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Entities Taxation Case

Beth

Entities Taxation Case

Assuming that Richardson Company is operated as a sole proprietorship, determine Richardson’s final federal income tax liability (including any self-employment tax) (Note – the assumption that the pension contribution on Tony’s behalf is 10% of the $65,000 “reasonable salary” is somewhat unrealistic (usually, the amount would be based on the sole proprietorship income). Still, this assumption is made to make the four entity results roughly comparable).

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Income Calculation = Revenue – Expenditure = 520000-485,430 = 34,570

 
Income (Income-Expenses) $34,570
Employment Income $41,300
Interest $1,400
Dividend $1,200
Property Income $9,200
Total Income $87,670
Losses, gifts of assets to charities $10,300
Net Income $77,670
Personal Allowances $26,400
Taxable Income $104,070
Tax Liability 10% $10,407
Less Tax Credit On Dividends (5% of 5,000) ($250)
Repayable $6,527

Assuming that Richardson Company is operated as a partnership (assuming that Tony Richardson is essentially a 100% partner, with a minimal interest held by Ellen), determine Richardson’s final federal income tax liability (including any self-employment tax). For these purposes, allocate 100% of all partnership items to Tony Richardson. (The same pension contribution assumption mentioned in “a” also applies here.)

Income (Income-Expenses) $34,570
Employment Income Ellen’s Salary $41,300
Interest $1,400
Dividend $1,200
Property Income $9,200
Total Income $87,670
Reliefs ($15,000)
Losses, gifts of assets to charities ($2,600)
Net Income $70,070
Personal Allowances $20,000
Taxable Income $90,070
Tax Liability (10% of $101,770) $9007
Less Tax Credit On Dividends (5% of 5,000) ($250)
Tax Payable $8757

Assuming that Richardson Company is operated as an S corporation (with Tony Richardson [DD] as essentially a 100% shareholder), determine Richardson’s final federal income tax liability and any FICA taxes paid on Tony’s compensation by Tony and by Richardson Company  Once again, allocate 100% of all S corporation items to Tony Richardson.

Income (Income-Expenses) $34,570
Employment Income Ellen’s Salary $41,300
Interest $1,400
Dividend $1,200
Property Income $9,200
Total Income $87,670
Reliefs ($15,000)
Losses, gifts of assets to charities ($2,600)
Net Income $70,070
Personal Allowances 0
Taxable Income $70,070
Tax Liability (10% of $16,770) $7007
Less Tax Credit On Dividends (5% of 5,000) ($250)
Tax Payable $62,813

Assuming that Richardson Company is operated as a C corporation (with Tony Richardson (DD) as a 100% shareholder), determine the final corporate income tax liability of Richardson Co., Richardson’s absolute federal income tax liability, any FICA taxes paid on Tony’s compensation by Tony and by Richardson Company 

Gross profit (Income-Expenses) $34,570
Dividends from 10% Owned Corporation $4,300
Interest $400
Gain on Sale of Depreciable Property $200
Installment on the gain on sale of property $1,200
Gross Income $40,470
Operating Expenses $15,000
Depreciation $2,600
Amortization on property $16,770
Dividends Received 4,000
Taxable Income $9,560
Regular Tax Liability (10% of $16,770) $9,560
Less Tax Credit On Dividends (5% of 5,000) $478
Tax Payable $478

Answer Summary

S. Propr P’ship S Corp C Corp
Corporate Income Taxes Paid NA NA NA $478
FICA Tax on TR – Paid by TR NA NA $1,770 $478
FICA Tax on TR – Paid by Company NA NA $70 $26
Unemp. Tax on TR – Paid by Company NA NA $86 $46
Self-Employment Tax Paid by TR $1,287 $896 NA NA
Fed Inc Tax Paid by Richardsons $10,407 $6,400 $140 $28
   Total Taxes $11,694 $7,296 $2,066 $1,056

 

Prepare a tax memo and draft a client letter indicating your recommendation to the Richardsons as the preferred entity. Provide the appropriate tax citations and explain why you believe this method will be best. Your tax partner wants the material provided in an easy-to-read format for these clients.

To: Richardson Company

From

Re: Richardson’s Recommendations

The enterprise’s entity determines the tax code governing businesses, and it could either be a C or S company. C Companies are the most expensive in operation and maintenance costs (Law, 10). At the same time, C companies have a high establishment cost and involve more legal processes. Nevertheless, they exhibit the most cost benefits, for instance, fringe benefits that incur more significant tax costs in sole proprietorships, partnerships, and limited liabilities. However, the tax costs are lower for C corporations than for S (Bohan et al., 2013).

