, uli AT&T; 8:59 PM 1 * 50% × tax Problem.docx Problem Stacey Small has a small
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, uli AT&T; 8:59 PM 1 * 50% × tax Problem.docx Problem Stacey Small has a small salon that she has run for a few years as a sole proprietorship. The proprietorship uses the cash method of accounting and the calendar year as its tax year. Stacey needs additional capital for expansion and knows two people who might be interested in investing. One would like to practice hairdressing in the salon. The other would only invest. Stacey wants to know the tax consequences of incorporating the business. Her business assets include a building, equipment, accounts receivable and cash. Liabilities include a mortgage on the building and a few accounts payable, which are deductible when paid. (IRC) Section 1361 Write a memo to Stacey explaining the tax consequences of the incorporation. As part of your memo examine the possibility of having the corporation issue common and preferred stock and debt for the shareholders' property and money.Explanation / Answer
The tax advantages of incorporating a salon business as a C corp. is that it will be easy for expansion into issuing equity and different kinds of stock later on .Stacy should look at the advantages of further issuance of capital along with certain very important tax benefits accruing to a C corp. While deciding on the tax consequences it would be important to know how much of profits one wants to distribute to others and how much reinvestment into the business is needed.
A C corporation would be an ideal from of incorporation as this type of firms file form 1120.
Since the lower tax bracket is 15% it is better that a C corp. is incorporated as a hair dressing salon is not expected to go over this.
C corp. is taxed separately from the shareholders. Stacey can deduct her Salary as a business expense.
Dividends distributed to shareholders of a C corp. can be taxed as qualified dividends and are taxed to the individual shareholder as 15%. A C corp. is more flexible for expansion later on.
Since this is a very cryptic way of incorporating a small business, it is suggested that Stacey forms a C corp. to avail of tax advantages and tax benefits accruing to the salon business.
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