Question

Logan, a 50% shareholder in Military Gear Incorporated (MG), is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

Answer 1

Answer:

$12,000

Explanation:

Calculation for how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation

First step is to calculate the amount he will pay for the taxes if Military Gear Inc. is a C corporation

Tax amount=($75,000 × 24%)

Tax amount=$18,000

Second step is to calculate the amount he will pay for the taxes if Military Gear Inc. is a S corporation

Tax amount=($75,000 -$50,000)*24%

Tax amount=$25,000*24%

Tax amount=$6,000

Now let calculate how much more tax will Logan pay currently

Tax amount=$18,000-$6,000

Tax amount=$12,000

Therefore how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation will be $12,000