Question

In 2018 Mark owns 85% of Keller & Sons. Keller & Sons is a law firm and distributes Mark $165,000. The firm has sales income of 3,600,000 and operating expenses of $1,000,000. The firm has property with an unadjusted basis of $800,000 and paid W2 wages for the year of $400,000. Mark is married and his taxable income (excluding any income from Keller & Sons) is $350,000. For each independent scenario below explain how the entity will be taxed and how Mark's return will be affected by the income from Keller & Sons. Show all work for any calculations.

a. Keller & Sons is a C-Corporation

b. Keller & Sons is a Partnership

c. Keller & Sons is an LLC, if you need more information please indicate what information you would need.

d. How would your answer change (or not ) in part b if they were a manufacturing company instead of a law firm?

Answer 1

Answer for a)

sales= 3600000

expences= 1000000

profit =3600000-1000000=2600000

CORPORATION TAX @20% =2600000*20/100=520000

Share of Mark = 520000*85/100=442000

Therefore Mark's taxable income is 442000+350000=792000

Marks personal tax is

Upto 2.5 lakh    NILL

above 2.5 542000*10/100=54200

Mark's personal tax return =54200

Answer for b)

sales= 3600000

expences= 1000000

book profit =3600000-1000000=2600000

BOOK PROFIT AMOUNT DEDUCTIBLE u/s 40B

ABOVE 3 LAKH 60% OF BOOK PROFIT

Therefore taxable income is 2600000*60/100= 1560000

hence share of Mark is 1560000*85/100=1326000

Therefore Mark's taxable income is 1326000+450000=1776000

TAX SLAB    TAX RATE

Upto 2.5 lakh    NILL

2.5 TO 5 LAKH    10%

ABOVE 20%

Marks personal tax is

Upto 2.5 lakh    NILL

2.5    250000*10/100=25000

1276000(1776000-500000) 1276000*20/100=255200

Mark's personal tax return =25000+255200=280200

Answer for c)

LLC stands for Limited liability company. It is not a taxing entity and it is not recognized by IRS . The IRS says LLC may be taxed as a partnership firm. Hence calculation of tax return is same as partnership firm.

Answer for d )

Since taxable income is less than 1000000 , Marks tax return is not affected.