Logan, a 50-percent shareholder in Military Gear Incorporated (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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If MG were a C corporation, the $100,000 loss would be carried back to the previous year, reducing Logan's taxable income and resulting in a refund of previously paid taxes. Any remaining loss could be carried forward to future years to offset future taxable income. However, since Logan is only a 50-percent shareholder, he can only deduct 50 percent of the loss on his individual tax return.

If MG were an S corporation, the $100,000 loss would pass through to Logan as a shareholder and offset his other taxable income, including the $75,000 of ordinary income he received from other sources. This would result in a reduced tax liability for Logan.

Assuming Logan's marginal tax rate is 24 percent, the tax savings from the pass-through of the loss would be $24,000 (($100,000 loss + $75,000 ordinary income) x 0.24 tax rate). Therefore, Logan would pay $12,000 more in taxes currently if MG were a C corporation compared to an S corporation.

Logan, a 50-Percent Shareholder in Military Gear Incorporated (MG), Is