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

Question

3. 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 $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. 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 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?

A. $0

B. $3,750

C. $7,500

D. $11,250

Explanation / Answer

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?

D $11250

Logan have to pay $11250 as taxes in military Gear Inc is a C corporation because ($75,000 x 15%). If it is S corporation then he have to pay $3750 as taxes (($75000 - $25000) x 15%).

So from above calculation he has to pay $7500 more ($11250 - $3750).

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