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 regular 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?

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Quizplus · Accepted Answer

If Military Gear Inc. is a C corporation, the $100,000 loss will be trapped at the entity level and cannot pass through to Logan as a shareholder. Therefore, Logan's taxable income will only include his $75,000 ordinary income from other sources. This will result in Logan's regular income tax liability of $11,250 ($75,000 * 15%).

If Military Gear Inc. is an S corporation, the $100,000 loss will pass through to Logan as a shareholder. Logan will be able to deduct his share of the loss ($50,000) on his individual income tax return, reducing his taxable income to $25,000 ($75,000 - $50,000). This will result in Logan's regular income tax liability of $3,750 ($25,000 * 15%).

Therefore, if Military Gear Inc. is a C corporation, Logan will pay $11,250 in regular income tax liability, whereas if it is an S corporation, Logan will pay $3,750. The difference between the two is $7,500, so the answer is C.

Logan,a 50 Percent Shareholder in Military Gear Inc