Smithon Widgets: Case Study
Memorandum
To: Mr. Jones,
From: Brian Banks
Date: 2/19/2014
Subject: Tax advice
In reference to the outright purchase of Smithon Widgets, I believe that this will result in an increase in your personal-tax liability. If you decide to buy this particular stock you will not only acquire all the assets that comes from obtaining this stock, but you will also acquire all of the liabilities of Smithon. In my professional opinion, issuing debt in Johnson Services Company to pay for the Smith Company would not be considered a favorable business move. In fact, I would not recommend this course of action for many reasons. One simple reason is that you would inherit Johnson Company’s existing operating loss issues. Most of Johnson Services’ assets are financed by debt, …show more content…
Because C corporations are double taxed on dividends and profits, this conversion from a C corporation to an S corporation would deem very beneficial to you. However, I would never recommend this suggestion if Smithon Company was not subject to “built in” gains. Typically, the S corporation status would be more beneficial to corporations in their early stages. If the entity is being changed to an S corporation, the tax year would also change to comply with S corporation standards.
An S corporation is not a separate taxpaying entity. All income, expenses, gains, losses, etc. are passed through to the owner. In this case, Mr. Jones would be the owner. The income would be taxable at Mr. Jones’ personal tax rate. However, all income, expenses, gains, losses, etc. retain their identity when passed through to the shareholders. Therefore, Mr. Jones could offset personal income with net losses from Smithon. Additionally, Mr. Jones could use any capital losses against his personal capital
To: Mr. Jones,
From: Brian Banks
Date: 2/19/2014
Subject: Tax advice
In reference to the outright purchase of Smithon Widgets, I believe that this will result in an increase in your personal-tax liability. If you decide to buy this particular stock you will not only acquire all the assets that comes from obtaining this stock, but you will also acquire all of the liabilities of Smithon. In my professional opinion, issuing debt in Johnson Services Company to pay for the Smith Company would not be considered a favorable business move. In fact, I would not recommend this course of action for many reasons. One simple reason is that you would inherit Johnson Company’s existing operating loss issues. Most of Johnson Services’ assets are financed by debt, …show more content…
Because C corporations are double taxed on dividends and profits, this conversion from a C corporation to an S corporation would deem very beneficial to you. However, I would never recommend this suggestion if Smithon Company was not subject to “built in” gains. Typically, the S corporation status would be more beneficial to corporations in their early stages. If the entity is being changed to an S corporation, the tax year would also change to comply with S corporation standards.
An S corporation is not a separate taxpaying entity. All income, expenses, gains, losses, etc. are passed through to the owner. In this case, Mr. Jones would be the owner. The income would be taxable at Mr. Jones’ personal tax rate. However, all income, expenses, gains, losses, etc. retain their identity when passed through to the shareholders. Therefore, Mr. Jones could offset personal income with net losses from Smithon. Additionally, Mr. Jones could use any capital losses against his personal capital