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 regular income tax rate is15%, how much more tax will Logan pay currently if Military Gear Inc. is a Ccorporation compared to the tax he would pay if it were an S corporation?

Question

Quizplus · Accepted Answer

If Military Gear Inc. is a C corporation, Logan cannot deduct the $100,000 loss against his other income, so he pays tax on the full $75,000 at 15%, resulting in $11,250 tax. If it were an S corporation, Logan could deduct his share of the loss ($50,000) against his other income, reducing taxable income to $25,000, resulting in $3,750 tax. The difference is $11,250 - $3,750 = $7,500.

Logan, a 50 Percent Shareholder in Military Gear Inc