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 income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation 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, the $100,000 loss can only be used to offset the company's taxable income. C corporations cannot distribute losses to their shareholders. Thus, Logan will not receive a tax benefit from the loss unless he sells his stock or the company generates future profits to offset the loss.

On the other hand, if Military Gear Inc. is an S corporation, Logan can deduct his share of the company's loss on his individual tax return, which can offset the $75,000 of ordinary income he received from other sources. This would result in a tax savings of $15,000 ($100,000 x 15%), assuming Logan is able to use the entire loss.

Therefore, the difference in tax between the two scenarios is $7,500 ($15,000 - $7,500), which is the amount Logan would save in taxes if Military Gear Inc. were an S corporation instead of a C corporation.

Logan, a 50 Percent Shareholder in Military Gear Inc