Q. Solve the below application problems Note: Please no copy from the textbook A

Question

Q. Solve the below application problems

Note: Please no copy from the textbook

A.

B.

Angela and Thomas are planning to start a new business. Thomas will invest cash in the business operations. The two currently project that the business will generate $200,000 of annual taxable income before consideration of any payments to Angela for her services. Both agree that Angela's services are worth $100,000. Angela and Thomas plan to form a passthrough entity but are unsure whether to choose a partnership or an S corporation. In either case, they will be equal owners of the entity. Given their other sources of income, both Thomas and Angela have a 35 percent marginal tax rate on ordinary income. (Ignore any payroll or self-employment tax consequences.) a. If the business is operated as a partnership, calculate ordinary income allocated to each owner and explain the treatment by the partnership and by Angela of her $100,000 payment for services b. If the business is operated as an S corporation, calculate ordinary income allocated to each owner and explain the treatment by the corporation and by Angela of her $100,000 payment for services c. Given your analysis above, explain to Angela and Thomas whether and to what extent income tax consequences should control their choice of entity.

Explanation / Answer

A:

(a) Answer:

Partnership ordinary income =$ 100,000($200000-$100000 Angelas deductible guaranteed payment).

Angela and Thomas will each report $50,000 of ordinary income (Partnership).

Angela will also report $100,000 of income from the guarnetted payment for her services.

(b) Answer:

S Corporation ordinary income = $100,000 ($200,000-$100,000 Angela's deductible salary payment).

Angela and Thomas will each report $50,000 of ordinary income.

Angela will also report $100,000 of income from the salary payment.

(c) Answer:

The income tax consequence of operatinf business as a partnership or as an S Corporation are identical in this case.

There is no Impact of income tax on the decision to be taken . So,the decision will be driven by other factors.

( B )Answer:

Option 1: If partnership

Given facts,

1- Annual Taxable Income of Mrs. Franklin: $ 80,000/-

2- Tax rate for Mrs Franklin -35%, & For Children - 20%

Taxable income of Mrs.Franklin & Children :

(1) Income from residential apartment building = $48,000 {$80,000*60%}

(2) Less: Amount charged for managing the building= ($15,000)

(3) Taxable income = $33,000 [Step1-Step 2]

(4) Total tax to be born by Mrs. franklin = $11,550 {$33,000 *0.35}

(5) Taxable income for each sons =$ 16,000 {$ 80,000 *20%}

(6) Total tax to be borne by each sons =$ 2,400 { $16,000*15%}

(7) Partnership Tax ( Step 4 +Step 6) = $ 16,350 ( $11550+$2400+$2400) { 2 SONS}

Option 2 : if there is no partnership

If there is no partnership, then mrs. franklin would have to pay $ 28,000 ($ 80,000* 0.35) as tax.

So, by opting income shifting agreement Mrs. Frnaklin has saved a tax of $ 11,650 /- ($28,000-$16,350).

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