ason is your tax client and calls you up at the end of tax season. He is a full-
ID: 2473233 • Letter: A
Question
ason is your tax client and calls you up at the end of tax season. He is a full-time executive with Yellow Corporation. He plans to start a part-time business selling products on the internet. He plans to devote about 15 hours each week to running his new business. You have just completed Jason's 2015 tax return, and you note that Jason's salary at Yellow Corporation places him in the 35% tax bracket. He projects substantial losses from his new business in each of the first three years but expects sizeable profits thereafter. Jason is planning on leaving those profits in the business for several years, then selling the business and retiring.
Would you advise Jason to incorporate the business now or operated it as a sole proprietorship? Why?
If you recommend not incorporating now, should he incorporate in the future? If so, when?
Where would he get the most benefit from the losses (consider the material participation rules)?
If he sells the business in the future to retire, what type of gain would Jason have if he had incorporated? If he was a sole proprietor?
Explanation / Answer
There are significant advantages for Jason to investigate other alternatives. The sole proprietorship does not offer limited liability and incorporating would provide that benefit.
Jason’s business looks as though it would qualify for S corporation status, and, as the text describes, there are tax advantages and, given the volume of sales and the “good living” Jason makes, he should consider this form of ownership.
A limited liability corporation offers many of the same advantages as an S corporation. Future ownership may be one consideration. If Jason wishes to take on additional owners, an S corporation may better facilitate that transition.
If he sells the business in the future to retire, Jason incorporation realized business gain or capital reserve gain.
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