Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax cons

Question

Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $119,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was $159,500 at the beginning of the year, and he received $84,500 ordinary income from other sources during the year. Assuming Logan's marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?

$12,675

$7,500

$5,175

$0

Explanation / Answer

In C corporation the tax will be charged on ordinary income $84500*15% 12675 In S corporation the tax will be charged on ordinary income less adjusted tax basis after losses (84500-(159500-119000))*15% (84500-40500)*15% 6600 More tax 6075 But $6075 is not the option than I think $12675 paid as tax under C corporation is the correct answer.

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