Furthermore, another advantage is some categories; for instance, health insurance does not comprise income tax. Therefore, the tax charged on the gross income is less. Notably, the gross income can be divided between the founders of Richardson Company to reduce taxable income (Collins et al., 1995). moreover, the founders could issue a public offer of shares of the firm as a way of acquiring finances to expand the firm

Client letter

To: Richardson Company

The tax benefits should be compared with the additional operational costs, complex tax regulations, and the bureaucratic administration operations franchise corporate tax is a requirement in the incorporation of a company. The establishment f a C venture is incorporated as Corporation; if the shareholders are willing to be taxed, it can be altered into an S corporation (Sinn, 1987). Therefore, I recommend C incorporation into Richardson Company if the enterprise has been profitable. Nonetheless, I would recommend S incorporation if it incurs losses (Ayers et al., 2003). The reason being the losses can be transferred to the shareholder. I would, therefore, recommend S incorporation, given that the enterprise incurred a loss.

Other Related Post: Aaron Feuerstein Case Study

References

Law, P. A. (10). Code of federal regulations.

Bohan, B., McCarthy, F., & McLoughlin, A. (2013). Bohan and McCarthy-Capital Acquisitions Tax. A&C Black.

Ayers, B. C., Lefanowicz, C. E., & Robinson, J. R. (2003). Shareholder taxes in acquisition premiums: The effect of capital gains taxation. The Journal of Finance, 58(6), 2783-2801.

Sinn, H. W. (1987). Capital income taxation and resource allocation. Amsterdam et al.

Collins, J. H., Shackelford, D. A., & Wahlen, J. M. (1995). Bank differences in the coordination of regulatory capital, earnings, and taxes. Journal of accounting research, 33(2), 263-291.

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Question 

Entities Taxation Case

Comparison of the Forms of Doing Business

Entities Taxation Case

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Facts:

Richardson Company is in its first year of operations as a hardware and software retailer (with occasional consulting jobs). Richardson reports the following current year results (without respect to the type of entity):

“Business” Income:

Sales (net of returns and allowances)                                                          $ 490,000

Gross Consulting Fees Collected                                                                     30,000

Dividend Income (5% investment in Novice Software Co.)                               4,000

Loss on Sale of Novice Stock ($28,000 – $33,000, held 11 months)              (    5,000)

 

“Business” Expenses and Costs:

Cost of Goods Sold                                                                                     (142,200)

Salaries of 5 employees other than owner Tony Richardson ($30,000 each)    (150,000)

Payroll taxes paid on employees [($150,000 x .0765) + ($35,000 x .062)]    ( 13,645)

Health insurance coverage for employees ($3,000 x 5)                                 ( 15,000)

Retirement plan contributions for employees (10% of salaries)                     ( 15,000)

MACRS depreciation on various company assets                                         ( 35,748)

Interest, rent, utilities, insurance, supplies, and miscellaneous expenses         ( 59,337)

Contributions to public charities                                                                   ( 13,300)

 

Compensation to Owners of “Business”:

Reasonable salary compensation to Tony Richardson                                     (  65,000)

Other cash payments to owners                                                                   (  20,000)

Health insurance coverage for Tony Richardson                                              (   3,000)

Retirement plan contribution for the owner (10% of “reasonable salary”)          (    6,500)

            Tony and Ellen Richardson (age 53) file a joint federal income tax return in the current tax year. They do not have any dependents. In addition to any compensation/income from the business described above, Ellen received a salary of $41,300 from ED Industries. Tony and Ellen also received $1,400 personal interest on a joint account,  $1,200 private dividends from jointly-held Thomson Company stock, and $9,200 from the sale of 100 shares of Thomson stock (acquired initially five years ago for $3,100).

Tony and Ellen’s expenses for the year include $2,600 in personal property taxes, $12,400 in state income taxes, 10,300 charitable contributions (not including the amounts mentioned above), $8,800 interest on a private home mortgage, and $2,600 of unreimbursed employee expenses by Ellen.

Required: 

Answer Summary

 

Tax year being compared: _________ S. Propr  P’ship  S Corp  C Corp
Corporate  Income Taxes Paid      NA      NA      NA
FICA Tax on TR – Paid by TR      NA      NA
FICA Tax on TR – Paid by Company      NA      NA
Unemp. Tax on TR – Paid by Company      NA      NA
Self-Employment Tax Paid by TR      NA      NA
Fed Inc Tax Paid by Richardsons
   Total Taxes

Prepare a tax memo and draft a client letter indicating your recommendation to the Richardsons as the preferred entity. Provide the appropriate tax citations and explain why you believe this method will be best. Your tax partner wants the material provided in an easy-to-read format for these clients.

Grading Rubric (30% of Grade)

Project Case
Grading Rubric
Maximum Earned Percentage
Total Points 100 0 0%
Tax Summary Chart – Correct Answer for Full credit if calculations provided
Sole Proprietor 10
Partnership 10
S-Corporation 10
Corporation 10
Tax Memo
Facts of Case Presented 1
Identification of Issues 7
Assessing tax law sources 7
Arriving at possible solutions 9
Recommendations 7
Draft Client Letter
Header and Salutation 1
Opening 1
Statement of the Issue 2
Short Review of facts 2
Review of tax law sources 2
Assumptions used 2
Recommendations 2
References 2
Other considerations
Spelling 3
APA citations correct 2
APA references correct 2
Grammar and punctuation 3
Calculations Provided 5
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