9. Angela and Thomas are planning to start a new business. Thomas will invest cash in the business but not be involved in day-to-day operations. Angela plans to work full-time overseeing business operations. The two currently project that the business will generate $200,000 of annual taxable income before consideration of any payments to Angela for her services. Both agree that Angela's services are worth $100,000 Angela and Thomas plan to form a passthrough entity but are unsure whether to choose a partnership or an S corporation. In either case, they will be equal owners of the entity. Given their other sources of income, both Thomas and Angela have a 37 percent marginal tax rate on ordinary income. (Ignore any payroll or self employment tax consequences.) a. If the business is operated as a partnership, calculate ordinary income allocated to each owner, and explain the treatment by the partnership and by Angela of her $100,000 payment for services. b. If the business is operated as an S corporation, calculate ordinary income allocated to each owner, and explain the treatment by the corporation and by Angela of her $100,000 payment for services c. Given your analysis, explain to Angela and Thomas whether and to what extent income tax consequences should control their choice of entity
9. Angela and Thomas are planning to start a new business. Thomas will invest cash in the business but not be involved in day-to-day operations. Angela plans to work full-time overseeing business operations. The two currently project that the business will generate $200,000 of annual taxable income before consideration of any payments to Angela for her services. Both agree that Angela's services are worth $100,000 Angela and Thomas plan to form a passthrough entity but are unsure whether to choose a partnership or an S corporation. In either case, they will be equal owners of the entity. Given their other sources of income, both Thomas and Angela have a 37 percent marginal tax rate on ordinary income. (Ignore any payroll or self employment tax consequences.) a. If the business is operated as a partnership, calculate ordinary income allocated to each owner, and explain the treatment by the partnership and by Angela of her $100,000 payment for services. b. If the business is operated as an S corporation, calculate ordinary income allocated to each owner, and explain the treatment by the corporation and by Angela of her $100,000 payment for services c. Given your analysis, explain to Angela and Thomas whether and to what extent income tax consequences should control their choice of entity
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:9. Angela and Thomas are planning to start a new business. Thomas will invest cash in the business but not be
involved in day-to-day operations. Angela plans to work full-time overseeing business operations.
The two currently project that the business will generate $200,000 of annual taxable income before consideration
of any payments to Angela for her services. Both agree that Angela's services are worth $100,000
Angela and Thomas plan to form a passthrough entity but are unsure whether to choose a partnership or an S
corporation. In either case, they will be equal owners of the entity. Given their other sources of income, both
Thomas and Angela have a 37 percent marginal tax rate on ordinary income. (Ignore any payroll or self
employment tax consequences.)
a. If the business is operated as a partnership, calculate ordinary income allocated to each owner, and explain the
treatment by the partnership and by Angela of her $100,000 payment for services.
b. If the business is operated as an S corporation, calculate ordinary income allocated to each owner, and explain
the treatment by the corporation and by Angela of her $100,000 payment for services
c. Given your analysis, explain to Angela and Thomas whether and to what extent income tax consequences
should control their choice of entity
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 2 images
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education