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

L will have to pay $11,250 ($75,000 × 15%) in taxes if M Gear Inc. is a C corporation.

L will have to pay $3,750 [ ($75,000 - $50,000) × 15% ] in taxes if M Gear Inc. is a S corporation .

Therefore, if M Gear, Inc. is a C corporation, L will have to pay $7,500 ($11,250 - $3,750) more in taxes currently.

The correct answer is C.

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