John Brown and Alice Green want to start a business together. They will have equal ownership of the company. Alice would like to know whether a partnership or a corporation would be the best form of business for her particular situation, strictly from a tax perspective. Alice would not take any form of payment from the company in the first year.
The following information is available for Alice:
Employment income = $100,000
Interest income = $5,000
A business loss of $25,000 is anticipated in Year 1 for the new company.
Personal tax rate = 41% and corporate tax rate = 13%
Required:
Based solely on minimizing Alice's Year 1 tax liability, which form of business will be most beneficial to Alice from a tax liability perspective? Support your answer with calculations. .

Question

Quizplus · Accepted Answer

The Answer is If the business is incorporated: $105,000 * .41 = Personal tax liability of $43,050 + NIL corporate tax on the business (due to the loss) If a partnership is formed: $105,000 - 12,500 (Alice's share of the loss) = 92,500 Net income for tax purposes * .41 = Personal tax liability of $37,925 Tax savings = $5,125 Solely from a tax perspective, a partnership would be most beneficial for Alice at this point in time as she would be able to utilize her portion of the business loss against her other income.

John Brown and Alice Green Want to Start a Business