Question

Agnes is going to invest $90,000 in a business entity. She will manage the business entity. Her projected share of the loss for the first year is $36,000. Agnes’ marginal tax rate is 33%. Determine the cash flow benefit of the first year loss to Agnes if the business form is: a. A general partnership b. An S corporation c. An LLC d. A C corporation

Answer 1

SOLUTION:-

Given - Investment = $90000, Loss = $36000

A - If it is a general partnership-

Agness will show $36000 loss for income tax purpose in Form 1040 so she can get cash flow benefits-

36000 * 33% = $11880

B - If it is a S corporation-

She can deduct whole amount of loss $36000 so the cash flow benefit will be $36000

Tax Rate = 33%

Projected share of loss = $36,000

C - If it is a An LLC-

For Limited Liability Corporation, conduit or Aggregate concept is applied for taxation. Thus, as an shareholder Agnes will deduct the $36,000 loss on her Form 1040. Thus, the cash flow benefit for Agnes will be  $11,880 ($36,000 x 33%)

D - If it is a A C corporation-

For C corporation, entity concept is applied for taxation. Thus, corporate loss is not passed through the shareholders. Thus, the cash flow benefit for Agnes will be $0

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