Richard plans to invest $100,000 for a 50 percent interest in a small business. His friend Jack will also invest $100,000 for the remaining 50 percent interest.

Richard plans to invest $100,000 for a 50 percent interest in a small business. His friend Jack will also invest $100,000 for the remaining 50 percent interest. On their investment, they expect to generate 10 percent before-tax return the first year. Richard's marginal tax rate is 33 percent, and Jack's marginal tax rate is 35 percent. They need to decide whether to establish the business as a partnership or as a C corporation. 1. If they establish a partnership, compute the after-tax cash flow for each partner if each of them withdraws $4,000 from the profits of the business the first year. What is the amount of cash that remains in the partnership, exclusive of employment taxes. 2. I... click for more

Flat Tax

Should the federal income tax be a flat tax, which means should everyone pay taxes at the same percentage? Include brief assessments on the pros and cons of this type of a system.

End of Year Reporting - Realty Corporation, an accrual-basis, calendar-year corporation, agrees to rent office space to Tenant Company for $3,000 per month

Introduction: Realty Corporation, an accrual-basis, calendar-year corporation, agrees to rent office space to Tenant Company for $3,000 per month, beginning from January 1, year 2. On December 15, year 1, Tenant gives Realty Corporation a $3,000 deposit in addition to rent for the months of January and February. In year 2, Tenant pays rent for the months of March and April, and on May 15, Tenant closes its business. Realty withholds $1,500 from the deposit for unpaid rent and $1,000 for damages. Realty Corporation refunds the balance of the deposit to Tenant on May 20, year 2. Task: How much income should Realty Corporation report in year 1 from the above-mentioned transactions for... click for more

Taxable Income Ruling: doctrine of constructive receipt

Introduction: Walter used the cash method to account for income from his cattle ranch. During an audit in the third year, the IRS auditor discovered a document from a customer indicating that two years earlier, Walter sold 115 heads of cattle to the customer for $77,000. The document appeared to be a tear slip, the top half of a document that includes a business check. Walter's bank records for the first year showed no such deposit, and a conversation with the customer revealed that its check for $77,000 had never been cashed. A new check was issued during the third year. Walter included $77,000 as income on his third year tax return. The IRS then issued an audit report contending that the... click for more

Advantages & disadvantages of 50/50 structure for notes/stock

When Keith created a new corporation as the sole shareholder, he was advised by his accountant to consider 50 percent of the invested amount as the loan and 50 percent for the purchase of stock. Discuss the advantages and disadvantages of this structure, as compared with treating the entire investment as the purchase of stock? Comment on how the approaches are different. Justify your answer with rationales.