the gain calculated for Straw when the land is later sold for $450,000?

Calculation of Straw's Gain in Profit Sharing Scenario

In this profit-sharing example, the basis for Straw's contribution is $45,000. When the land is sold for $450,000, Straw must recognize a gain of $180,000.

In a profit-sharing agreement where Straw contributes land with a basis of $90,000, and Rasp contributes cash of $270,000, it is important to calculate each partner's basis to determine the gain or loss when an asset is sold. In this scenario, Straw and Rasp share profits and losses equally, which means that the basis for Straw's contribution is calculated as $90,000 divided by 2, resulting in $45,000.

When the land is sold two years later for $450,000, the gain for Straw is determined by subtracting their basis from the selling price. Therefore, the gain for Straw is $450,000 - $45,000 = $180,000.

Understanding how to calculate gains and losses in a profit-sharing agreement is crucial for partners to accurately assess their contributions and returns. By following the proper calculations, each partner can determine their share of profits or losses when assets are sold or businesses are liquidated.