1. Question 31 Short Answer Question - Sara is the sole owner of Yellow Corporat
ID: 2395101 • Letter: 1
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1. Question 31 Short Answer Question - Sara is the sole owner of Yellow Corporation. Her basis in Yellow is $50,000. The value of her stock is $100,000. In addition, to compensate herself for services that she provides to Yellow, Sara pays herself an annual salary of $40,000. Because of recent downturn in business, she needs to put an additional $80,000 into her corporation to help meet short-term cash-flow needs (to pay for inventory costs, salaries, and administrative expenses). Should she do a capital contribution transfer of $80,000 or a loan? What is best for tax purposes? Explain your answer. 2. Question 56 A subsidiary corporation is liquidated under Sec 332. Pursuant to its liquidation, the subsidiary distributed property to a minority shareholder. With respect to this distribution, what are the tax consequences to the subsidiary corporation and to its minority shareholder? 3. Question 58 One shareholder of an S corporation takes a short-term unwritten cash advance of $9,000 during tax year. Would this arrangement create a second class of stock? Explain.Explanation / Answer
Answer - Explanation.
Sara has two options for contribution to business account. One is Capital contribution and other is Loan
Sara can consider both options for financing her sole proprietor business. But for tax purpose only, which one would be better? Lets discuss
1) Loan Financing - In loan financing, Loan amount appears in balance sheet and interest paid on loan is deducted from income. In simple terms, loan financing would brought the interest as tax deductible expenses. And in case of non payment of loan, consequences are severe.
2) Capital contribution transfer is equal to equity financing. It is non deductible contribution.
Just for the sake of tax purpose, loan (debt financing) is better option.
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