Jane and Suzan are interested in organizing a new interior decorating business as 80-20 owners. Jane will contribute $80,000 in exchange for an 80% ownership interest and Suzan will contribute $20,000 for a 20% owners hip interest. The business will borrow $40,000 as a working capital loan. Jane and Suzan will both actively manage the interior decorating business, but they will not draw a salary or take distributions during the first two years of operations. The two-year business plan projects a first year loss of $120,000 and a second year profit of $60,000. In light of the first year projected loss, Jane and Suzan are considering organizing as either a general partnership or an S corporation. Jane is in the 35% marginal bracket and Suzan is in the 25% marginal bracket in the first and second years of operations.
a. Assuming the business plan projections are accurate in the first year, calculate the first year tax savings to Jane and Suzan arising from the interior decorating usiness if the business is organized as a general partnership. Please show your work and explain your calculations.
b. Assuming the business plan projections are accurate in the first year, calculate the first year tax savings to Jane and Suzan arising from the interior decorating business if the business is organized as an S corporation. Please show your work and explain your calculations.
c. Assuming the business plan projections are accurate in the second year, calculate the second year tax liability to Jane and Suzan arising from the interior decorating business if the business is organized as a general partnership. Please show your work and explain your calculations. You may ignore payroll taxes for this calculation.
d. Assuming the business plan projections are accurate in the second year, calculate the second year tax liability to Jane and Suzan arising from the interior decorating business if the business is organized as an S corporation. Please show your work and explain your calculations. You may ignore payroll taxes for this calculation
e. Assuming the business plan projections are accurate in the first and second year, what would Janes and Susan’s bases be in their ownership interest at the end of the second year if the interior decorating business was organized as a general partnership? As an S corporation? Please show your work and explain yourcalculations.
Matrial you can use to answer
THESE ARE THE US TAXATION
2016 Corporate Tax Rate Schedule
If Taxable Income Is: But not over The Tax is Plus this % of the amount Over
Over--
$0 $50,000 $0 15% $0.00
$50,000 $75,000 $7,500 25% $50,000
$75,000 $100,000 $13,750 34% $75,000
$100,000 $335,000 $22,250 39% $100,000
$335,000 $10,000,000 $113,900 34% $335,000
$10,000,000 $15,000,000 $3,400,000 35% $10,000,000
$15,000,000 $18,333,333 $5,150,000 38% $15,000,000
$18,333,333 ---