Boots, Inc. is a “C” corporation engaged in the show manufacturing business. Boots is a Calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. In answering the questions below, assume for convenience that Emil and Betty each are taxable at a combined federal and state flat rate of 40% on ordinary income and combined flat rate of 20% on qualified dividends and long-term capital gains. During the current year, Boots has the following income and expense items. Income Gross profit-Sales of inventory-------$2,600,000 Capital Gains------------------------------$200,000 Expense and Losses: Operating Expense----------------------$800,000 Equipment Purchase (100% Expensed) ---$800,000 Capital Loses-------------------------------$220,000 Determine Boots, Inc.’s Taxable income and its tax liability for the current year. What result in (a), above, if Boots distribute its after-tax profits to Emily and Betty as qualified dividends? What result in (a) above, if instead of paying dividends Boots pay Emil and Betty salaries of $500,000 each? Has the effectiveness of this traditional strategy to reduce the impact of the double tax on corporation earning changed as a result of 2017 Act?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Boots, Inc. is a “C” corporation engaged in the show manufacturing business. Boots is a Calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. In answering the questions below, assume for convenience that Emil and Betty each are taxable at a combined federal and state flat rate of 40% on ordinary income and combined flat rate of 20% on qualified dividends and long-term capital gains. During the current year, Boots has the following income and expense items.

Income

Gross profit-Sales of inventory-------$2,600,000
Capital Gains------------------------------$200,000

Expense and Losses:

Operating Expense----------------------$800,000
Equipment Purchase (100% Expensed) ---$800,000
Capital Loses-------------------------------$220,000

Determine Boots, Inc.’s Taxable income and its tax liability for the current year.
What result in (a), above, if Boots distribute its after-tax profits to Emily and Betty as qualified dividends?
What result in (a) above, if instead of paying dividends Boots pay Emil and Betty salaries of $500,000 each? Has the effectiveness of this traditional strategy to reduce the impact of the double tax on corporation earning changed as a result of 2017 Act?
Consider generally whether there is any advantage to operating Boots as a pass-through entity, such as a partnership, limited liability company, or S Corporation and, if so, whether Emil and Betty will qualify for the new 20% deduction for qualified business income. What additional facts are necessary to evaluate this options?

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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