Logan, a 50-percent shareholder in Military Gear Inc.(MG), is comparing the tax consequences of losses from C corporations with losses from S corporations.Assume MG has a $100,000 tax loss for the year, Logan's tax basis in his MG 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 tax rate is 24 percent, how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?

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Quizplus · Accepted Answer

If MG is a C corporation, the $100,000 loss is trapped at the corporate level and cannot be passed through to shareholders. Logan's taxable income would therefore be $75,000 (ordinary income from other sources) and he would pay tax of $18,000 ($75,000 × 0.24). If MG is an S corporation, the $100,000 loss would flow through to Logan, reducing his taxable income to $0. However, because Logan's tax basis is only $150,000, he would only be able to deduct $75,000 of the loss in the current year. The remaining $25,000 loss would carry over to future years. Therefore, Logan would pay $0 tax in the current year, but would not get the full benefit of the loss until future years when sufficient tax basis is available. The difference in tax paid currently between the C corporation and the S corporation is $18,000 - $6,000 = $12,000 (option C).

Logan, a 50-Percent Shareholder in Military Gear Inc