b. Assuming the busi ness plan projections are accurate in 2018 and the consulti
ID: 2332305 • Letter: B
Question
b. Assuming the busi ness plan projections are accurate in 2018 and the consulting ousiness is organized as a C-Corporation, what amount of federal income tax would the business, Britta, and Shei ila each pay in 2018 from the consulting business' operations? Only consider income taxes in your computations (i.e. ignore payroll and NIIT). Pl ease show your work and explain your calculations. (6 points) Should Britta and Sheila form their business as a general partnership or a C- Corporation? Explain your decision (2 points). c. List at least three non-tax considerations Britta and Sheila may want to consider when choosing between a general partnership and C-corporation? (3 points) d.Explanation / Answer
b. As per IRS, tax rates for C corporations in 2018 are slashed from 35 percent down to 21 percent.
So, business will be taxed at 21%.
As per IRS, the income received from consultancy is classified as income from profits and gains of business or profession, whereas in case of employment, it is considered as salary income. As an employee, one cannot claim deduction of any expenditure incurred by him for employment purposes while calculating the taxable income. A salaried employee is eligible to claim tax exemption on certain components of the salary, such as house rent allowance and leave travel allowance. However, all the eligible business expenses incurred in providing consultancy services are deductible from the consultancy income for tax purposes-even the value of depreciation of the business assets can be deducted.
Britta and Sheila will pay tax as per the slab rate where maximum tax rate is 37%. They will also be taxed for the dividends and gains they receive from the corporation.
c. For general partnerships, The biggest advantage of a general partnership is the tax benefit. Businesses structured as partnerships do not pay income tax. Instead, all profits and losses are passed through to the individual partners. Creating a general partnership is simpler, cheaper, and requires less paperwork than forming a corporation.
For C corporation, A traditional corporation's profits are subject to double taxation, meaning the corporation is taxed on its earnings. Shareholders who earned profits as dividends or capital gains are also taxed. This is usually only found in large businesses. Corporations are much harder to form and maintain than other entities. They must also publish annual reports and other data. This allows creditors to assess their creditworthiness.
So, they should go for forming a general partnership.
d. Three non tax considerations that they should consider:-
1) Time and Cost
A lot of time is required in preparation of a C corporation. Also, to form a C corporation, document preparation fees, application fees with the state registrat, fees for certificate of incorporation etc are higher.
2) Complications
Corporations are much harder to form and maintain than other entities. They must also publish annual reports and other data.
3) Regulations
Federal, state, and local entities impose heavy regulations on corporations. This can cost a lot of money. They have to follow more regulations than the general partnership.
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