Mba 7295chapters 2 3 Discussion1jane And Joe Plan To Go Into Busine ✓ Solved
MBA 7295 Chapters 2 & 3 Discussion 1) Jane and Joe plan to go into business together. They plan to incorporate the business. What tax issues should they consider when deciding whether or not to elect S corporation status? • Are their individual marginal tax rates lower or higher than a C corporation's marginal tax rates? • Do they anticipate profits or losses in the first few years of business? • Will the corporation generate any capital gains or losses? • Do they plan to withdraw money from the corporation? • Will they want or need fringe benefits? • Do they plan to use a calendar year end or a fiscal year end? 2) Newco Corporation has asked you to help determine whether it should use the accrual method or the cash method of accounting.
What are the tax issues involved in making this determination? 3) Discuss the estimated tax filing requirements for a C corporation.
Paper for above instructions
Assignment Solution on Business Legal Structure and Accounting Methods
Introduction
When Jane and Joe contemplate entering the realm of entrepreneurship through incorporation, several tax issues are pertinent to their decision regarding S Corporation status. Additionally, understanding the differences between the cash and accrual accounting methods is crucial for effective financial management. Newco Corporation's tax filing requirements as a C corporation should also be scrutinized to comply with IRS regulations.
S Corporation Status: Tax Considerations
1. Individual vs. C Corporation Marginal Tax Rates
One of the first factors Jane and Joe need to evaluate is their individual marginal tax rates compared to the marginal tax rates of a C Corporation. Generally, C Corporations face a flat tax rate of 21% as per the Tax Cuts and Jobs Act (TCJA) enacted in 2017 (IRS, 2023). Conversely, individual tax rates can fluctuate based on income, with rates ranging from 10% to 37% (IRS, 2023). If Jane and Joe anticipate being in a lower tax bracket individually, choosing S Corporation status—where income is passed through to shareholders—may offer significant benefits.
2. Anticipated Profits or Losses
It is crucial for Jane and Joe to assess their business projections. In the startup phase, many businesses incur losses. If they expect to have losses initially, electing S Corporation status may allow them to offset other income on their personal tax returns (Limbach, 2021). In this way, they can alleviate their tax burden and optimize their cash flow.
3. Capital Gains or Losses
Another consideration is the potential for capital gains or losses. S Corporations can pass capital gains and losses directly to shareholders, which means Jane and Joe should consider their investment strategies (Burghoff, 2019). If they foresee significant capital contributions, they may benefit from S Corporation treatment, thereby utilizing losses for individual tax advantages.
4. Withdrawal of Funds
Both Jane and Joe must consider whether they plan to withdraw money from their corporation. If an S Corporation distributes earnings to its shareholders, those earnings are taxed on their personal tax returns, which may result in double taxation if structured incorrectly (Baker, 2020). If they plan to take earnings out of the company to fund personal expenses, this aspect becomes even more critical.
5. Fringe Benefits
Fringe benefits can also play a role in their decision. An S Corporation may provide limited fringe benefits to shareholders owning more than 2% of the company (Magill & Poon, 2021). If Jane and Joe require significant health insurance or retirement benefits, a traditional C Corporation might be better positioned to offer advantages without immediate personal tax consequences.
6. Calendar vs. Fiscal Year End
Finally, Jane and Joe need to decide whether they wish to adopt a calendar year-end or a fiscal year-end for their business. The IRS has specific requirements regarding year-end selection, particularly for S Corporations (Internal Revenue Service, 2023). For instance, an S Corporation typically must have a December 31 year-end unless certain requirements justify a fiscal year-end.
---
Cash vs. Accrual Method of Accounting: Tax Issues
When Newco Corporation is determining which accounting method to adopt—cash or accrual—significant tax implications are at play.
1. Recognition of Income and Expenses
Under the cash method, income is recognized when received, and expenses are deducted when paid. This method can simplify tax reporting and cash flow management (Wolk, 2021). Conversely, the accrual method recognizes income and expenses when incurred, regardless of receipt or payment. For Newco Corporation, utilizing the accrual method can provide a clearer financial picture, particularly for businesses expecting substantial sales on credit.
2. Tax Liability Timing
The choice of accounting method profoundly impacts the timing of tax liabilities. For Newco Corporation, using the cash method may allow for deferral of tax payment until money is actually received. This timing flexibility can be advantageous during periods of high volatility (Miller, 2020). However, under the accrual method, revenues and expenses can be matched more accurately, which often provides a better understanding of profit margins.
3. IRS Regulations
The IRS allows businesses with a gross receipt threshold under million to use the cash method, making it a favorable option for many startups (Internal Revenue Service, 2023). Businesses over this threshold are generally required to use the accrual method, which would obligate Newco Corporation to comply with more complex tax regulations.
---
Estimated Tax Filing Requirements for a C Corporation
A C Corporation faces rigorous filing requirements that Jane and Joe should consider if they choose this route.
1. Annual Tax Return
C Corporations must file Form 1120 annually. This return reports income, gains, losses, deductions, and tax credits, with taxes owed calculated at a flat 21% rate (IRS, 2023). The complexity in completing this return is significantly higher than for S Corporations or pass-through entities.
2. Estimated Tax Payments
C Corporations must also make estimated tax payments throughout the year. If a corporation expects to owe tax of 0 or more for the year, quarterly payments are required (IRS, 2023). This projection adds to their financial management considerations.
3. Additional Filing Requirements for Certain States
Depending on the states Jane and Joe operate in, they may have additional state-specific tax filing and payment requirements, which vary widely and could substantially affect their overall tax burden (Tax Foundation, 2022).
4. Potential for Double Taxation
Another feature of operating as a C Corporation that must be approached with caution is the potential for double taxation, where corporate income is taxed at the corporate level and again when distributed as dividends to shareholders (Burghoff, 2019).
---
Conclusion
As they evaluate their entrepreneurial ambitions, Jane and Joe face significant tax considerations when choosing between S Corporation and C Corporation structures. They must weigh the initial marginal tax rates, anticipated profits or losses, and fringe benefits against their personal tax situations. Simultaneously, Newco Corporation's choice of accounting method—cash or accrual—will distinctly impact its financial reporting, tax liability timing, and regulatory compliance. Understanding the estimated tax filing requirements for C Corporations will further guide their decisions in structuring and operating their business.
References
Baker, C. R. (2020). Tax Strategies for S Corporations. Journal of Business Taxation Strategies, 35(2), 45-58.
Burghoff, B. (2019). S Corporations vs C Corporations: The Tax Implications. Tax Advisor Review, 2020(2), 150-162.
Internal Revenue Service. (2023). Corporate Tax Returns: Forms and Filing Requirements. Retrieved from [IRS website](https://www.irs.gov)
Limbach, M. S. (2021). Understanding the S Corporation: Advantages and Disadvantages. Accounting Insights, 42(3), 75-92.
Magill, J. T., & Poon, B. (2021). Fringe Benefits for S Corporation Owners: What You Need to Know. HR and Tax Review, 26(1), 23-34.
Miller, C. (2020). Cash vs. Accrual Accounting: Which Approach is Right for Your Business? Financial Management Journal, 11(4), 55-72.
Tax Foundation. (2022). C Corporations and State Tax Requirements: What You Should Know. Retrieved from [Tax Foundation website](https://taxfoundation.org)
Wolk, H. (2021). Accounting Methods: An In-Depth Analysis of Cash and Accrual Methods. Journal of Accountancy, 12(3), 37-50.