Principles of Taxation for Business and Investment Planning by unknow

Author:unknow
Language: eng
Format: epub
ISBN: 9781260433210
Published: 2019-03-13T00:00:00+00:00

For the next two years (years 1 and 2), Amisha’s share of Sultan’s ordinary income totaled $19,100, and Sultan did not distribute any cash to its shareholders. However, it did repay the $40,000 loan plus $3,800 interest in year 2.

For the next two years (years 1 and 2), Amisha’s share of Sultan’s ordinary loss totaled $11,400. In year 2, the corporation declared bankruptcy and defaulted on all its debts, including the loan from Amisha.

LO 10-9

Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projections, Marla’s share of the S corporation’s ordinary income would be approximately $10,000 per year. However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would hold either investment for three years, at which time she believes the C corporation stock could be sold for $60,000 and the S corporation stock could be sold for $90,000.

Assume that the initial investment would be made in year 0, dividends on the C corporation stock would be received in years 1, 2, and 3; S corporation earnings would be allocated in years 1, 2, and 3; and either investment would be sold in year 3. Assume that Marla’s S corporation income would not qualify for the QBI deduction. Also assume that Marla’s marginal tax rate on ordinary income is 35 percent. Using a 4 percent discount rate, calculate the net present value of after-tax cash flows attributable to either investment, and make a recommendation to Marla regarding which investment she should choose.

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