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%, 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

Logan would pay $18,000 in taxes if Military Gear Inc. is a C corporation ($75,000 × 24 percent) because none of the MG loss would be available to offset his personal income. If it were an S corporation, he would have to pay $6,000 in taxes [($75,000 − $50,000) × 24 percent]. Thus, he has to pay $12,000 more in taxes ($18,000 − $6,000) currently if Military Gear, Inc. is a C corporation.

Logan, a 50 Percent Shareholder in Military Gear Inc